Businesses, insurers at odds over COVID-19 business interruption claims

When Marla Poytinger temporarily closed her bar-entertainment business last month due to the COVID-19 coronavirus outbreak, she needed to figure out a way to stay afloat while continuing to pay and provide health insurance for more than 60 employees.

She and her husband, David Poytinger, own Milwaukee-based Bars and Recreation, the operator of axe-throwing bar AXE MKE, mini-golf bar Nine Below and painting bar Splash Studio, all located on Milwaukee’s East Side, as well as axe-throwing and floor shuffleboard bar NorthSouth Club in Walker’s Point.

Those businesses now sit lifeless and revenue has halted due to state-mandated closures of all bars and restaurants to curb the spread of the coronavirus. As they dipped further into their reserves each day, the Poytingers, who are parents to two children and one on the way, had to explore all options to stay afloat.

“We’ve literally read the 880-page (CARES Act) Bill and we’re working through every possible option for relief that we can get through that,” said Marla Poytinger in an interview with BizTimes Milwaukee earlier this month. “We’re applying for grants, applying for loans. We actually took out a home equity line of credit on our house. We’re digging deep.”

But before checking those boxes, Poytinger initially wanted to confirm their expensive business interruption (BI) insurance, also known as business income insurance, through Neenah-based SECURA Insurance would cover payroll expenses and net income loss due to the coronavirus shut down.

She was shocked to learn that, unfortunately, it would not.

In a March 16 email response, the Poytinger’s insurance agent at Mequon-based Robertson Ryan & Associates said BI coverage “only applies if there is direct physical loss of or damage to property at the premises.” And the policy’s civil authority provision “only applies if there is direct physical damage to property other than your own, which prohibits access to your property.”

Poytinger filed the claim anyway, only to have SECURA deny it “essentially immediately,” she said.

A company representative later explained that the claim would have been accepted if Bars and Recreation could have produced evidence that someone infected with the coronavirus entered one of its facilities. But because the business closed before that happened, or before there was evidence of it, the claim was denied.

“Essentially they’re saying ‘your problem is that no one got sick,'” said Poytinger. “I think that’s a backwards way of thinking.”

She’s frustrated because Bars and Recreation dolled out expensive BI insurance premiums for years to protect itself and its employees from disaster. Now at a time when the business is in dire need of a safety net, its insurance coverage is not kicking in.

If its BI claim was accepted, Bars and Recreation would collect a payment worth “hundreds of thousands of dollars,” said Poytinger, which could potentially determine whether or not the business could reopen after the shutdown. 

Bars and Recreation is not alone.

Many of the one-third of the country’s small businesses that have BI coverage are running into similar roadblocks with their insurance providers, who say they are not responsible for business loss related to COVID-19.

Their argument is BI insurance covers financial loss due to direct physical damage to the property such as from fire, explosion, flood or other natural disasters.

“The industry is not considering the (coronavirus) a physical damage item, therefore they are denying the claims based on the fact that there is no physical damage,” said Gary Burton, chief operating officer at Robertson Ryan & Associates.

And what’s more, many of these policies contain virus or bacteria exclusions, meaning no coverage is available for interruptions related to diseases like COVID-19 (even in the case that there was property damage). Without those exclusions, a tidal wave of claims from all of the businesses hurt by the coronavirus would devastate insurers, an industry representative says.

“The reason those exclusions exist is exactly what we’re experiencing today,” said Andy Franken, president of Wisconsin Insurance Alliance. “The industry is not capable of paying out claims to most of their insureds all at the same time.”

For Wisconsin’s insurance industry, Franken said data suggests paying out BI claims to small businesses would cost $2 billion to $3 billion every 45 to 60 days.

“It would put the solvency of many insurance companies in jeopardy and would leave all of their other insureds who have auto accidents, fires or other mishaps without insurance,” he said.

But Poytinger and other small business owners locally and nationwide aren’t so convinced.

“What it feels like, and what I think most people in my position believe, is the insurance companies are looking for a loophole to deny coverage and are sort of hiding out and hoping we’re all going out of business before they have to pay out any of these claims,” she said. 

“Since there’s no plan for this type of occasion, insurance companies have an out, saying, ‘Well if this would happen in a flood we would cover you… but as of now, we don’t have to cover anything,” said Justin Carlisle, James Beard Award nominated chef and owner of Ardent, Red Light Ramen and Laughing Taco, all in Milwaukee.

Income loss from COVID-19 isn’t covered on Carlisle’s insurance policies either, but limiting operations to carryout service and furloughing 50 employees has at least lowered the business’ insurance rates for now, he said.

In other states, policy holders have begun taking legal action against insurers. According to an April 8 report by Insurance Journal, a dozen business owners have sued insurance companies for refusing to accept BI coverage claims, but it’s likely only the beginning of widespread litigation.

Independent restaurants and bars are leading that charge as some of the hardest hit by COVID-19.

Late last month, Chicago bar operator Billy Goat Tavern filed a class action lawsuit against Fond du Lac-based Society Insurance, citing breach of contract and declaratory relief on behalf of themselves and all bar-restaurants in Illinois, according to court documents.

Carlisle said there have been rumblings of a possible class action lawsuit taking hold here in Wisconsin, led by Milwaukee-based chefs. Poytinger said it would be a necessary step to move the needle on this issue. Both operators are in talks with their attorneys.

Some of the national restaurant industry’s biggest names such as Thomas Keller, Wolfgang Puck and Jean-Georges Vongerichten, under a new advocacy organization called the Business Interruption Group, are calling on President Trump and lawmakers to pass legislation requiring insurers to pay out BI claims related to COVID-19.

So far, state legislation has been introduced in New Jersey, New York, Ohio, Louisiana and Pennsylvania, according to the National Law Review. But the National Association of Insurance Commissioners has urged Congress to oppose proposals forcing “insurers to retroactively pay unfunded COVID-19 business interruption claims that insurance policies do not currently cover,” placing the responsibility back in the hands of Congress to address the needs of the economy during a pandemic.

In addition to BI insurance coverage, restaurants are also calling for changes to the federal government’s $2.2 trillion CARES Act, which was passed last month to provide a lifeline for small businesses in the wake of COVID-19. But for many operators, getting those funds has been a long and difficult process, and after finding some holes, it seems the bill’s $350 billion Paycheck Protection Program could hurt the industry more than help.

That’s partly why restaurants, in the meantime, have turned to their insurance providers for help.

“If we had an actual clear (federal assistance) program that didn’t have all of these weird hoops to jump through, we would have a lot less pressure on the business interruption insurance issue,” said Susan Quam, executive vice president of the Wisconsin Restaurant Association.

She called the ongoing fight over BI coverage a “huge dilemma” for both restaurants and insurers, and said federal backing is needed to help insurers to pay out some, preferably all, BI insurance claims to policy holders.

“There’s really no winners in this…,” Quam said. “Restaurants need business interrupting insurance and if it’s going to be 10 times more expensive in the next six months because of heavy losses in the insurance industry, that doesn’t help us in recovery mode either.”

The retail industry is undergoing similar turmoil, as non-essential stores are forced to shutdown or shift to e-commerce and layoff employees.

Mark Blutstein can barely remember the last time he filed an insurance claim for his 110-year-old fourth-generation family-owned retail distribution business, which currently operates at two separate Milwaukee-based businesses, MukLuk’s-Express Promotions and Nitro Golf-QuietWear. 

MukLuk’s China-based factories that make its shoes and promotional products were closed down for weeks due to COVID-19, and major clients such as Kohl’s and Dick’s Sporting Goods have canceled orders for the 2020 spring season, which is basically a wash, he said.

Luckily, the business is able to keep its 100 employees for now. But being told there was no BI coverage available for COVID-19 loss was a slap in the face. 

After paying “huge” BI insurance premiums over the years and always being told by their insurance provider, Australia-based QBE Insurance Group Limited, “they’re there for you,” Blutstein said, “it’s unbelievable that this is not business interruption insurance.”

“I don’t want to rip on (companies like) American Family Insurance, but (Miller Park) is going to be named American Family Field, and they’re not paying business interruption insurance,” he said. 

“I understand that, if you look at the insurance companies they are very strong financially right now. They have a lot of surplus,” said Gary Burton, of Robertson Ryan & Associates. “I understand that it’s easy to say they should just pay this out… but it would have a profound impact on many insurance companies if they were forced to consider this to be business interruption.”

He pointed out the insurance industry is responding to COVID-19 in other ways such as workers compensation for medical workers, as well as suspending policy cancellations due to late payments through the end of May.

The state’s Office of the Insurance Commissioner last month mandated Wisconsin insurers to assist restaurants that had begun offering delivery service to customers during the COVID-19 public health crisis.

“In some ways that shows the power of the insurance commissioners,” he said. “No insurance company pushed back on Wisconsin OCT doing that… but I believe that if a state was to pass a law that would require them to pay BI coverage, the insurance company industry group would probably take them to court and fight this.”
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