Business Income Insurance for Covid-19 – One Year Later

We now have passed the one-year anniversary of the COVID-19 crisis, and many businesses have pursued Business Income insurance claims for revenue lost due to the pandemic. The aggregate value of these disputes is staggering, and if even a fraction of claims are ultimately successful, the overall impact on the insurance industry would potentially surpass environmental and asbestos liabilities.

Business Income insurance (also known as Business Interruption insurance) is a component of first party property policies. It replaces lost revenue that is caused by “direct physical loss or damage” to covered property. In addition to Business Income coverage, most property policies contain additional lines of coverage designed to replace lost revenue, such as Civil Authority, Ingress & Egress, and Dependent Business Coverage, among others. The additional coverages also require “direct physical loss or damage” to the property of the policyholder, or the property of another entity. Therefore, whether the presence of the coronavirus (and/or the government closure orders prompted by the virus) satisfies the phrase “direct physical loss or damage” will be the most important and heavily litigated issue that the insurance industry has confronted in decades.

Our team published an article at the start of the COVID-19 crisis with preliminary observations, predictions, and advice for policyholders asserting claims. Business Interruption Insurance for COVID-19 and Coronavirus Losses. The thesis of that article is that insurers’ reflexive, across the board denials of coverage are unjustified, and that COVID-19 insurance disputes will be decided based on the three factors affecting all insurance disputes: policy wording, state law, and the specific facts of each loss. These factors vary from case to case, and therefore the results of COVID-19 Business Income cases should be expected to vary as well. The cases decided over the past year, taken together, illustrate the importance of these three factors.

It may be ten years or more before the final chapter is written on insurance coverage for COVID-19 losses. This article will summarize the events and court decisions of the past year, and it will offer strategies for businesses to maximize their chances of recovery based on what the first year of data has shown.

The Insurance Industry Narrative that No Coverage is Available: When the world came to a halt a year ago, insurers wasted no time communicating their talking points that there is no Business Income coverage available for COVID-19 losses, and that submitting a claim would be a waste of time. Insurers’ representatives generated countless articles and press releases with the same theme, i.e., the mere presence of coronavirus, an invisible substance that can be wiped away with a cloth, does not constitute “direct physical loss or damage” to property because it does not alter the property’s structure. Many businesses accepted this narrative at face value and did not dispute their insurer’s preliminary denial of their claims. Many other businesses others submitted no claim at all. The insurance industry successfully took advantage of the extremely trying circumstances affecting many of its customers. It is difficult for a business whose revenue stream has fallen off substantially, or ceased altogether, to hire experienced insurance coverage counsel to go to war against a well-funded insurer. But fortunately, a substantial number of businesses did file lawsuits, and by now there have been enough preliminary court decisions to evaluate the accuracy of the insurance industry’s narrative.

Summary of COVID-19 Court Decisions to Date: There have been over 2,000 COVID-19 Business Income lawsuits filed in the past year, and to date there are approximately 250 substantive decisions on the books. By mid-March 2021, there have been approximately 200 cases decided in favor of insurers, and approximately 50 in favor of policyholders, resulting in an 80/20 ratio in favor of the insurers.

1 While the case count favors insurers, the body of law follows patterns and provides guidance as to which claims are likely to be covered. Most of the decisions in favor of insurers were based on two features. First, a heavy majority of the 200 decisions in favor of insurers involved policies with virus exclusions. And second, in many of those 200 decisions, the policyholder did not allege the presence of the virus anywhere on its property.

But in cases where there is no virus exclusion in the policy, and where the policyholder does allege the presence of coronavirus on the property, a majority of decisions have gone in favor of policyholders. Most of those decisions have been denials of insurers¹ motions to dismiss, not a determination that coverage exists, so they are merely preliminary victories for the policyholder. But if the trend continues and the decisions are affirmed on appeal, there will be a majority rule that if (a) a policy contains no virus exclusion, and (b) there was COVID-19 or coronavirus on the property, then the policyholder is entitled to Business Income coverage. The case law has revealed several additional “plus factors” in terms of policy wording, state law, and claim features that suggesting a higher likelihood of success. For example, a case pending in U.S. District Court for the District of Colorado, Tom’s Urban Master LLC vs. Federal Insurance Company, Case No. 1:20-cv-03407, contain no virus exclusion and alleges virus on the property, and then it also contains several additional features — state orders requiring the complete closure of the businesses at issue; a 1,000-foot property extension in the policy (discussed below); publicly known and reported individuals with positive COVID-19 tests on the premises; admissions by the insurer in its 10K filings and other public forums; and, favorable state law precedent on the “loss or damage” issue. Western Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52, 56 (Colo. 1968). Cases with favorable features such as these are likely to result in substantial recoveries.

The 80/20 ratio in favor of insurers does not prove the accuracy of the insurers’ narrative that no coverage is available, because the first 250 decisions are not a representative sample. The insurance industry was strategic in selecting the right cases for early decisions in their favor. But as time moves forward, policyholders will use the early decisions to choose which cases are worth pursuing, and to present those claims most effectively. For policyholders that elected not to pursue litigation in the early months of the COVID-19 crisis, now is an appropriate time to re-evaluate their claims under the precedent that has developed around the country.

Early Summary Judgment Decisions In Policyholders’ Favor: While most of the favorable rulings have been denials of motions to dismiss, at least five courts have written thorough, well-reasoned opinions granting partial summary judgment in favor of the policyholder, leaving only the amount of damages to be determined. Smile Savers Dentistry, PC vs. CNA, No. GD-20-006544 (Pa. Ct. Common Pls. Allegheny Cty. March 22, 2021); Cherokee Nation, et al. v. Lexington Insurance Company, Case No. CV-20-150 (District Court of Cherokee County, OK, January 29, 2021) Henderson Road Restaurant Systems, Inc. v. Zurich Am. Ins. Co., 2021 WL 168422 (N.D. Ohio Jan. 19, 2021); Perry Street Brewing Co. vs. Mutual of Enumclaw Ins. Co., No. 20-2-02212-32 (Wash. Super. Ct. Spokane Cty. Nov. 23, 2020); North State Deli, LLC., et al. vs. The Cincinnati Ins. Co., Case No. 20-CVS-02596 (N.C. Sup. Ct. Durham Cty. Oct. 9, 2020). In all five cases, the policyholder was in a business that required in-person customers to visit a facility (three restaurants, one casino, one dentist), and in each case the business was required by government order(s) to close entirely. The most interesting and important element of these decisions is that they did not require the policyholder to establish the presence of COVID-19 or coronavirus on the insured property. In each case the court held that the closure orders deprived the policyholder of its ability to use property for its revenue-producing purpose, and that therefore the closure orders, standing alone, qualified as “direct physical loss or damage to property.” The Courts focused on the word “loss,” and held that “loss” must be given its own meaning, distinct from the word “damage.” These cases were based on standard principles of insurance policy interpretation that are the law in all states, and therefore this line of authority is a powerful weapon for policyholders in virtually any state. An early motion for summary judgment based on these cases should be given serious consideration in virtually any COVID-19 Business Income case.

There is Not Yet Any Appellate Authority: To date there have been no appellate decisions addressing COVID-19 Business Income coverage, but there will likely be a number of appeals decided by the end of 2021. There are appeals pending in several federal appellate courts, and there have been many requests for certification to various states’ high courts. As one example, a federal district court in Ohio requested that the Supreme Court of Ohio address the “direct physical loss or damage” issue, and the parties are waiting for the Supreme Court to state whether it will take the case. Neuro-Communication Services, Inc. v. Cincinnati Ins. Co., Supreme Court No. 2021-0130, Certified by the U.S. District Court for the Southern District of Ohio, Pearson, J., January 19, 2021. Because contracts are governed purely by state law, a decision by one or more state Supreme Courts would be extremely significant. Once a body of appellate law develops, there will potentially be stark differences from one state to the next regarding insurers’ duty to pay for COVID-19 losses.

Non-COVID 19 Case Law on Loss or Damage to Property: Every state has its own historical case law defining what constitutes “loss or damage” to property for purposes of Business Income coverage. Some cases hold that there must be structural alteration to property (i.e., a roof collapsing or a fire destroying a building), but others have held that structural alteration is unnecessary. Policyholders have based their position on a body of law from around the country holding that property damage exists even when the structural integrity of the property is not affected. E.g., Western Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52, 56 (Colo. 1968) (gasoline vapors); Oregon Shakespeare Festival Ass’n v. Great Am. Ins. Co., 2016 WL 3267247, at *9 (D. Or. No. June 7, 2017) (smoke); Essex Ins. Co. v. BloomSouth Flooring Corp., 562 F.3d 399, 405-06 (1st Cir. 2009) (carpet odor); Mellin v. N. Sec. Ins. Co., 115 A.3d 799, 804-805 (N.H. 2015) (cat urine); Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., 2014 WL 6675934, at *5 (D.N.J. Nov. 25, 2014) (ammonia gas). The coronavirus has caused over 550,000 deaths in the United States, and is infinitely more dangerous than smoke, cat urine, and the other conditions at issue in these cases. These cases support the argument that the closure and inability to use property because of a dangerous virus constitutes “direct physical loss or damage” to the property, and the key to that argument is the word “loss.” A building cannot be “lost” as car keys or a cell phone might be, so to give the word “loss” a reasonable meaning in the context of Business Income insurance, it must be interpreted to include the owner’s loss of ability to use property for its revenue-producing purpose.

A Virus Exclusion Does Not Necessarily Defeat a Claim: A substantial percentage of the over 2,000 lawsuits brought to date involve policies with a virus exclusion. Policyholders have advanced a variety of arguments as to why the exclusion does not apply, such as ambiguity, regulatory estoppel, and others. The most effective argument has been that the lost revenue is not caused by the virus itself, but rather by closure orders, and therefore the exclusion is inapplicable as written. This argument has been unsuccessful in most instances where it was attempted, but it has been successful in a limited number of cases. E.g., Urogynecology Specialist of Florida LLC v. Sentinel Insurance Company, Ltd., 2020 WL 5939172 (S.D. Fla. Sept. 24, 2020). In addition, the reasoning of the cases cited above that granted summary judgment to policyholders (Smile Savers Dentistry, Cherokee Nation, Henderson Road, Perry Street Brewing, and North State Deli) support an argument that the virus exclusion is inapplicable to COVID-19 losses. None of these cases involved policies with the exclusion, but they required no proof of virus on the property, and held that the inability to use property due to the state and local closure orders qualified as “loss” of the property. Thus, there is ample authority to support the pursuit of coverage under policies even with a virus exclusion in force.

Certain Jurisdictions Potentially Favor Policyholders: Until there is a body of appellate law, it is premature to identify any jurisdiction as definitively good or bad. There have been certain states, however, that appear potentially more likely to yield good results to policyholders based on historical precedent on the property damage issue, favorable COVID-19 decisions, or a combination of those two factors. These states include Colorado, Missouri, Ohio, Pennsylvania, Washington, North Carolina, Virginia, Oklahoma, and several others. Early decisions under the laws of at least two foreign countries, England and France, have gone in favor of policyholders as well, so insurance policies construed under the laws of those nations offer good potential for recovery. Certain Insurers’ Forms Provide Stronger Opportunities for Recovery. The forms utilized by the major property and casualty Insurers for first party coverage vary from one to the next. Certain insurer’s forms allow for stronger cases to be asserted by policyholders. For example, Federal Insurance Company (a subsidiary of Chubb) uses a form known as the Customarq Classic Insurance Program, which has no virus exclusion, and which also defines the insured property to include a 1,000-foot radius. This means that even if the policyholder were required to prove the presence of the coronavirus on its property (i.e., a requirement contrary to the Cherokee Nation line of cases), it can argue that it has made that showing by proving that a person testing positive for COVID-19 was merely within 1,000 feet of its property, not on the property itself. In Tom’s Urban Master, mentioned above, the insured property is within 1,000 feet of the Staples Center in Los Angeles, and numerous NBA players with publicly-known cases of COVID-19 in March 2020 played games in that venue during the time when they were carrying the virus, which the policyholder will argue establishes virus on the property, as it is defined. Another example is Zurich’s Edge Property Form, on which many hospital and entertainment venues’ programs are written. This form carries state-specific amendments which delete the word “virus” from its standard contamination exclusion, demonstrating Zurich’s intent to cover revenue losses caused by viruses within those states. There are other examples of favorable features in certain insurer’s standard forms, and in addition, many larger companies’ policies are written on specially tailored forms with even stronger wording in the insured’s favor. It is therefore necessary to review a business’s policy closely to determine whether or not its losses are covered.

Class Actions Are Not the Answer: A surprising number of early COVID-19 lawsuits were framed as class actions on behalf of all policyholders asserting claims against the defendant insurer. There is at least one such case against most or all of the major property and casualty insurers. These suits were generally brought by law firms specializing in plaintiffs’ class action lawsuits, not lawyers who are experts in insurance recovery. Insurance coverage lawsuits historically have not been suitable for class action treatment, because differences in policy wording, facts, and state law predominate over perceived similarities in claims. We know of no COVID-19 insurance recovery class action(s) certified to proceed as a class, nor for that matter, any insurance recovery lawsuit of any kind certified to proceed as a class. The most likely outcome in these cases is that class certification will be denied, and any class member counting on a class action lawsuit to protect or vindicate its claim will find that that months or years of time have been wasted, and that possibly deadlines stated in its policy related to its own claim have been missed.

New Cases are Being Filed on a Steady Basis: Every day, more and more major US companies are filing lawsuits against their insurers seeking coverage for COVID-19 Business Income losses. In the past three weeks, suits have been filed by the Philadelphia Eagles, the Los Angeles Lakers, Madison Square Garden, In-N-Out Burgers, Planet Hollywood, a group of private Ohio universities, a group of 40 Marriott Hotels, and Caeser’s Entertainment, to name a few. These suits are seeking recoveries in the tens or hundreds of millions of dollars, and in most of these cases, the policyholder is represented by experienced, nationally known insurance recovery counsel. Sophisticated policyholders continue to file suits, even when the preliminary scorecard shows an 80/20 count in favor of insurers, because they can tell the difference between a winning hand and one that should be folded. These companies have analyzed case law developed to date, and determined that cases brought in the right jurisdiction, with the right policy language, and the right facts, offer good odds of success. When the final chapter on COVID19 Business Income is written years from now, it is likely that many companies will have successful outcomes.

Bad Faith Exposure for Insurers: The majority of COVID-19 Business Income lawsuits assert bad faith claim against the insurer, and with good reason. Insurers are required to investigate every claim independently, and the outcome of each claim turns on the three variables described above. But each of the major property and casualty insurers made a business decision at the outset of the COVID-19 pandemic to deny all claims, rather than to sort the meritorious claims from the others. Therefore, policyholders who do establish coverage can make a compelling argument that their claim was wrongfully denied as part of an overall business strategy that failed to take account of the individual merits of each claim. Many insurers have made public statements and admissions in the media and in their 10K and 10K filings that will be powerful evidence of their bad faith. For these reasons, policyholders whose claims are vindicated in court are likely to win consequential, punitive, or statutory damages, and/or attorneys’ fees, on top of the actual value of their claims.

Recommended Strategies: Policyholders who decided not to sue insurers after their claims were denied, or who elected not to submit a claim at all, should go back and evaluate their claim based on the case law and other events that have transpired over the past year. For policyholders that do hold meritorious claims, and who have the conviction necessary to pursue them aggressively, now is the perfect time to file suit, because the landscape has evolved sufficiently to identify the right forum and the right arguments to maximize chances of success. For policyholders that have valid claims, but which lack the resources or desire to litigate, an effective strategy would be to identify and track other claims lawsuits against the same insurer, under the same state’s law, and with similar policy wording and facts as their own claim. Successful outcomes in other cases can be used in negotiations with insurers to leverage settlements without the investment of the company filing its own lawsuit. But the window of opportunity may be closing, because policies often include contractual deadlines (in addition to state statutes of limitations) to file suit or to take other actions, and some of those deadlines are defined as one year after loss. Therefore, policyholders should move reasonably quickly to review their policies and assess their options.

About Milone Law Firm PLLC: We represent exclusively policyholders in all kinds of insurance coverage disputes. The founder of the Firm, Richard D. Milone, has practiced Insurance Recovery for over thirty years at major law firms, most recently Jones Day, and has helped clients recover over $1 billion from insurers. Milone Law Firm was formed to offer clients quality policyholder representation at substantially lower costs than large firms, often utilizing alternative fee arrangements. Further information about our team, our pricing, and our qualifications to assist policyholders is available at www.milonelawfirm.com.