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Developments in Business Interruption Insurance Coverage and Litigation Due to COVID-19

Author: Mike Coffey, Tina Ma

Guest Editor: Ashley Kaye

February 1, 2021 8:28pm

As coronavirus cases continue to rise, lockdown and stay at home orders have returned, shutting down and limiting business operations.  As such, it is likely the number of business interruption claims will increase in the upcoming months.  Historically, business interruption insurance cover claims arising from natural disasters and most policies contain a specific exclusion for damages arising from a virus.  Since the start of the pandemic in March 2020, insurers have received over 200,000 claims for business interruption losses arising out of coronavirus orders, with 50% of claims submitted by bars and restaurants.[1]  Some businesses seeking coverage under a business interruption insurance policy for closure due to COVID-19 have found their claim denied, since such coverage generally requires physical damage as a trigger for coverage.[2]  Approximately 82% of these claims were closed without payment, and just 3,000 were paid.[3]

Current Litigation Developments

There are currently over 1,000 COVID-19 business interruption litigation cases pending nationwide.[4]  Decisions issued from these cases have predominantly favored insurers, in the form of motions to dismiss.  Most courts have not needed to address the virus exclusion language in the policies, finding instead COVID-19 does not constitute a “direct physical loss” to property.[5]  Courts have granted approximately 70% of motions to dismiss as of late November 2020; where there is virus exclusion language in the policy, courts have granted the motion approximately 80% of the time. [6]  Overall, judges have dismissed more than four times as many business interruption lawsuits as they have allowed to proceed.[7]

In Social Life Magazine, Inc. v. Sentinel Insurance Co. Ltd., 20-CIV-3311 (VEC) (S.D.N.Y. May 20, 2020), the Judge denied plaintiff’s motion for a preliminary injunction seeking the insurer to pay its business interruption claim pending resolution of the suit because plaintiff was unlikely to show coverage under New York law.  In denying plaintiff’s motion, the Judge stated, “I feel bad for every business that is having difficulties during this period of time.  But New York law is clear that this kind of business interruption needs some damage to the property to prohibit you from going.”  Plaintiff voluntarily dismissed the suit on May 22, 2020.

On December 11, 2020, the Southern District of New York granted dismissal of a restaurant’s class action complaint for losses resulting from COVID-19 closure orders.  The court interpreted the policy language “direct physical loss of or damage to” to mean a “negative alteration in the tangible condition of the property.”  Based on the foregoing, the court held the loss of ability to use otherwise unaltered or existing property “cannot be classified as a form of ‘direct physical loss’ or ‘damage.’”  The court further held the complaint had not triggered policy’s civil authority coverage because the complaint failed to plead the surrounding area suffered damage or the closure order completely barred access to the insured property.[8]

In July 2020, the Judicial Panel for Multidistrict Litigation heard arguments in favor of consolidating all business interruption suits in a single MDL.  The panel declined to create a national MDL, stating there were too few common questions of fact, and centralization would not result in any efficiencies.  The panel left open the possibility of creating insurer-specific MDLs.[9]

At this time, litigation results have been favoring insurers, particularly in New York state and federal courts.  Motions to dismiss complaints arising out of business interruption claims have been predominantly successful based on the policy language concerning “direct physical loss or damage,” as well as a virus carve out and exclusion from coverage.

Legislative Developments

Early during the pandemic, several states, including New York, New Jersey and Pennsylvania, considered forcing insurers to cover COVID-19 business interruption losses.  Although various bills have been introduced, to date the bills remain pending and have not been enacted.[10]  New York’s bicameral legislature, consisting of a Senate and an Assembly, currently has two bills pending in each branch, for a total of four bills.  The proposed initiatives target property damage and business interruption policies, mandating such policies, “be construed to include among the covered perils . . . coverage for business interruption during a period of a declared state of emergency due to the coronavirus disease 2019 (COVID-19) pandemic.”  These bills make explicit the legislatively mandated revisions to insurance policies will control even in instances where the insurance contract has express virus exclusion carve out language.[11]

The New York bills would apply coverage retroactively to March 7, 2020, when the coronavirus pandemic began to take hold on New York businesses, and the state entered a shutdown.  Furthermore, the New York bills would require insurers renew any business interruption policy that expires while a state of emergency remains pending.  Under these bills, insurers must reissue new policies without rate increases.[12]

In addition to state initiatives, on November 19, 2020, members of the House Financial Services Committee’s Subcommittee on Housing, Community Development and Insurance discussed with insurance industry representatives and a small business owner representing the National Retail Federation proposals for a pandemic business interruption insurance program to help businesses in a future pandemic.  Rep. Carolyn B. Maloney of New York stated she plans to reintroduce her proposal, H.R. 7011, the Pandemic Risk Insurance Act (PRIA), modeled after the Terrorism Risk Insurance Act (TRIA), allowing the government and the private sector to share the cost of identified catastrophic events.  The bill would bar insurers from excluding viral epidemics from coverage.[13] However, her proposed program would be voluntary, unlike terrorism risk coverage.  The voluntary nature of the program could lead to lower insurer participation, which would result in higher costs so that not many businesses would choose or be able to purchase such coverage.  This cycle of events would make insurance coverage even more expensive in the future.[14]

Whether these proposed initiatives, in their current iterations or an amended version, will pass remains to be seen.  However, if courts enact any proposed legislation, it will significantly affect the business interruption policy coverage in the present and future.  Furthermore, if coverage is mandated for COVID-19 closure losses and applied retroactively, there could be serious implications in the litigation landscape as well.

Insurers should continue to monitor both the litigation and legislative landscape of these issues, and we will continue to do so to provide continued updates.

[1] See Joel Salomon, FSA, Business Interruption Claims Likely as Lockdowns Return (December 1, 2020) available at https://insight.factset.com/business-interruption-claims-likely-as-lockdowns-return (last accessed December 15, 2020).

[2] See Diane Schottenstein, Overview: Impact of COVID-19 on Commercial Leasing, City Bar Center for Continuing Legal Education (August 13, 2020).

[3] Salomon, Business Interruption Claims Likely as Lockdowns Return, supra.

[4] See Steven C. Corhern and Christopher L. Yeilding, COVID-19 Business Interruption Insurance Litigation: A Five Month Update (September 8, 2020) available at https://www.balch.com/insights/publications/2020/09/covid19-business-interruption-insurance-litigation (last accessed December 15, 2020).

[5] See Turek Enterprises, Inc. v. State Farm Fire and Casualty Co., No. 20-11655 (E.D. Mich. Sept. 3, 2020); 10E, LLC v. Travelers Indem. Co. of Connecticut et al., No. 2:20-CV-04418-SVW-AS, 2020 WL 5095587 (C.D. Cal. Aug. 28, 2020); Malaube v. Greenwich Insurance Company, No. 22615-CIVWILLIAMS/TORRES, 2020 WL 5051581 (S.D. Fla. Aug. 26, 2020); Diesel Barbershop, LLC, et al. v. State Farm Lloyds, No. 5:20-CV-461-DAE, 2020 WL 4724305 (W.D. Tex. August 13, 2020); Rose’s 1, LLC v. Erie Insurance Exchange, Civil Case No. 2020 CA 002424 (Sup. Ct. of the District of Columbia Aug. 6, 2020).

[6] Salomon, Business Interruption Claims Likely as Lockdowns Return, supra.

[7] See Jeff Feeley and Katherine Chiglinsky, Insurers Winning Most, But Not All, COVID-19 Business Interruption Lawsuits, Insurance Journal (November 30, 2020) available at https://www.insurancejournal.com/news/ national/2020/11/30/592047.htm (last accessed December 15, 2020).

[8] See Michael Cetta, Inc. d/b/a Sparks Steak House, on behalf of themselves and all other similarly situated v. Admiral Indemnity Company, 1:20-CIV-4612 (JPC) (S.D.N.Y. Dec. 11, 2020).

[9] Cohern and Yeilding, COVID-19 Business Interruption Insurance Litigation: A Five Month Update, supra.

[10] Cohern and Yeilding, COVID-19 Business Interruption Insurance Litigation: A Five Month Update, supra.

[11] See Matthew T. McLaughlin and Mark S. Vecchio, New York State May Alter the Scope of Business Interruption Policies to Cover COVID-19 Claims (June 18, 2020) available at   https://www.venable.com/insights/publications/ 2020/06/new-york-state-may-alter-the-scope-of-business (last accessed December 15, 2020); see also New York Assembly Bill 10226-B8.

[12] McLaughlin and Vecchio, New York State May Alter the Scope of Business Interruption Policies to Cover COVID-19 Claims, supra. 

[13] See Mary Williams Walsh, Businesses Thought They Were Covered for the Pandemic.  Insurers Say No., The New York Times (Aug. 5, 2020).

[14] See Zoe Sagalow, House Panel Loses Way on Pandemic Business Interruption Insurance, 2020 CQINSB 1273, (November 20, 2020).

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