Update: Business Interruption Claims Due to COVID-19
August 27, 2020
By Michael Bentivegna
Over the past several months, business owners, lawyers and accountants across the country have been questioning if insurance companies would pay on business interruption insurance claims on damages related to COVID-19. The insurance companies are stating that the lack of “direct physical loss or damage” to insured property forms the basis for their denial of these claims. This has led to a surge in insurance claims turning into lawsuits, with more than 800 as of the first week in August 2020. An alarming statistic is that for hurricanes, business interruption cases often spike between one and three years after the event. COVID-19 continues with no definite end in sight, and the 800 suits filed have already surpassed the number of cases filed for hurricanes Ike, Sandy, Irma and Harvey combined. Of course, hurricanes often only affect certain areas, whereas this pandemic has affected the world. The University of Pennsylvania is tracking the litigation numbers on its COVID-19 Coverage Litigation Tracker.
- Hartford Financial Services Group (130-plus), Cincinnati Financial Corporation (80-plus), Travelers Companies, Inc. (45-plus), Zurich Insurance Group Ltd (40-plus), and Erie Insurance Exchange (35-plus) are the top five insurance groups being sued, accounting for more than 40% of the cases.
- Business income (700-plus), extra expenses (615-plus), and civil authority (600-plus) are the three most sought-after coverages.
- The week of May 4, 2020, saw the highest increase in weekly filings, approximately 80 suits.
- The three most frequent industries are food services and drinking establishments (295-plus), ambulatory health care services (115-plus), and personal and laundry services (45-plus), accounting for more than 55% of the cases.
Some state representatives have initiated legislative action to try to help business owners, specifically small businesses, recover money from their insurance providers. On March 16, 2020, New Jersey lead the charge, proposing Bill A-3877 concerning business interruption insurance related to the 2019 coronavirus state of emergency. This bill states that “every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption in force in this State on the effective date of this act, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic, as provided in the Public Health Emergency and State of Emergency declared by the Governor in Executive Order 103 of 2020 concerning the coronavirus disease 2019 pandemic.”
Bill A-3877 would apply for any loss sustained during the declared state of emergency for companies with less than 100 eligible employees (full-time, working 25 hours or more per week) and is retroactive to March 9, 2020, for policies in force on that date. Over the course of March and April, nine other states also introduced similar bills regarding business interruption coverage and COVID-19, including New York (Assembly Bill A10226B), Pennsylvania (Bill 2372), South Carolina (Bill S 1188), Massachusetts (SD 2888), Rhode Island (H 8064), California (Assembly Bill 1552), Ohio (House Bill 589), Michigan (H 5739), and Louisiana (House Bill 858 and State Bill 477). Although these bills are similar to New Jersey, there are slight variations relating to number of employees. South Carolina would apply to businesses with 150 employees, while New York increases the number of employees to 250. Funding for reimbursement also varies. New Jersey states an insurer that indemnifies an insured who has filed a claim pursuant to its provisions may apply to the Commissioner of Banking and Insurance for relief and reimbursement from funds collected by all licensed insurers. Rhode Island would collects funds from insurance companies “other than life and health insurance companies.” Another variation among the bills relates to retroactivity. New Jersey’s bill would be retroactive to March 9, 2020, while Pennsylvania would be retroactive to March 6, 2020. Although Louisiana House Bill 858 failed, the remaining bills are still waiting approval, and insurance companies have time to make their cases as to why this would be so damaging to their industry.
There have been some early rulings on a few court cases that appear to be moving the needle in favor of the insurers. On July 2, 2020, a Michigan judge ruled in favor of the insurance company in Gavrilides Management Company, et al. v. Michigan Ins. Co. Gavrilides attempted to claim the loss of access was caused by government orders instead of the virus. The judge ruled ““direct physical loss or damage” requires more than mere loss of use or access, and that the virus exclusion clause excluded coverage caused by the impact of COVID-19. Judge Joyce Draganchuk of Michigan’s 30th Circuit Court ruled that some tangible alteration to a property is required to trigger coverage. In Washington, DC, a superior court judge also ruled in favor of the insurer, dismissing a restaurant’s business interruption claim. In Rose’s 1 v. Erie Indemnity, Associate Judge Kelly Higashi noted that the mayor’s orders were not a physical intrusion, therefore the orders “did not effect any direct changes to the properties.”
In Pennsylvania, Berkshire Hathaway filed a motion to dismiss a restaurant’s suit, arguing the virus exclusion "plainly applies" to the restaurant's claims. 1 S.A.N.T. Inc., the Town & Country Bar and Grill in New Castle filed suit against Berkshire Hathaway and the National Fire & Marine Insurance Co. The restaurant claimed the exclusion policy for loss due to contamination by virus was invalid because in 2006—when the Insurance Services Office Inc. received approval to put virus and bacteria exclusions into their policies—the state regulators misrepresented this as something that would not limit their coverage.
The early returns appear to be in favor of the insurer, as judges have been strictly citing the plain language of the insurance policies regarding viruses. However, it cannot hurt to be prepared for a shift in court decisions. To learn more, check out the following articles prepared by EisnerAmper’s FLVS team regarding how to prepare for and file a business interruption claim with your insurance provider.