Legal and Regulatory Developments - Business Interruption Insurance for COVID-19 Related Losses

As the COVID-19 pandemic continues to have significant economic consequences, a key issue for insurers and businesses throughout the country is whether all or a portion of losses may be covered by insurance. (For a global perspective, see our article linked here.) Because many commercial insurance policies do not provide business interruption coverage for losses occasioned by COVID-19 related shutdowns, legislative and regulatory pressure on insurers to pay business interruption losses despite what their policies say will continue, as well as litigation seeking to determine if coverage exists under such policies.

Overview

Standard commercial property insurance policies typically include one or more “time element” coverages that protect insureds against reduced earnings and increased expenses because of damage to the property they use to conduct business or, in the case of contingent time element coverages, the property of others on whom they may depend. The purpose of such insurance is to put insureds in substantially the same financial position they would be in if the property damage had not occurred. These coverages are called “time element” because the severity of loss depends on the length of the interruption in normal business operations.

• Business income: This insurance covers lost business income when the insured property suffers direct physical loss or damage from a covered cause of loss resulting in a necessary interruption of the insured’s business. It typically pays net profits that the insured would have earned absent a suspension of operations and normal operating costs that the insured still incurs while operations are suspended.The physical loss or damage must be to covered property and must result from a covered peril.
  
  Courts are split as to whether this coverage may apply where buildings have become uninhabitable or nonoperational because of contamination, including from airborne contaminants. Even under the reasoning in the decisions where courts found coverage, however, the contaminant was already on the physical premises of the business. Losses resulting from reduced business due to fears of future impending contamination from a virus would likely not be not covered. 
• Extra Expense: This insurance covers the costs associated with arranging, equipping and operating out of temporary quarters due to property damage at the insured’s premises. As with business income insurance, a key requirement for coverage is physical damage to covered property from a covered cause of loss.    
• Contingent business income and extra expense: This extends coverage to business income losses resulting from an interruption of the insured’s business and extra expense due to property damage suffered by a key supplier or customer. Thus, for this coverage, the insured is not required to suffer direct property damage. Rather, the insurance is typically triggered if the supplier or customer suffers damage of the type covered under the policy, provided that such damage resulted from a covered cause of loss. 
• Civil authority: This extends coverage to losses resulting from an interruption of the insured’s business when actions by local, state or federal authorities in response to damage to property other than the insured’s property prohibit access to the insured’s property. As with contingent business income, the insured is not required to suffer direct property damage, but again the damage must result from a covered cause of loss. 
• Ingress/Egress: This extends coverage to losses resulting from an interruption of the insured’s business when physical access to the insured’s premises is physically hindered by property damage resulting from a covered cause of loss, irrespective of whether the damaged property is covered by the policy. 

Even when business income or extra expense losses result from damage to covered property, the property damage still must be caused by a covered peril or otherwise not excluded. Many commercial property policies exclude losses caused by viruses or infectious agents. An ISO exclusion for “loss due to virus or bacteria” is attached to many standard commercial policies and expressly excludes "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." Therefore, even if damage to covered property is determined to have occurred, this endorsement will most likely exclude business interruption losses due to the coronavirus.

Coverage Litigation

Businesses across the country have filed lawsuits seeking recovery under their insurance policies for financial harm incurred as a result of the various governmental closure orders arising from the pandemic. Beginning in mid-March, hundreds of single-plaintiff and putative class action complaints have been filed in state and federal courts around the country arising from allegations that BI claims have been or were expected to be improperly denied.

Some plaintiffs have alleged that the physical damage prerequisite for business interruption coverage has been satisfied because contamination by the coronavirus constitutes “direct physical loss” requiring remediation to clean the surfaces of the covered property. See, e.g., Cajun Conti LLC et al. v. Certain Underwriters at Lloyd’s, London et al., No. 2020-02558 (La. Dist. Ct., Orleans Parish, Mar. 16, 2020). Others have simply asserted that their businesses suffered a direct physical loss of and damage to their property due to the suspension of their operations from the pandemic and the civil authorities’ measures to stop the human to human and surface to human transmission of COVID-19, and that such risks and losses are covered by “all risk” commercial property policies that lack a virus exclusion. See El Novillo Restaurant, et al. v. Certain Underwriters at Lloyd’s, London et al., No. 1:20-cv-21525-UU (S.D. Fla. Apr. 9, 2020).

Yet others have asserted a theory that the “stay-at-home” government orders “were issued in response to dangerous physical conditions and caused a suspension of business operations on the covered premises.” Cafe International Holding Company LLC v. Chubb Ltd. et al., No. 1:20-cv-21641-XXXX (S.D. Fla. Apr. 20, 2020). Another group of plaintiffs have argued that courts should invalidate the ISO virus exclusion in business interruption policies, and that the insurers should be estopped from enforcing the virus exclusion because, in 2006, the insurance industry represented that property policies were not a source of recovery for losses involving contamination by disease-causing agents. See Crossroads Invs., LLC v. Philadelphia Indem. Ins. Co., No. 2:20-cv-02329 (E.D. Pa. May 18, 2020); 1 S.A.N.T., Inc. v. Berkshire Hathaway, Inc., No. 2:20-cv-00862 (W.D. Pa. June 11, 2020).

In some cases, however, policyholders have also asserted claims for bad faith, alleging that the insurance company failed to investigate or properly evaluate the business interruption claim or has made a business practice of wrongfully denying COVID-19 business interruption claims. See, e.g., Roscoe Same LLC v. Society Ins., No. 1:20-cv-02641 (N.D. Ill. Apr. 30, 2020); SJP Inv. Partners, LLC v. The Cincinnati Ins. Co., No. 01-cv-2020-902268.00 (Ala. Cir. Ct. June 19, 2020).   Some policyholders have added claims for unfair claims practices and unfair and deceptive trade practices, alleging that the insurance company has not performed a fair and good-faith investigation of the business interruption claims, has wrongfully denied the claims, and promised coverage that was not provided and that it had no intention of providing. See, e.g., Sero, Inc. v. Berkley N. Pac. Group, LLC, No. 3:20-cv-00776 (D. Or. May 13, 2020) (Washington Consumer Protection Act); Water Sports Kauai, Inc. v. Fireman’s Fund Ins. Co., No. 3:20-cv-3750 (N.D. Cal. June 5, 2020) (Hawaii unfair and deceptive trade practices claim).

The majority of complaints to date have been filed by small business and restaurant owners. On June 23, however, a group of minor league baseball teams sued their insurers, arguing that COVID-19, the state and local government responses to the pandemic, and Major League Baseball’s failure to provide baseball players to the minor league teams have caused them significant losses that are covered by their business interruption insurance policies. Chattanooga Prof’l Baseball LLC v. Philadelphia Indem. Ins. Co., No. 2:20-cv-03032 (E.D. Pa. June 23, 2020).

There have also been a few single-plaintiff complaints filed against brokers for negligently failing to inform the insureds about coverage deficiencies and alternatives, and negligently failing to procure appropriate insurance. In most of these, the claims against the brokers are generally in the alternative to the primary declaratory judgement and breach of contract claim against the insurer. See Musso & Frank Grill Co. v. Mitsui Sumitomo Ins. USA Inc., No. 20STCV16681 (Cal. Super. Ct. May 1, 2020); Motherway & Napleton, LLP v. Sentinel Ins. Co., No. 2020L004977 (Ill. Cir. Ct. May 6, 2020); Ybarra Inv., Inc. v. Scottsdale Ins. Co., No. 2020-25079 (Tex. Dist. Ct. Apr. 22, 2020).

Consolidation Efforts

In federal courts, some plaintiffs have sought—so far unsuccessfully—to utilize the Multi District Litigation mechanism to consolidate cases in a single forum.  The U.S. Judicial Panel on Multidistrict Litigation (JPML) consists of seven federal judges who consider motions for centralization of civil actions in federal courts, and may consolidate cases for “coordinated pretrial proceedings,” including discovery and summary judgment. Cases are remanded back to the courts in which they originated at or before conclusion of pretrial proceedings. For cases to be consolidated, they must involve one or more common questions of fact, and consolidation is intended to achieve efficiency and avoid duplication of discovery and inconsistent pretrial rulings. Motions seeking consolidation and transfer were filed in late April in In re COVID-19 Bus. Ins. Coverage Litig., No. 2942 (J.P.M.L.), and were heard on July 30. 

In its order, the JPML denied the motions for consolidation, concluding that the proposed multidistrict litigation “entails very few common questions of fact, which are outweighed by the substantial convenience and efficiency challenges posed by managing a litigation involving the entire insurance industry.” The JPML noted that there was little potential for common discovery, since the actions involved a number of different insurers; that the cases involved different insurance policies “with different coverages, conditions, exclusions, and policy language”; and that management of consolidated litigation would be incredibly complicated at best. Although it denied the request for industry-wide multidistrict litigation, the JPML decided to consider consolidating insurer-specific cases. It found persuasive the argument that centralization of actions involving a single insurer or group of insurers would promote convenience and efficiency, and so it directed four insurers or groups of insurers (Certain Underwriters at Lloyd’s, London, Cincinnati Insurance Company, the Hartford insurers, and Society Insurance) to show cause why actions involving them should not be centralized. Centralization of these insurer-specific actions will be heard at the next JPML calendar hearing, on September 24.

A similar attempt to consolidate BI coverage cases at the state court level was denied by the Pennsylvania Supreme Court in Joseph Tambellini, Inc. v. Erie Insurance Exchange, where the plaintiffs asked the Supreme Court to invoke its rarely used “King’s Bench” power to assume jurisdiction over cases involving extraordinary circumstances and matters of great public importance to create a process for those cases to be heard in one trial court..

Substantive Decisions

Several courts have ruled on business interruption claims recently, with more decisions likely to come in the near future.  While most decisions to date have favored insurers, they have not been uniform.

In the earliest business interruption decision, the Southern District of New York denied a preliminary injunction due to the plaintiff’s likely inability to demonstrate property damage triggering coverage. The plaintiff, a magazine publisher, sought to recover its business interruption losses under a business owner’s insurance policy with Sentinel Insurance Company Limited. Social Life Magazine, Inc. v. Sentinel Ins. Co. Ltd., No. 1:20-cv-03311-VEC (S.D.N.Y. Apr. 28, 2020). At a hearing in May on the preliminary injunction, the court questioned whether there was any damage to the Plaintiff’s property, noting that the virus “damages lungs.  It doesn’t damage printing presses.” The court concluded, “New York law is clear that this kind of business interruption needs some damage to the property to prohibit you from going. . . . [T]his is just not what’s covered under these insurance policies.” Based on the property damage requirement, the plaintiff had not shown a probability of success on the merits; the owner of the business could still go onto the business premises, so the premises were not entirely uninhabitable or unusable.  The court therefore denied the preliminary injunction. After the hearing, but before the court entered a written order, the plaintiff voluntarily dismissed the action.

A Michigan state trial court dismissed with prejudice a suit seeking to recover under a restaurant group’s business interruption coverage because the plaintiff did not—and could not—allege direct physical loss. Gavrilides Mgmt. Co. LLC v. Michigan Ins. Co., No. 20-258-CB (Mich. Cir. Ct. July 21, 2020). During a July hearing, the judge ruled from the bench that, under the common meaning of the policy language and federal case law, “direct physical loss of, or damage to, property” must involve something with material existence or that alters the physical integrity of property. The mere restriction of dine-in services at a restaurant did not meet the requirement physical loss or damage. The court also rejected the argument that the virus and bacteria exclusion in the policy was vague.

The Western District of Texas also recently dismissed a suit for business interruption coverage without leave to amend. Diesel Barbershop, LLC v. State Farm Lloyds, No. 5:20-cv-00461-DAE (W.D. Tex. Aug. 13, 2020). The plaintiff barbershop businesses sought to recover under their policies, and the insurer moved to dismiss. The court held that “accidental direct physical loss” required tangible injury to property, and the plaintiffs had not alleged any physical alteration to their property. The court also concluded that the virus exclusion barred the plaintiffs’ claims; it found that the exclusion was unambiguous and enforceable, and that COVID-19 was pleaded as the underlying cause of the plaintiffs’ loss.

A trial court in the District of Columbia similarly ruled in favor of insurers on a motion for summary judgment. Rose’s 1, LLC v. Erie Ins. Exchange, No. 2020 CA 002424 B (D.C. Super. Ct. Aug. 6, 2020). The plaintiff restaurant owners sought to recover for their loss of income from the closure of their restaurants. The court held that the closure of the restaurants did not constitute a direct physical loss under the policy. The losses were not “physical,” even though the COVID-19 virus itself is tangible, because the plaintiffs did not offer any evidence that the virus was present at their properties. Moreover, the governmental closure orders did not themselves constitute a physical intrusion.

However, not all courts have found for insurers. In August, Western District of Missouri allowed a business interruption claim to withstand a motion to dismiss. Studio 417, Inc. v. Cincinnati Ins. Co., No. 20-cv-03127-SRB (W.D. Mo. Aug. 12, 2020). The plaintiff hair salon and restaurants asserted putative class claims for declaratory judgment and breach of contract. On the insurance company’s motion to dismiss, the court held that the plaintiffs adequately alleged a “direct physical loss,” based on the allegation that COVID-19 particles attached to and damaged the plaintiffs’ property, making their premises unsafe and unusable. The court also found that the plaintiffs stated a claim for civil authority coverage by alleging that government orders required them to suspend operations or cease dine-in service.

United Kingdom Financial Conduct Authority (FCA) Decision

The UK’s FCA instituted a test case in the High Court to resolve some of the uncertainties in the interpretation of non-damage extensions to business interruption policies. The objective was to allow policyholders and insurance companies to obtain uniform legal guidance quickly and to understand whether these extensions cover business interruption losses associated with COVID-19. To that end, the FCA identified a sample of policy language that covers the key issues that are likely to be at issue. Specifically, the Court was asked to decide, against a matrix of agreed/assumed facts, whether there is cover under certain “non-damage” extensions to business interruption policies. Certain insurers whose policies include this sample language were asked to participate in the test case; the results of the case are binding on participating insurers and will provide persuasive guidance for other insurers. The FCA asked all other UK insurers to identify which of their policies may be affected by the test case.

On September 15, the Court issued a 165-page opinion that analyzed numerous specific policy provisions and made several holdings.  The Court found that policyholders will generally (but not uniformly, depending on specific policy language) be able to establish cover under policies containing “disease clauses” which require the occurrence of a notifiable disease within a specified radius or vicinity of the insured premises (the “relevant area”). By contrast, the Court interpreted “denial of access” clauses more narrowly, particularly where they contain a requirement for an emergency/incident/danger or disturbance etc. to have occurred. The Court said those wordings were intended to provide narrow localized cover and that action taken in response to the nationwide pandemic would not therefore suffice. Notably, and unlike the US courts to have issued BI coverage decisions, the UK High Court did not address whether the specific coverages at issue require property damage, or whether a virus exclusion present in most applicable US policies precludes coverage.

Insurers need to update their policyholders who have made claims or complaints on the Test Case and its “implications” for their claims/complaints by September 22, 2020. There will be a hearing in October 2020 at which (1) the parties will make submissions to the Court regarding the appropriate declarations to be made in light of its findings, and (2) insurers are very likely to seek permission to appeal.

Regulatory Activity

Over the course of the first months of the pandemic, several states issued data calls requesting information on business interruption coverage that property/casualty insurers write in their state.

Separately, the National Association of Insurance Commissioners (NAIC) announced that it would be coordinating data calls on behalf of insurance regulators in 50 states, the District of Columbia, and the U.S. territories. The data calls had have two components: a one-time report of business interruption premium and exposure information, and a monthly report with COVID-19 claims and report, first due on June 15. Requests were made by individual state insurance departments with requested information to be submitted directly to the NAIC through the NAIC’s Regulatory Data Collection (RDC) app. 

Legislative Activity

Legislators at both the federal and state levels are considering whether to compel insurers to cover COVID-19-related losses under existing policies regardless of policy terms and conditions. The industry’s position is clear: property policies cover the risks attendant to physical loss or damage to property, including resulting loss of income and extra expense. Except as otherwise expressly set forth in a policy, they do not cover, and policyholders did not pay for coverage for, losses caused by communicable diseases.

Pandemic Risk Insurance Act

The House Financial Services Committee is considering the creation of a federal program for future pandemics. Please see our separate alert for an overview of the Pandemic Risk Insurance Act (H.R. 7011), introduced by Representative Carolyn Maloney (D-NY) on May 26, 2020.

On June 29, Rep. Mike Thompson (D-CA) introduced the Business Interruption Relief Act of 2020 (H.R. 7412). Under the proposed law, if an insurer pays a BI claim arising from a civil authority order necessitated by the COVID-19 pandemic, and that claim would otherwise be subject to an exclusion in the policy, the insurer could seek reimbursement from a fund created within the Department of Treasury. Significantly, policies without such an exclusion are not eligible for reimbursement.

State Activity

Bills that would mandate retroactive business interruption coverage have been introduced in numerous states, the District of Columbia, and Puerto Rico. None has advanced very far in the legislative process, although the District of Columbia business interruption provisions were removed from omnibus COVID-19 legislation at the last minute prior to adoption.

In New Jersey, the legislature failed to vote on Bill No. A3844 that would have required insurers to cover business interruption claims submitted by certain businesses if the claims related to coronavirus-incurred financial losses. Insurers required to pay COVID-19-related business interruption claims could then seek reimbursement from the New Jersey Department of Banking and Insurance, which, in turn, would apportion losses through a special assessment of all authorized insurers writing that line of business.

Louisiana, Massachusetts, Michigan, New York, Ohio, Pennsylvania, Rhode Island, and South Carolina each since proposed bills requiring insurers to cover otherwise-excluded claims arising from the coronavirus. The Massachusetts, Ohio, New York, Pennsylvania, and South Carolina measures would each create a reimbursement fund that would be funded by an assessment on insurers based on net written premiums received by each insurer. The Massachusetts SD.2888 and South Carolina S 1188, would apply to businesses with as many as 150 employees, while Ohio House Bill 589, like the proposed New Jersey law, Michigan’s H 5739, and Rhode Island’s H 8064 would only apply to businesses with 100 or fewer employees.

On May 14, the proposed Louisiana Senate Bill, S 477, was amended to strip the provision requiring insurers to cover BI claims. The amended bill would only require insurers to include a form listing exclusions in their business insurance policies. Louisiana Insurance Commissioner Jim Donelon had called the initial proposed bill, which required retroactive coverage of all business interruption claims arising from the pandemic, regardless of exclusion, “dangerous” to the insurance industry.

New York State Senate Bill S 8211A and New York Assembly A-10226B would both apply to businesses with up to 250 employees, and would require automatic renewal of policies providing business interruption and contingent business interruption coverage that expire during the state of emergency. On April 22, a bill (A-10327) was introduced by Democrat Linda Rosenthal in the New York Assembly requiring that business interruption policies issued to certain human services and community-based health providers be construed to provide coverage for business interruption during a declared state emergency due to the COVID-19 pandemic. New York Senate Bill S 8853, proposed July 29, would amend the state’s insurance law to effectively require payment of all BI and contingent BI claims by policyholders with fewer than 250 employees, where the interruption arises from a virus, bacterium, or microorganism. Insurers would be permitted to seek reimbursement from funds managed by the superintendant.

In Pennsylvania, House Bill H 2372, proposed on April 3, would only apply to businesses with 100 or fewer employees. The Pennsylvania Senate’s SB1114, proposed on April 15, does not have a similar limit. Instead, the SB1114 requires payments of 100% of coverage of claims by small businesses and 75% of claims made by all other claimants. The Pennsylvania Senate’s S 1127, proposed on April 30, would apply to any business, regardless of size, that carries a commercial property policy. That bill does not direct insurers to make payments of business interruption claims, however, and instead defines certain terms applicable in many such policies. If enacted, the bill would effectively override many of the defenses insurers assert in response to COVID-19 related business interruption claims. Pennsylvania House Bill H 2759, proposed on August 8, is limited to claimants with fewer than 100 employees, and would require payment of BI claims arising from pandemics, and would reimburse insurers for claim payments from money collected from the state insurance commissioner from all property and casualty insurers, not just those insurers offering BI coverage.

The Massachusetts SD.2888, the Pennsylvania SB1114, the South Carolina S 1188, and the NY A-10226B all explicitly address the ISO policy exclusion for viruses, which arose out of the SARS pandemic several years ago, and which requires payment even where that exclusion would apply. Although many bills do not expressly mention the virus exclusion, it is likely that the bills intend to override the exclusion.  South Carolina also addresses the “ordinance or law” exclusion in certain policies, which typically excludes coverage where the damage arises from the enforcement of or compliance with an ordinance or law regulating property.

On June 26, the California State Assembly passed A.B. 1552 by a vote of 77-0, sending the proposed law to the California Senate, where it stalled due to an early recess resulting from an outbreak among staffers. A.B. 1552 would create rebuttable presumptions impacting the burden of proof in coverage decisions. For BI claims caused by government closure orders, it would be presumed that the virus was present on the subject property and/or within the geographic area covered by a civil authority order, and caused physical damage.

Other efforts may take the form of legislative declarations that COVID-19 related business interruption is the result of damage or loss to property.  For example, a non-binding resolution by the San Francisco Board of Supervisors declared the proclivity of the virus to adhere to surfaces for prolonged periods of time to amount to physical property loss or damage, and further requests that the California Insurance Commissioner consider it to be a material misrepresentation to deny in any public filing that COVID-19 does not have a propensity to cause property loss or damage.    
On April 27, S&P Global Ratings issued a FAQ in which it cast doubt on the success of the proposed state legislation:

We would expect that a host of constitutional and legal challenges would likely accompany a potential retroactive expansion of insurance contract coverage. We anticipate that such efforts in any state would be largely unsuccessful unless the government provides resources to insurers to meet such obligations.

The FAQ also cautioned that, “[a]bsent a government backstop, enactment of such [legislation] would present a solvency issue for the sector.

A report by AM Best issued on May 5 concluded that legislation nullifying exclusions in BI policies to allow coverage arising from the pandemic poses an “existential threat” to the industry

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If you have any questions about this legal alert, please feel free to contact any of the attorneys listed under Related People/Contributors or the Eversheds Sutherland attorney with whom you regularly work.