As the COVID-19 pandemic continues to have significant economic consequences in the US, a key issue for insurers and businesses throughout the country is whether all or a portion of losses may be covered by insurance. 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 are seeking 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 are currently pending. The briefs filed by plaintiffs before the JPML argue that consolidation of all such suits in a single federal court is appropriate because of the importance and commonality of the issues raised by the business interruption coverage actions.

One plaintiff seeking consolidation argues that the central issue of whether stay at home orders and government-mandated business closures trigger business interruption coverage is “too important to the survival of the insured businesses and indeed, to the recovery of the economy as a whole,” to allow different courts to possibly reach different conclusions. Another plaintiff, seeking consolidation in a different court, argues that the same type of expert evidence—as to both the nature of physical damage or loss and the actual presence of COVID-19—will likely be needed in all of the coverage actions, and that consolidation will avoid duplicative discovery and reduce litigation costs.

The insurance companies, along with some policyholder-plaintiffs, have opposed consolidation. They argue that the numerous different cases involve different legal and factual issues—different terms and exclusions in policies issued by different insurers to different policyholders, different COVID-19 regulations and orders applicable to different communities, different state insurance laws and rules of interpretation, different facts around the existence of the virus and physical damage at the different insured locations. As some policyholders pointed out, “the [JPML] has repeatedly recognized that inherent differences in insurance contracts render insurance actions particularly ill-suited for multidistrict litigation.” Those opposing consolidation also argue that convenience and efficiency support keeping localized disputes local.

The next regularly scheduled JPML calendar hearing is set for July 30.

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

In one single-plaintiff litigation, 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, filed suit seeking 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). The plaintiff requested an order requiring Sentinel to pay $197,000 for its loss of business income.

At a May 14 hearing 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.

Similar Activity in the United Kingdom

The UK’s Financial Conduct Authority (FCA) has 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 is 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 has identified a sample of policy language that covers the key issues that are likely to be at issue. Certain insurers whose policies include this sample language have been asked to participate in the test case; the results of the case will be binding on participating insurers and will provide persuasive guidance for other insurers. The FCA has asked all other UK insurers to identify which of their policies may be affected by the test case. The participating insurers recently filed their defenses, and an eight day hearing will be held in late July.

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.

State Activity

Bills that would mandate retroactive business interruption coverage have been introduced in nine 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.

There are presently two proposed bills in the New York State Senate: S 8178, which would apply only to those companies with 100 or fewer employees, and S 8211, which would apply to businesses with up to 250 employees. The New York Assembly’s current proposed A-10226B would apply to businesses with up to 250 employees, and requires 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.

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.

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. 

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. 

Industry Comments and Activity

NAIC

With this proposed state legislation as the backdrop, on March 25, the NAIC issued a statement opposing any legislative proposals that would require insurers to retroactively pay unfunded COVID-19-related business interruption claims that insurance policies do not currently cover.

NCOIL

The National Council of Insurance Legislators (NCOIL) sent a letter to the Chair of the House of Representatives Committee on Small Business outlining NCOIL’s position on this issue. In the letter, NCOIL stated that any efforts by state legislators to enact legislation that would effectively override policy exclusions, as discussed above, “would violate the Contract Clause within Article I of the United States Constitution, which prohibits the Legislature from impairing the obligation of contracts.” Instead, NCOIL proposed a solution akin to the Victims Compensation Fund that was established following the 9/11 attacks by creating a COVID-19-related fund to assist businesses with business interruption claims. NCOIL specifically suggested the creation of:

a COVID-19 Business Interruption & Cancellation Claims Fund (COVID Claims Fund) incorporates the usage of the insurance industry’s claims processing systems to handle claims processing for the Fund in order to ensure all claims are validated prior to payment, removing any that do not meet the established criteria. We also would suggest that legislation establishing the COVID Claims Fund be preemptive of any State efforts to mandate business interruption coverage for the virus, for the constitutional reason discussed above.

In its letter, NCOIL also expressed optimism that it would support the proposed PRIA, discussed above.) NCOIL also pointed out that its Claims Fund proposal would explicitly cover non-insured pandemic losses, including those subject to the type of exclusions discussed above.

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