(As featured in Credit Union Times)
Many businesses are experiencing disruption due to the coronavirus (COVID-19) pandemic, and you may be wondering if there is any opportunity for your business to offset this exposure through insurance. While the default position of most insurers will be to deny coverage, this article will explain the reasons why, as well as explore options that could keep such claims alive down the road.
‘I Thought We Had Business Interruption Insurance!’
This is the primary complaint I hear from business clients when they receive a denial letter from their insurance carrier after submitting a claim for business interruption. After all, as a general matter, a property policy should insure business interruption losses (i.e., loss of business income) following a covered event. This coverage will even extend to business income losses resulting from an act or order by a civil authority.
However, businesses have been blindsided when told by insurers that business income loss resulting from a civil order due to coronavirus (e.g., stay-at-home orders) are not considered “covered events.” Why is this?
A close reading of the insurance policy reveals that loss of business income is only covered when “caused by direct physical loss of or damage to property at the premises.” Insurers have therefore taken the initial position that neither coronavirus nor any resulting civil order caused any “direct physical loss of or damage to property” warranting a recovery of business income.
Even worse, many policies explicitly exclude coverage for any “loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” In other words, even if your business was able to argue that some form of “direct physical loss or damage to property” existed, the infectious disease exclusion above would nullify coverage.
Voila! Insurers will deny coverage for coronavirus-related business interruption losses as a default position. As a business explanation, insurers have argued that the sheer volume of claims that would result if they allowed coverage could be catastrophic to the insurance industry.
When Nothing Goes Right . . . Go Left
In the face of insurers’ coverage denials, businesses are beginning to pursue their options in court. On March 15, 2020, Cajun Conti, LLC filed the nation’s first lawsuit against its insurer and others, arguing in favor of business interruption coverage for coronavirus-related disruption involving its New Orleans-based restaurant (Cajun Conti, LLC v. Certain Underwriters at Lloyd’s, London, et al.).
Similar lawsuits have since been filed by other businesses in Illinois (Big Onion Tavern Group LLC, et al. v. Society Insurance Inc.), California (French Laundry Partners LP, et al. v. Hartford Fire Ins. Co., et al) and Oklahoma (filed by the Chickasaw and Chocktaw Nations against their respective insurers).
In each of these lawsuits, the virus exclusion referenced above had not been included in the policy. As such, the focus then turned to whether a governmental imposed shutdown due to COVID-19 should constitute a “direct physical loss.” The plaintiffs’ arguments in favor of coverage are largely summarized as follows:
The fact that the insurer did not include an explicit exclusion for viruses or other infectious diseases created a reasonable anticipation by the businesses that coverage would not be denied on these grounds.
Nearly every state has some form of “stay-at-home” order, effectively closing all but “essential” businesses listed on guidance documents issued by each respective governor’s office. In other words, authorities in these states have in fact caused a “direct physical loss.”
The courts in each of these states have regularly determined that the presence of a dangerous substance in a property constitutes a physical loss or damage. Therefore, since coronavirus is necessarily a dangerous substance, closure based on the possibility of its presence should be considered physical loss.
Given insurers’ default coverage position on business income loss related to coronavirus, a strongly-worded coverage letter followed by a lawsuit may be warranted. If you do go this route, first make sure to review your policy to see whether the explicit virus exclusion exists (hint, the battle will likely be more uphill if you do).
In evaluating whether to pursue action against your insurer, consider the costs of litigating in court compared to the amount of business income loss. For example, a lawsuit could cost you well in excess of $100,000 start to finish, which might not make fiscal sense if you’ve only lost $25,000 to $50,000 in business income. Unless you have a strong argument that the insurer somehow acted in bad faith, you may likely be stuck with your contractual damages.
Avengers . . . Assemble!
Understanding the impact of insurers’ denials on small businesses – as well as the typically slower pace of litigation proceedings – several states have recently introduced bills that would require insurers to cover business interruption losses during the declared state of COVID-19 emergency:
On March 16, 2020, New Jersey Assembly introduced Bill No. A-3844, the first legislative effort that would require insurers to cover business interruption losses related to COVID-19 notwithstanding the presence of any exclusion.
On March 24, 2020, the Ohio and Massachusetts legislatures introduced, respectively, House Bill 589 and Bill No. SD.2888 (the Massachusetts bill explicitly applied to small businesses having 150 or fewer full-time employees).
On March 27, 2020, the New York Assembly introduced Bill No. A-10226, reducing the small business threshold to 100 full-time employees.
On March 31, 2020, the Louisiana State Legislature introduced Senate Bill 477 (no employee limit) and House Bill 858 (100-employee limitation similar to the New York bill).
On April 3, 2020, Pennsylvania General Assembly introduced House Bill 2372 (also applicable to businesses with fewer than 100 employees).
Additional states are expected to join the fray in the coming weeks. Of course, it is expected that insurers will be opposing such measures.
While the outcome of situations like these has not yet crystalized, it may be wise to have your attorney prepare that robust and strongly-worded coverage letter, as long as your business has experienced significant coronavirus-related business income loss. In the event your insurer has already declined coverage, there may be litigation options available depending on the language of your policy (and your appetite for protracted proceedings).
And keep your ear to the ground because your state legislature may also be exerting pressure on insurers during these difficult times!
KEEFER is your ounce of prevention.