As the COVID-19 pandemic continues to have significant economic consequences in the US, a key issue for insurers and businesses throughout the country will be whether all or a portion of losses may be covered by insurance. Because many commercial insurance policies likely do not provide business interruption coverage for losses occasioned by COVID-19 related shutdowns, there will be mounting legislative and regulatory pressure on insurers to pay business interruption losses despite what their policies say, as well as litigation regarding coverage 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 in some cases have found this coverage may apply where buildings have become uninhabitable or nonoperational because of contamination. See, e.g., Gregory Packaging Inc. v. Travelers Prop. Cas. Co. of Am., Civ. No. 2:12-cv-04418 (WHW)(CLW), 2014 WL 6675934, at *6 (D.N.J. Nov. 25, 2014)) (building rendered uninhabitable due to ammonia); Port Auth. of N.Y. and N.J. v. Affiliated FM Ins. Co., 311 F.3d 226, 235 (3d Cir. 2002) (asbestos); Western Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 437 P.2d 52 (Colo. 1968 (gasoline vapors); TRAVCO Ins. Co. v. Ward, 715 F.Supp.2d 699, 709 (E.D. Va. 2010), aff’d, 504 F.App’x 251 (4th Cir. 2013) (vapors from defective drywall); Essex v. BloomSouth Flooring Corp., 562 F.3d 399, 406 (1st Cir. 2009) (unpleasant odor). Other jurisdictions have found to the contrary. See, e.g., Universal Image Prods., Inc. v. Chubb Corp., 703 F. Supp. 2d 705, 709-10 (E.D. Mich. 2010); Mastellone v. Lightning Rod Mut. Ins. Co., 175 Ohio App. 3d 23, 40-41, 884 N.E. 2d 1130 (Oh. Ct. App. 2008); Great Northern Ins. Co. v. Benjamin Franklin Fed. Sav. & Loan Ass’n, No. 90-35654, 1992 WL 16749, at *1 (9th Cir. Jan. 31, 1992).

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.

Coverage Litigation

Businesses in different parts of the country have already begun filing lawsuits seeking declarations that their insurance policies cover their financial losses resulting from the pandemic. In light of the amounts at stake and number of businesses impacted by the pandemic, we expect an increase in policyholder litigation relating to these issues.

The proprietors of Oceana Grill, a New Orleans-based restaurant located in the French Quarter, filed a petition in state court on March 16 seeking a declaratory judgment that their business interruption coverage would cover COVID-19-related damages. The petition asserts that contamination by the coronavirus “would be a direct physical loss” requiring remediation to clean the surfaces of the establishment, and notes that the applicable policy does not include an exclusion for losses from a virus or global pandemic. It also asks the court for a declaratory judgment that a Civil Authority Order by Louisiana Governor John Edwards banning gatherings of 250 or more people in a single space and restrictions on restaurants issued by the Mayor of New Orleans trigger the civil authority provision of the policy. 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).

On March 24, two tribes in Oklahoma filed suits in an effort to recover financial losses to their casinos and restaurants, which are closed due to the outbreak. Chickasaw Nation Dept. of Commerce v. Lexington Ins. Co., No. CV-2020-00035 (Okla. Dist. Ct. Pontotoc Cnty., Mar. 24, 2020); Choctaw Nation of Oklahoma v. Lexington Ins. Co., No. CV-20-42 (Okla. Dist. Ct. Bryan Cnty., Mar. 24, 2020).

On March 25, in California, the owner of several Michelin-starred restaurants, including The French Laundry in Napa Valley, filed a similar complaint, alleging that his insurer owes coverage for both business interruption and property damage claims. French Laundry Partners, LP dba The French Laundry v. Hartford Fire Ins. Co., (Cal. Superior Ct. Cnty. of Napa, Mar. 25, 2020).

On March 26, a Houston-area wig store filed a lawsuit in Harris County Texas alleging the wrongful denial of coverage for business interruption costs due to the Covid-19 outbreak. Barbara Lane Snowden DBA Hair Goals Club v. Twin City Fire Ins. Co., No. 2020-19538/Court: 113 (Texas Dist. Ct. Harris Cnty., Mar. 26, 2020).

On March 27, a group of more than a dozen Illinois-based restaurants and other businesses filed a suit in District Court in the Northern District of Illinois against Society Insurance, Inc. The group of plaintiffs seek a declaratory judgment that their claims for business interruption coverage resulting from the coronavirus pandemic and associated government closure orders are covered under their policies with Society Insurance. The plaintiffs also bring a breach of contract claim and a claim for bad faith arising from Society Insurance’s denials of coverage, some of which the plaintiffs allege were preemptively and without notice by the insureds. Big Onion Tavern Group, LLC, v. Society Ins., Inc., No. 1:20-cv-02005 (N.D. Ill. Mar. 27, 2020).

New Orleans-based law firm Gauthier Murphy & Houghtaling LLC, which represents both the proprietors of the Oceana Grill and The French Laundry in their lawsuits, has formed a non-profit coalition of interested parties called the Business Interruption Group with the purpose of demanding payment for restaurants that have business interruption insurance and do not have virus exclusions in their policies. The group’s website (https://werbig.org/) states that the group’s intention is to bring legal action in every state if insurers do not start paying insurance business claims, and declares its support for federal subsidiaries for insurers that pay business interruption losses caused by the coronavirus. According to the website, founding members of the group include celebrity chefs Thomas Keller, Wolfgang Puck, Daniel Boulud and Jean-Georges Vongerichten.

Regulatory activity

Several states have issued data calls requesting information on business interruption coverage that property/casualty insurers write in their state.

New York. As reported in our prior Legal Alert, on March 10, the New York Department of Financial Services (DFS) directed all property/casualty insurers authorized in New York to provide policyholders under commercial property policies with an explanation of benefits under their policies and the protections provided in connection with COVID-19. The explanation would include information about the covered perils under the policy, whether contamination related to a pandemic may constitute physical damage or loss for purposes of business interruption cover, and whether a government order prohibiting or impairing the policyholder’s access to its covered property in connection with COVID-19 would be sufficient to trigger civil authority coverage under the policy.

Washington. On March 25, the Washington State Office of the Insurance Commissioner (OIC) issued a similar letter instructing all property/casualty insurers authorized to write business in Washington to provide the OIC with information regarding the commercial property insurance they have written in Washington state and the details on the business interruption coverage provided in the types of policies for which the insurer has ongoing exposure. For the purpose of the letter, “commercial property insurance” is defined to include business owner policies, commercial multiple peril policies, specialized multiple peril policies and policies providing substantially similar coverage to these policies.

The OIC letter required each responding insurer to provide the OIC with the volume of business interruption, civil authority, contingent business interruption and supply chain coverage the insurer wrote that was in effect on March 15.

The OIC letter also directed each insurer to examine the policies it has issued and explain the coverage each policy offers in regard to COVID-19, and to prepare and send to policyholders a “clear and concise explanation of benefits” under their policies that indicates whether the policies contain a requirement for "physical loss or damage" for business interruption coverages and whether contamination related to a pandemic may constitute “physical loss or damage.”

California. On March 26, the California Department of Insurance (CDI) issued a notice to all admitted and non-admitted insurance companies writing insurance in California requesting information related to business interruption coverage provided under commercial insurance policies. The notice asks insurers to provide information on the volume of business interruption coverage and explain other data elements for each policy. In particular, each insurer is directed to provide to CDI the volume of business interruption coverage, civil authority coverage, contingent business interruption coverage and supply chain coverage the insurer wrote that has not lapsed as of March 26. For these coverages, each insurer is directed to provide information on the following questions:

• How many policies are covered under each coverage identified above?
• Out of these policies, how many policies fall under businesses with more than 500 employees, or alternatively, meet your definition of large business?
• Out of these policies, how many policies fall under businesses with fewer than 500 employees, or alternatively, meet your definition of medium size business?
• Out of those with fewer than 500 employees, how many policies fall under businesses with fewer than 100 employees, or alternatively, meet your definition of small business?

Responses are due to the CDI by April 9.

Legislative Activity

Legislators at both the federal and state levels are considering whether to take legislative action 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.

Federal Activity

On March 18, a bipartisan group of 18 members of the House of Representatives sent an open memorandum regarding commercial business insurance coverage to the chief executives of the American Property Casualty Insurance Association (APCIA), the National Association of Mutual Insurance Companies (NAMIC), the Independent Insurance Agents & Brokers of America (the “Big I”), and the Council of Insurance Agents & Brokers (CIAB). In the memorandum, the lawmakers proposed that the insurance industry accept coronavirus-related financial losses subject to commercial coverage. The industry groups quickly responded, noting that property insurance policies, which are approved by state regulators, “do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.”

Notably, the federal CARES Act does not address business interruption insurance coverage.

On March 31, the Congressional Research Service (CRS) issued a report to Congress in which it discussed the issue of business interruption insurance coverage. In the report, CRS noted that some industry sources have estimated the cost of covering business interruption claims for small businesses to range from $110 billion to $290 billion, monthly.

State Activity

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.

Massachusetts, Ohio, New York, and Louisiana have each since proposed similar bills requiring insurers to cover otherwise-excluded claims arising from the coronavirus, and a Pennsylvania House Representative issued a memo last week indicating that he would introduce similar legislation. The Massachusetts, Ohio, and New York 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 law, SD.2888, would apply to businesses with as many as 150 employees, while Ohio House Bill 589, like the proposed New Jersey law, New York’s A-10226, and Louisiana’s HB 858, would only apply to businesses with 100 or fewer employees. So far, only the Massachusetts bill explicitly addresses 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 the other states do not expressly mention the virus exclusion, it is likely that the bills intend to override the exclusion.

These bills raise many questions that should be addressed in evaluating the viability of the proposed programs, including:

• How can the programs be structured so that they are not unconstitutional?
• How can the programs be funded without creating solvency burdens or unfairly affecting competition?
• Will insurers be able to pass surcharges on to policyholders by charging higher premiums?
• Which policyholders will receive the benefit of the legislative measures?
• How will reinsurance with respect to the policies subject to the legislation be impacted?

All but a small number of states have closed their legislatures as a result of the pandemic, thus leaving these pieces of legislation in a state of limbo.

NAIC

With this proposed 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 “Pandemic Risk Insurance Act of 2020” (PRIA) which would create the Pandemic Risk Insurance Program (PRIP) to provide a federal backstop for insured pandemic losses. 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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