While the world is adjusting to the life-changing effects of coronavirus and COVID-19, many businesses have experienced massive decreases in sales, and some have been forced to stop delivering their goods or services altogether. Restaurants, hotels, and the entire hospitality industry has been hit especially hard, since the population became completely home bound for several months.
These businesses are turning to their Business Interruption insurance as a natural means to replace lost revenue. To discourage claims, the insurance industry has put forth a self-serving narrative that there is no coverage available. The attorneys at Milone Law Firm have thirty years’ experience representing commercial policyholders against property and casualty insurers, and we hope that this summary will help policyholders to formulate their claims and to differentiate myth from facts.
The most important takeaway is that every business interruption claim is unique, and therefore any across-the-board commentary regarding the likelihood of coverage is likely to be misleading. Every insurance claim turns on three variables – the policy wording; the facts surrounding the loss; and, state law, which differs from one state to the next. It is impossible to determine whether a certain claim is valid without conducting an informed review of all three variables on a case by case basis.
With that background, here is a summary of the issues that we have identified and encountered while helping our clients to navigate their business interruption claims.
How Should Notice and Related Requirements Be Satisfied? Any business believing that it might have a valid claim should give notice to its insurer without delay. Notice of a claim can be provided by a broker, an attorney, or the business itself. In the COVID-19 crisis, providing notice as early as possible is important for the usual reasons (i.e., insurers will try to exploit late notice as a coverage defense), plus the fact that earlier-noticed claims will be evaluated sooner and later-noticed claims risk being buried in an avalanche of submissions. Policies typically provide instructions for how to give notice, and those should be followed to the letter. In addition, policies frequently contain deadlines for submitting a sworn proof of loss, and for filing a lawsuit, with the latter deadline often tighter than applicable statutes of limitations. These deadlines should be calendared and carefully followed.
Is there Truth to Insurers’ Public Statements of No Coverage? Some insurers, along with trade associations, agents, and lawyers representing their interests, have tried to discourage claims by issuing blanket statements that there is no business interruption coverage available for losses stemming from COVID-19. Given the overwhelming volume of claims that are expected, it is not surprising that insurers want to minimize their financial hit through any means necessary. However, broad statements are irresponsible and false. Every claim depends on its own merit, and many will prove to be valid. The insurers that publicized misleading, blanket statements in the media will face exposure for bad faith and unfair claims handling practices when claims go to litigation and the insurers’ public statements are proven wrong. But that is an issue for another day, and the immediate point for policyholders is that they should tune out the talking points and focus on the three things that matter – policy wording; facts surrounding the loss; and state law.
How Should Policyholders Handle Preliminary Interviews? In addition to some insurers’ approach of “deny first, ask questions later,” our team has encountered more professional responses from certain major insurers. Within a few days of notice, claims handlers have requested telephone conferences with policyholders. On these conference calls, the insurers have indicated that their own attorneys are reviewing the claim for coverage, and that a yes/no determination will be made as soon as possible. The claims handlers have also used these conferences as an opportunity to interview policyholders about the facts surrounding their claims. These interviews are an encouraging step, and the questions seem innocent enough. However, the insurers are providing the information gathered to their own coverage attorneys, who will be recommending whether to accept or to deny coverage. It therefore would be wise in advance of these interviews to have your own attorney review your policy to identify the potential disputes, so that truthful answers to these questions can be phrased in a manner that will maximize the chances of coverage. For instance, there is both a right and a wrong way to answer simple questions like “Have any of your employees tested positive for COVID-19,” or “Has your restaurant offered take-out or delivery.” You should think carefully about your answers to potential questions before such an interview.
Are Policyholders Filing Suits Against Insurers? From mid-March through late June 2020, there have been approximately 500 lawsuits filed by policyholders against their insurers pursuing Business Interruption or similar forms of coverage arising from the COVID-19 crisis. These suits have been brought in approximately 35 states, and some are framed as class actions on behalf of all policyholders asserting Business Interruption claims against a certain insurer. These suits are likely just the beginning, considering how many hundreds of thousands of businesses have lost revenue due to COVID-19. For further discussion of these suits and our recommendations for companies considering litigation, please see our article entitled “Strategy and Pricing for COVID-19 Business Interruption Claims,” available at www.milonelawfirm.com.
Is It Necessary to Prove that Property Damage Caused Lost Revenue? Business Interruption insurance generally does not come as a stand-alone policy, but rather is sold as part of a comprehensive package covering first-party property losses. Part of the genesis of the “no coverage” myth is the assertion by insurers that such policies do not cover business interruption generally, but only provide coverage as an add-on to physical property damage. Conceptually this can be true, but insurers often mischaracterize the necessary property damage as something that causes structural harm, such as flooding, wind, or a falling tree. But courts in many states have held that any condition that renders property un-usable qualifies as property damage for purposes of triggering business interruption and other components of property insurance. As two examples, a federal district court applying New Jersey law held that the presence of ammonia in a warehouse constitutes property damage, and the Colorado Supreme Court held that gasoline vapors in a building constitute property damage. In both cases, the property was not safe to inhabit until the condition was corrected. Many states have their own line of case law addressing the property damage issue generally. To date, two courts have issued preliminary rulings on this issue in the context of COVID-19, one favoring coverage, and one favoring the insurer. As this issue is decided from state to state, choice of law will likely become an important factor in claims resolution.
Are There Other Types of Coverage Available? Commentary has focused mostly on Business Interruption coverage, but most commercial property policies contain other lines of coverage that also can replace revenue lost due to COVID-19 closures. The most likely is Civil Authority, which provides coverage for lost revenue when a federal, state, or municipal authority orders closures. Other possibilities are Ingress/Egress, which applies when customers or suppliers are blocked from reaching the premises of a business, and Contingent Business Interruption, which applies when customers’ or suppliers’ own businesses are prevented from operating. These additional lines of coverage may require only off-site property damage (i.e., no damage to the Insured’s own property). Some policies include a Pandemic Event Endorsement, which would provide a separate pathway to coverage. The bottom line is that every policy needs to be scrutinized closely to determine what arguments can be made.
What About the “Virus” Exclusion In Some Policies? – One basis for the no coverage myth is an exclusion for viruses that has been added to some policies by endorsement. This exclusion is written on a standard form prepared by the Insurances Services Office (an industry group that prepares policy wording on behalf of insurers) in 2006 in response to the SARS virus. This exclusion is a significant hurdle, but many companies’ policies do not contain it, and to the extent that insurance industry talking points imply that the exclusion is standard in all policies, those statement(s) are misleading. In the case of policies that do not contain the exclusion, the absence of the exclusion creates a powerful argument in favor of coverage. And, many of the 500 lawsuits filed to date are brought under policies that do contain the exclusion, and policyholders have advanced arguments as to why the exclusion does not bar their claim.
Are there other Exclusions that Might Apply? – Most policies contain 1-2 dozen exclusions, and insurers that are intent on denying coverage for COVID-19 claims probably will find a way to argue that one or more of these exclusions apply. The exclusions’ applicability will turn on the same three variables as any insurance dispute (policy wording, facts of the loss, and state law). Under all states’ law, exclusions are to be construed as narrowly as reasonably possible, and ambiguity is construed in favor of the policyholder. Policyholders therefore will have the upper hand with respect to the arguments over whichever exclusion(s) an insurer might try to assert.
What State’s Law Will Govern? Since most policies do not contain a choice of law clause, determining which state’s law applies to a given policy is a complex process that turns on many factors, such as the residence of the policyholder, the insurer, and the broker; the location of the insured property itself; and several others. Different states apply different tests for choosing the governing law, and when litigation is filed, the court will apply the choice of law rules of the forum state. This means two things. First, before litigation has been filed, the applicable law is undetermined and unknowable, and thus open to wide interpretation. Therefore, in pre-litigation negotiations over coverage, policyholders should not accept insurers’ assertions that any one state’s law governs their policy. Second, if litigation is filed, choosing the right court is extremely important, because having the most favorable state’s law applied can swing the outcome of a dispute. Filing suit in a certain state does not guarantee that the law of that state will be applied, but courts do often lean toward applying their own state’s law when the relevant factors are conflicting.
Which Court Is the Best Choice for an Insurance Coverage Lawsuit? – Many factors go into choosing the right court in which to file suit. The best choice is frequently the policyholder’s home state. But often several different courts could be reasonable venues, and policyholders should carefully weigh the pros and cons of each. As noted above, the biggest factor is choosing the court most likely to apply favorable precedent on issues likely to control coverage, and what those issues are depends on the wording of the policy. An important factor also is choosing a court that is likely to remain open and active during the COVID-19 crisis. The faster a case moves forward, the greater the leverage for the policyholder.
Might an Insurer File Its Own Lawsuit Against a Policyholder? It is not uncommon for insurers to file their own declaratory judgment lawsuits against their insureds seeking a ruling that a claim is not covered. This scenario is explained further in a separate article available at www.milonelawfirm.com, “Our own Insurer Just Sued Us — Why Would they Do That, and What Should We Do Now?” One of the main reasons why insurers file preemptively is to establish venue in a state where they believe the law is favorable to their arguments. To date, we know of just one set of lawsuits filed by an insurer, and those suits involved unusual circumstances. But the possibility of insurers filing further suits cannot be ruled out. If policyholders choose not to sue, they should have a contingency plan in case the insurer beats them to the courthouse. This plan should include the policyholder’s readiness to get its own suit on file in a favorable jurisdiction, and then to win the forum battle between the competing lawsuits.
Are there Going to Be Laws Passed Requiring Insurers to Pay Claims? Bills have been introduced at the federal level and in several states that would require insurers to pay Business Interruption claims in connection with COVID-19 related shutdowns. Insurers likely will question whether federal and state authorities have the power to interfere with contracts between private parties. But these are unprecedented times which call for proactive and bold measures, and the insurance industry’s own efforts to discourage claims are likely among the factors that invited legislative activity. We will be watching closely to determine which bills get traction and how they can help in the advancement of policyholders’ claims.
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