The coronavirus pandemic brought businesses to its knees, shuttering everything from restaurants to hotels, gyms, hair salons, retailers, and other establishments. Many business owners turned to their Business Interruption (BI) insurance policies to cover loss of income and to pay ongoing expenses like payroll, rent, etc. Yet BI policies are designed to respond only if a business is forced to close due to direct physical damage to its property as a result of covered peril (like a fire). Furthermore, BI policies typically exclude viruses.
On the heels of BI claims denials by insurers, beginning in mid-March hundreds of single-plaintiff and putative class-action complaints were filed in state and federal courts around the country. At the same time, the business community, insurers, industry associations, and politicians called for a remedy – some sort of stop-gap approach where insurance carriers and the government share in paying for losses over a specified amount. Various proposals were touted but the needle for each of these proposals hasn’t moved an inch.
In the lawsuits filed, some plaintiffs have alleged that the physical damage prerequisite for BI coverage has been satisfied because contamination by the coronavirus constitutes “direct physical loss” requiring remediation to clean the surfaces of the covered property. 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.”
In addition, in some cases, policyholders have also asserted claims for bad faith, alleging that the insurance carrier failed to investigate or properly evaluate the BI claim or has made a business practice of wrongfully denying COVID-19 BI claims.
Where do BI cases stand today?
In recent weeks, carriers have won more rulings than policyholders as the courts begin to work through more than 1,100 COVID-19 BI coverage disputes, according to a recent article in the Wall Street Journal. While the judges sympathize with businesses’ plight, most support the insurers’ legal arguments. According to the University of Pennsylvania Carey Law School, which is tracking COVID-19 litigation, insurers have prevailed in state courts in California, Michigan and the District of Columbia, and in federal courts in Texas and California.
On the flip side, many states have yet to rule in BI cases and appeals can ultimately undo some of the judges’ rulings. Also, a judge in a federal court in Missouri recently rejected an insurer’s motion to dismiss litigation in two cases. The judge stated that the plaintiffs – hair salons, bars and restaurants – “have plausibly alleged that COVID-19 particles attached to and damaged their property, which made their premises unsafe and unusable.”
While these cases go through the courts, the fallout from the pandemic coupled with the lack of insurance coverage has been devastating for businesses. New York off-price department store, Century 21, for example, just announced its bankruptcy and plans to close all of its stores. While the company is the latest victim of the pandemic, it also stated that it “had ‘no viable alternative’ to shutting down after its insurance providers failed to pay some $175 million Century 21 claims it’s owed under Business Interruption policies.”
Agents & Brokers Brought into BI Lawsuits
In a virtual presentation held by the Independent Insurance Agents of Texas on “Agency E&O Best Practices and COVID-19,” industry leaders discussed how professional liability claims against agents have begun to trickle in. While the main targets of the BI lawsuits are insurers, insurance agents will be added as policyholders fail to find relief from their insurance companies.
This potential litigation trend against agents and brokers was also discussed in The Insurer: “Although the lawsuits naming brokers don’t currently specifically allege mis-selling or bad advice – they are still pursuing insurers for what they claim are covered claims – sources said it is inevitable that if actions are not successful they will refocus on the way the agent sold and represented the coverage.” In fact, of the reported lawsuits brought against insurers in the U.S. so far in the fallout from the coronavirus outbreak, a number have also named brokers as defendants.
As the battle over BI COVID-19 claims continues, Distinguished is committed to keeping you updated. It’s always important to discuss policy conditions and terms with insureds so they are very clear as to what is and isn’t covered.