The last two weeks have seen the first lawsuits by businesses seeking insurance coverage for business losses due coronavirus-related events.  Two Napa Valley gourmet restaurants sued their insurance carrier to compel coverage because the restaurants were forced to close, and a group of Chicago movie theaters and restaurants banded together to sue their carrier after it denied coverage.  Louisiana, Oklahoma, and likely other states are seeing similar litigation.

These lawsuits could be a harbinger of a larger fight as other businesses will likely go to court to attempt to obtain coverage.  On the other side, insurance companies are aggressively seeking to limit the billions of dollars in coronavirus claims that are likely headed their way.

The Lawsuit by the Napa Valley Restaurants

Connoisseurs of fine dining may recognize the two restaurants that filed the lawsuit, The French Laundry and Bouchon Bistro.  The March 25, 2020, Complaint filed against The Hartford in Napa County Superior Court alleges that the restaurants purchased insurance to cover a business disruption where the government prohibits access to the restaurant in these circumstances.  Moreover, the Complaint says that the restaurants’ particular insurance policy was upgraded to include a “Property Choice Deluxe Form” that “specifically” covers losses from a virus.

The lawsuit is framed as a “Declaratory Judgment Action.”  As such, the restaurants are asking the Napa County Superior Court to find that the facts exist to trigger insurance coverage and order that The Hartford is required to pay for the covered losses.  We have not seen The Hartford’s response.

The Chicago Lawsuit

In Illinois, six business owners banded together to file a lawsuit against Society Insurance from which they had purchased “business interruption” insurance, allegedly without exclusions for viruses and pandemics.  The owners had to close their restaurants and theaters pursuant to a government coronavirus order.

Unlike the California case, the insurance company in Illinois had already denied the claims.  The business owners allege that the insurance company acted in bad faith, in part due to the speed of the denial, and did not meaningfully investigate the claims.  One of the restaurant owners, Erick Baylis, was quoted in the website Eater Chicago as expressing his frustration with his insurance carrier: “We’ve been paying our policies every month.  For them to come out and find a way not to pay, it’s outrageous.” 

Society Insurance said it would not comment on the lawsuit.  But according to the denial letter attached to the Complaint, Society rejected the claims because there was no physical loss to the property that would trigger coverage.  A government-ordered shutdown does not, according to Society, create a “physical loss” to the property, so there could be no coverage for the business interruption.   It further said that even if coronavirus had contaminated the businesses’ property, it would not consider that contamination to be the type of damage that was covered. 

The Insurance Industry’s Reaction to the Anticipated Flood of Coronavirus Claims

As a general rule insurance companies are trying to manage expectations about coronavirus claims. They are broadcasting their view that in most cases, no coverage exists, even if a policy is supposed to cover “business interruptions.”

A trade organization, the American Property Casualty Insurance Association (APCIA), issued a statement emphasizing its position that most business insurance policies exclude coverage for “communicable diseases or viruses.”  Additionally, insurers point out that policies that provide “business interruption” coverage usually require some sort of physical damage to the property, such as a flood or storm damage.  They say that a government-ordered shutdown caused by the fear of a virus may not be part of the coverage.

With these types of pronouncements, the industry is trying to curtail the filing of  claims and reduce public and political pressure to provide coverage where it believes there is no coverage.  They are especially active in this effort because of the overwhelming magnitude of potential claims.  Further, some state lawmakers across the country have proposed legislation to help guarantee coverage in certain policies.  We are not aware of any of those bills becoming law.

APCIA president and CEO David Sampson issued a statement warning that new laws requiring coverage for coronavirus claims could rock the insurance industry.  He said “[I]f policymakers force insurers to pay for losses that are not covered under existing insurance policies, the stability of the sector could be impacted.”

While insurance companies resist lawmakers imposing coverage, media reports suggest that they are considering asking for the government to search for other ways to address the anticipated onslaught of claims and litigation.  Legislatures, insurance departments, and courts may all soon be weighing in on these issues.

What Policyholders Should Do if They Have a Claim

Many businesses affected by the coronavirus outbreak want to know if their insurance company provides coverage.  The answer very much depends on the particular language in the business’s policies.

There is no universally-used “standard form” for commercial insurance policies and the terms often vary. As pointed out by the industry, policies that provide business interruption insurance usually require “direct physical loss of or damage to” covered property and some contain an exclusion for losses due to “virus or bacteria.”  Businesses should review the actual language and facts with their advisors.  

Other types of policies may also provide coverage for other types of losses. For a summary of the types of polices that might provide coverage, please refer to our previous article on the subject. We will continue to monitor the situation as the lawsuits unfold and as lawmakers and courts weigh in. 

In the meantime, businesses should not assume that they lack coverage for losses associated with the coronavirus.  Promptly filing a claim may be necessary to protect the business’s rights.  Many policies contain time limits on when a claim for coverage must be submitted.  Furthermore, even if the claim is denied, the decision may not be final.  The law, policy, and practice with respect to coverage for coronavirus-related claims is unsettled and likely to evolve.  Promptly filing a claim preserves options as we await developments.