The Las Vegas Strip Closed and So is My Business. Is the Pandemic a Covered Loss?

Author: Cheryl Wilson

Guest Editor: Allen Aho

June 1, 2020 9:00am

As any lawyer would respond:  It depends.  There are numerous coverage options a business owner has to explore in order to prepare for the uncertainties of the future. In an entertainment town like Las Vegas, a business owner should consider event cancellation and contingent or supply disruption policies in a comprehensive insurance coverage package. However, the issue of what is a covered loss is determined by the language in the final policy of insurance.

Beginning on March 12, 2020, Nevada declared a state of emergency and its governor issued emergency orders which closed all non-essential businesses and asked the citizens to stay home. http://gov.nv.gov/News/Emergency_Orders/Emergency_Orders/  Fully stocked restaurants had to pivot and focus on carry-out orders to conduct their business while bars and nightclubs were required to shut their doors. Food was going to waste, waiters and staff were suddenly unable to work and business owners are looking at their insurance to cover the losses.  Is a pandemic a covered loss?

Nevada law, as with all states, starts and ends with the language in the policy to determine if a loss of business income resulted from a covered cause of loss. An insurance policy should be “read as a whole,” and its “language should be analyzed from the perspective of one untrained in the law or in the insurance business. Policy terms should be viewed in their plain, ordinary and popular connotations.”  Am Excess Ins. Co., v MGM, 102 Nev. 601, 604, 729 P.2d 1352, 1354 (1986). If a term in an insurance policy is ambiguous, it will be construed against the insurer, because the insurer was the drafter of the policy. Powell v. Liberty Mutual Fire Ins. Co., 127 Nev. 14, ––––, 252 P.3d 668, 672 (2011). Whether a term is ambiguous depends “‘on whether it creates reasonable expectations of coverage as drafted.’” Thus, “a court should interpret an insurance policy to ‘effectuate the reasonable expectations of the insured.’” Id. at ––––, 252 P.3d at 672.  In other words, if a term is subject to more than one meaning, the policy will be read in favor of the insured.

In Fourth St. Place v Traveler’s Indemnity, 127 Nev. 957, 270 P.3d 1235 (2011), the Nevada Supreme Court was asked to interpret an “all-risks” policy which contained certain limitations and exclusions. The insured owned a building and hired a third party contractor to repair the roof.  The contractor, Above It All, removed the roof during a weekend and, when it rained during the weekend, the unprotected building was damaged by the rain and rendered uninhabitable to the tenants. The policy of insurance contained limitations as to rain damages to the property and specifically excluded damages caused by faulty workmanship. Accordingly, after submitting a claim for property damages and business income, the carrier denied the claim and concluded the damages did not result from a covered loss. The trial court agreed and entered summary judgment in favor of the carrier.  On appeal, the Nevada Supreme Court agreed:

The section of the Policy entitled “Coverage” provides, “We will pay for direct physical loss of or damage to Covered Property …caused by or resulting from a Covered Cause of Los.” The policy defines “Covered Causes of Loss” as “Risks of Direct Physical Loss” unless the loss falls within the “Limitations” or “Exclusions” sections of the policy.

We concluded that the Policy at issue does not provide coverage because the damage sustained by Fourth Street did not result from a covered cause of loss. Specifically, (1) the “Limitations” section of the Policy precludes coverage because the Building’s roof did not sustain damage by wind before it was damaged by rain, and (2) the “Exclusions” section of the Policy precludes coverage for damage because Above it All’s failure to prevent damage during the roof repair process is excluded by the “faulty workmanship” provision. Id., at 94.

It seems “technical,” but this is a correct ruling.  When contracts are interpreted as written, it protects the insured and the insurer because the duties and obligations are plainly stated. In this case, roof damages were only covered when caused by wind and since this roof damage was not caused by wind, there was no coverage.  Accordingly, in Nevada, the coverage starts and ends with the language of the policy.

How will Nevada law impact claims arising due to the pandemic? The insurance policy language will be strictly interpreted and in favor of the insured.  So, in a new complaint filed in the United States District Court in Nevada, Project Lion LLC, et al v Badger Mutual Insurance, 2:20-cv-00768 (April 28, 2020), the Court will first interpret the policy in its plain language and, if there is ambiguity, will rule against the insurer since it drafted the policy.  In this case, plaintiff asks the court to interpret its policy of insurance to include the current pandemic as a covered loss alleging it is not subject to the exclusion for “Civil authority.”  The Complaint alleges, among other things, the following:

        1. Plaintiffs’ Polices contain an exclusion for Civil Authority, which provides: We do not cover loss caused by order of civil authority, including seizure, confiscation, destruction or quarantine of property.  We cover loss resulting from acts of destruction by civil authority to prevent the spread of fire, unless the fire is caused by a peril excluded under the policy.
        1. The Civil Authority exclusion is not applicable to Plaintiffs’ claims because the Closure Orders and other orders of civil authority generally applicable to businesses, not as a result of any contamination of Plaintiffs’ particular property, and Plaintiff’s property was not seized, confiscated, destroyed, quarantined, or the subject any similar action.

Assuming the plain language of the policy excludes loss “caused by civil authority”, it will be up to the parties and the court to decide whether the exclusion applies in these facts.

Another new action is Levy Ad Group, Inc., v Chubb Corp., 2:20-cv-00763, (April 28, 2020).  The Complaint asks the Court to interpret policy language for Business Income with Extra Expense:

        1. The business interruption/business income coverage provides that the Chubb defendants will pay for the business income loss incurred by the Named Insureds due to the actual impairment of their operations, and for the extra expenses incurred by the Named Insureds due to the actual or potential impairment of their operations, directly caused by the prohibition, by a civil authority, of access to the insured business premises, as a result of direct physical loss or damage to property within one mile of the insured premises, caused by a covered peril.


        1. There are no exclusions in the business interruption insurance coverage for any pandemic or virus-related peril, although there are specific exclusions for earthquake, flood, fungus, nuclear hazards, pollutants, and war and military action.

While the court will interpret any ambiguities in favor of the insured, if the Court finds the insurance policy is not ambiguous, it will interpret whether the business interruption coverage applies and if it requires “a direct physical loss or damage to property within one mile of the insured premises.”

These two new cases exemplify only a few of the issues which will be impacted as businesses seek coverage for pandemic-related losses.  Due to the variety of policies and coverages a business may purchase, it is impossible to predict if all losses caused by the pandemic are covered by a commercial policy of insurance. However, in Nevada, the language will be interpreted in favor of the insured and given its plain meaning.  So, is the loss your business sustained due to the pandemic covered under your policy of insurance? Under Nevada law, it depends.

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