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What will be the true cost of COVID-19 business interruption coverage challenges?

Getting through COVID-19 is proving to be a daunting task. Beyond the daily struggle of individuals and healthcare professionals facing health challenges and working to save lives, we are hit by the sobering reality of the economic impact of our collective battle against the virus. Restaurants, hospitality venues and other service providers impacted by closures and loss of business are some of the earliest and most hard-hit financially—many of the early efforts to address losses are focused here. We look forward to the light at the end of the tunnel, but what will be the true cost of the safety net beginning to form as recovery efforts, legislation and coverage challenges take shape to support these and other business losses?

The full weight of the economic impact will not be fully understood for some time, but legislation and lawsuits are already seeking to address one piece of the economic impact: whether insurance policies provide business interruption coverage for losses related to COVID-19. The primary issues that have been raised in the discussion of coverage have focused on the following policy language: “direct physical loss of or damage to insured property,” whether virus or disease qualifies as a “covered peril,” whether the policy contains a virus exclusion, and whether losses due to closure by a “civil authority” would be covered. On a previous blog, our experts Damian Glynn and Leon Briggs started an early discussion surrounding coverage issues and those points still hold true, even as the details evolve.

Various efforts are underway to seek resolution in the U.S. for coverage issues. Lawsuits have been filed in at least five states (to date, and the number may climb even as we publish) seeking guidance from the courts about business interruption coverage.

  • Louisiana: The first suit seeking a declaration of coverage was filed in state court in Louisiana on March 16, 2020 by the owners of Oceana Grill against their insurer and, interestingly, state officials. The suit asks the court to find that the presence of the coronavirus is direct physical damage that would require coverage under business interruption policies—and also mentions coverage for civil authority closures.
  • Oklahoma: On March 24, 2020, the Chickasaw Nation filed suit in Oklahoma state court against their insurers, seeking a declaration that their “all risk” policy provided coverage for business interruption losses due to the shutdown of their casinos. It was not clear if they have relevant pandemic exclusions on the policy—but instead focused on the argument that exposure to the coronavirus amounts to direct physical damage.
  • California: On March 25, 2020 the French Laundry restaurant filed suit in California state court seeking a declaration of coverage—this time based not only on the argument that coronavirus-related exposure amounted to physical damage, but also that coverage was due as a result of the shutdown by civil authority. The same firm is representing Oceana Grill and the French Laundry in these cases.
  • Illinois and Texas: On March 27, 2020, several Chicago restaurants and movie theaters filed suit in U.S. District Court for the Northern District of Illinois seeking a declaration. Unlike the previous suits, this is not merely seeking a declaration of coverage—but was filed in response to the insurer’s denial of coverage. The suit alleges that exposure to the coronavirus amounts to physical damage under the policy—and notes that there is no infectious disease exclusion on the policy. The suit also alleges that the insurer denied the claims without an appropriate investigation. A suit similarly claiming bad faith failure to investigate was filed on March 26, 2020 in state court in Texas.

In another effort to address the coverage issues, several states (New York – A. 10226, New Jersey – A. 3844, Ohio – H.B. 589, Louisiana – S.B. 477/H.B. 858, and Massachusetts – S.D. 2888) are considering legislation to require insurers to retroactively cover business interruption losses due to the pandemic. The bills have slight variations:

  • New York’s proposal would apply to policies in place as of March 7, 2020 for businesses with fewer than 100 full-time employees. Insurers required to make payments under this act would seek reimbursement from a fund that will be created from a “Special purpose apportionment” that would be collected from insurers in the state.
  • Ohiowould similarly require coverage, retroactive for policies in force as of March 9, 2020 for businesses with fewer than 100 full-time employees.
  • Massachusettswould also require coverage—and specifically says this is true even if the policy contains a virus or pandemic exclusion. It would cover policies in force as of March 10, 2020 issued to businesses with 150 or fewer full-time equivalent employees. The sponsor of the bill has indicated there would be a reimbursement process for payments under the act, but that process is not spelled out in the proposed law.
  • New Jerseywas the first state to propose a law related to this issue, but the bill seems to be being reworked and was not sent to a vote in the Senate. This legislation would apply to policies in place as of March 9, 2020 for businesses with fewer than 100 eligible employees. There is discussion in the law about providing some means for reimbursement to insurers.
  • Louisiana’s law would cover policies in place as of March 11, 2020 for businesses with fewer than 100 full-time employees.

So, the states are all slightly different in their approaches—and it is easy to see how challenging it would be to apply slightly different laws across 50 states. The lack of uniformity would create an administrative burden in determining what dates and businesses are covered. In addition, some proposed legislation contains blanket statements about providing coverage, while other proposals refer to specific policy terms. This creates challenges in cases where there could be a law that refers to certain policy terms, but not all that might be at issue in a given case. As a result, some legislation seeking to mandate coverage might not even achieve its intended purpose.

Consider the cost of these lawsuits and challenges for the insurance industry, too. According to a recent Insurance Journal article, the estimated exposure for business interruption claims would represent one quarter to one half of the entire industry surplus available to pay P&C claims. The American Property Casualty Insurance Association (APCIA) estimates that business continuity losses for small companies could reach $383 billion per month during the COVID-19 shutdown, and projected as many as 30 million business interruption claims—10 times the number of the most claims previously handled by the industry in a year. This is a hefty tab for the insurance industry to consider, particularly since the general understanding has been, based on policy forms and exclusions, that business interruption coverage would not apply in a pandemic. Underwriting will not have taken the potential magnitude of losses into account, creating a possible funding gap. Indeed, the National Association of Insurance Commissioners, a group of state regulators, has weighed in on the issue stating that the business interruption policies were “generally not designed or priced to provide coverage for communicable diseases.” Similarly, many State Departments of Insurance have posted FAQs or other information indicating that these types of losses would not typically be covered by business interruption policies.

At the same time, policyholders are facing potentially devastating losses. As noted above, they are seeking guidance from the courts about coverage available—and have spurred legislators in several states to seek to provide coverage for these losses. Advocacy efforts are also underway; several chefs and the lawyer representing restaurants in coverage actions in California and Louisiana have joined together to create the Business Interruption Group (BIG) to advocate for business interruption coverage for restaurants—and specifically points to the “civil authority” coverage on policies with no virus exclusion. The group reports on its website that they had a call with President Trump to introduce him to their campaign and that he was “supportive.”

The above discussion should make clear that at this point there is no central, uniform approach to these issues. The lawsuit approach could create a real patchwork of decisions across the country. And, even then, there may be multiple rulings within each state due to various policies.

Questions abound. Does the coronavirus create “physical damage?” What about a policy that has a virus exclusion? What about a policy with civil authority coverage? Depending on the policy at issue, those separate issues may be dispositive in different cases. Similarly, the facts of each case will vary. Does “civil authority” coverage apply only where a total closure/shelter-in-place/stay at home order was issued? What about restaurants that had losses before any order was issued? What about restaurants that had losses after an “advisory” rather than mandate from a state? And, what about limitations in civil authority coverage—many policies limit coverage to four weeks. You can see that this could generate seemingly endless litigation. And given that many courts are now closed or limited in service, it is not an exaggeration to say that getting resolution about these issues from the courts could take years.

It is understandable, then, that some have taken the approach to try and legislate coverage issues; in Massachusetts and New Jersey, laws were introduced on an emergency basis in an attempt to expedite their consideration. Unfortunately, even if one of these laws passes quickly, it is almost certain that it will be challenged in the courts. As many commentators have noted, a legislative attempt to modify contract terms retroactively would be open to a constitutional challenge. So, again, given the closure and delays in many courts, this would seem to provide no quicker resolution of the issues.

So, with potentially catastrophic losses facing restaurants and other small businesses—and the potentially catastrophic impact on the insurance industry if coverage is legislated or otherwise mandated, absent some central effort to address these issues—it would seem that these concerns will stay relevant for months or years to come. There may not yet be light at the end of the tunnel when it comes to the looming cost of supporting businesses as they recover, but we will continue to monitor and share updates as we collectively work toward progress. Whatever the decisions, Sedgwick is here to help.

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