Following the initial blow of the COVID-19 pandemic last year, insurance companies were inundated with business interruption claims from customers in need of a lifeline.
Businesses ranging from restaurants to health systems sought payment for steep income losses due to government-mandated shutdowns or, in some cases, the presence of the coronavirus itself. The claims were largely denied by insurers under the premise that COVID-19 does not directly cause physical damage to property.
Arguing otherwise, businesses took legal action. According to national data collected by the University of Pennsylvania Carey Law School, more than 2,000 business interruption (BI) coverage lawsuits against insurers have been filed since March 2020.
Courts have largely sided with insurers. Of those 2,000-plus cases, only about 33% have been decided in trial-level state or federal courts, with about 40% of decided cases now up for appeal. To date, 90% of trial court rulings between state and federal courts have been made in favor of insurers.
This outcome doesn’t come as a huge shock to those in the industry.
“The contract language is pretty clear: Property damage needs to be part of the claim, and the courts, for the most part, have seen that quite clearly,” said Andy Franken, president of the Wisconsin Insurance Alliance. “We’re confident at the end of the day, despite some outlier courts, that the policy language will be upheld.”
BI insurance is typically added to a property/casualty policy and, therefore, is intended for events like fires, explosions and other natural disasters that damage a business’s property and halt operations as a result.
The success rate for insurers is even higher for cases that involve policies with exclusions for virus, bacteria and communicable disease, like COVID-19. Such exclusions were adopted by the industry following similar coverage disputes that emerged from the SARS outbreak of 2003. Written into most BI insurance policies today, virus exclusions serve as an extra layer of protection against paying out a mountain of claims for an event that impacts the masses.
“Some of our analysis put (COVID-19) claims upwards in the trillions of dollars,” said Jim Whittle, vice president and counsel at American Property Casualty Insurance Association. “The entire insurance industry in the U.S. would not have the capacity to pay that, so you’re looking at bankruptcies of insurers who are otherwise insuring other activities that we need.”
The issue of virus exclusions is a subject of dispute in ongoing litigation against one Wisconsin insurance company, Fond du Lac-based Society Insurance, which has been sued by dozens of Midwest-based hospitality businesses after broadly denying BI insurance claims last year.
The cases were combined under a multi-district litigation in the Northern District Court of Illinois. Judge Edmond Chang selected three bellwether plaintiffs: Chicago-based Big Onion Tavern Group LLC, Chicago-based Valley Lodge Corp., and Madison-based Rising Dough, Inc. Unlike most rulings in other courts, Chang has sided with the policyholders, denying Society Insurance’s motions to dismiss the case earlier this year.
According to court documents, the BI insurance policies in question do not contain specific virus or pandemic exclusions, and the businesses argue “that this fact alone, given that Society would or should have known of this industry best practice, implies that the policy necessarily encompasses business interruption due to viruses and pandemics.”
The central question of the case is whether the coronavirus and subsequent government mandates that restricted the use and operation of the business’s properties could be considered “direct physical loss of property.”
In his February ruling, Chang said a reasonable jury could find “the pandemic-caused shutdown orders do impose a physical limit: the restaurants are limited from using much of their physical space.” Meanwhile, he decided that Society Insurance does not owe coverage under the policy’s contamination provision and the civil authority provision, which kicks in when the government prohibits access to the property and area around it.
Other Wisconsin-based companies that have sued Society Insurance include Badger Crossing Inc. in Cashton, Santino LLC in Menasha, Colectivo Coffee Roasters in Milwaukee, and Al Johnson’s Swedish Restaurant in Door County.
From the insurance industry perspective, government is far better suited to address mass loss resulting from widespread disaster. Franken said insurance companies and other business groups are pushing for changes at the federal level.
“We supported the American Rescue Plan Act and the Paycheck Protection Program, but really, there needs to be some backstop of the federal government to help small businesses in future pandemics,” he said.
Going forward, education remains crucial to the consumer side of insurance. Whittle said insurers will likely adopt a standalone document to give to customers when they purchase BI insurance clearly stating that the policy does not cover pandemic losses. In addition, he encourages businesses to do their homework.
“Business owners need to be proactive and ask questions to get the coverage that they need,” said Whittle.