A Question of Coverage: Business Interruption Claims

Businesses that lost employees to illness or were forced by state governments to close their doors for weeks or months during the COVID-19 pandemic thought their insurance payouts would cushion the financial blow.

But, for a year-and-a-half, business policyholders and their insurers have been embroiled in legal battles in state courts. The fight is over payouts of so-called “business interruption” policies — a form of property insurance that replaces income lost in the event business is halted.

“For the most part, insurers have rejected business interruption claims [related to the pandemic] and forced their policyholders to sue to obtain coverage,” says Peter Halprin, partner for insurance recovery at Pasich LLP.

Many if not most insurers say business interruption policies were meant to cover physical losses more commonly associated with tornados, hurricanes, or earthquakes — not a global pandemic and the ensuing government-ordered lockdowns.

But companies large and small that have paid premiums for business interruption insurance for years are crying foul, saying their claims are legitimate and necessary.

“Physical Loss”

Robert Gordon, senior vice president for policy, research, and international for the American Property Casualty Insurance Association (APCIA),  says that over the last year, “there has been an increase in litigation as plaintiffs’ lawyers are trying to capitalize on the pandemic.”

Companies large and small that have paid premiums for business interruption insurance for years are crying foul, saying their claims are legitimate and necessary.

He admits that many insured businesses suffered “extensive losses when consumers’ daily routines were dramatically disrupted.” However, he says, “business interruption insurance is part of property insurance policies that insure direct physical loss of or damage to covered property.”

And there lies the legal snag: insurers and their attorneys argue that “direct physical loss” is the destruction of covered property by fire or other insured peril or the physical loss of covered property due to theft, for example. “Direct physical damage” is the destruction or alteration in the structure or physical integrity of covered property by fire or other insured perils.

But business policy-holders and their proponents argue that the pandemic and its ripple effects caused what amounts to significant “business interruption.”

Even if there were no actual physical damage to a property or business, if the government is “telling you that you cannot use your property, or operate your business, that is a ‘physical’ alteration to your property,” and a BI policy should cover it, Halprin and other attorneys argue.

Case Files

More than 1,900 lawsuits have been filed, according to data compiled by the University of Pennsylvania Carey Law School. Less than a quarter have been decided, according to Reuters. Of those, 188, or nearly 40%, are being appealed.

John Ellison, a partner in the insurance recovery practice at Reed Smith, says the cases have been “a mixed bag… with bad results for some policy-holders and some success for [other] policy-holders.”

Ellison says the insurance industry is “claiming that they are winning more than losing… but they’re not taking into account the cases where the insurance claim has not yet been dismissed.”

A complicating factor is that insurance coverage is regulated at the state level. Some states, such as Ohio, North Carolina, New Hampshire, and Pennsylvania, have been more favorable to businesses in these cases, as opposed to states like New Jersey, which have typically sided with insurance companies, Halprin says.

Greg Thaler, managing director for the Berkeley Research Group, assists hundreds of clients in preparing their business interruption claims from COVID-19. They include more than 150 hotels and restaurants, a national department store chain, and a wide variety of retailers, manufacturers, entertainment companies, and construction firms.

Some U.S. companies have had their claims paid because they had language specifically covering pandemic-type losses: infectious disease or interruption by communicable disease coverage, Thaler says.

However, Thaler says, many companies with claims are battling with insurers over whether the loss of use of their properties is covered. In some cases, these plaintiffs had “all-risk” policies, which generally cover all causes of loss unless they are expressly excluded.

Other policies contain exclusionary language that insurers argue rule out claims related to pandemics or viruses, says Halprin. But some plaintiffs are challenging whether those exclusions are enforceable.

Some of the courts have ruled in favor of businesses when there is proof the pandemic directly affected the company.

For example, the Cinemark movie chain sued FM Global for $500 million for not paying out on a business interruption claim. In May, a U.S. District Court in Texas refused to dismiss the lawsuit, noting that COVID-19 was present on Cinemark properties. More than 1,700 Cinemark employees tested positive for, were exposed to, or displayed COVID-19 symptoms shortly after being on the properties.

The court also ruled that Cinemark’s insurance policy included “communicable disease response” and “interruption by communicable disease” coverages. However, FM Global says that coverage was limited to a much lower dollar amount.

Clarity Needed

Even if insurer’s policies didn’t exclude pandemic coverage, insurance industry lobby groups say there is no way they could cover the massive business income losses attributed to the pandemic.

Neil Alldredge, senior vice president of corporate affairs for the National Association of Mutual Insurance Companies (NAMIC), points out that the insurance industry could not offer enough financial support to offset the $400 billion-plus in pandemic-related losses to businesses.

The insurance industry, he says, only maintains an “$800 billion surplus. So this pandemic is beyond the scale and scope of what has been considered insurable.”

Some experts dispute that notion. According to the Insurance Information Institute, only about two out of five small businesses have business interruption policies. Tyler Leverty and Lawrence Powell, professors at the University of Wisconsin and the University of Alabama, told Reuters in June 2020 that insurers would be on the hook for a maximum of $120 billion a month in claims.

Regardless, groups like the APCIA have maintained that losses caused by government-mandated shutdowns should be reimbursed by the federal government. The APCIA backs the creation of a business continuity protection program (BCPP) to financially protect businesses in the case of future pandemic-related government shutdowns. So far, nothing has come of that idea.

Meanwhile, companies face a hardening market for business interruption insurance. “My clients have told me that insurers have increased their premiums per dollar of insurance,” Thaler says. “Insured companies are looking at ways to offset the pain of higher premiums by purchasing lower amounts of business interruption insurance or by increasing their deductibles.”

At the same time, he says insurers are “stripping out coverage related to virus and disease, so it is a bit of double-whammy for companies that now have to pay higher premiums for less coverage.”

Mike Rouse, practice leader for insurance broker Marsh LLC, says some carriers are experiencing losses at levels that are “much greater than they anticipated during their underwriting process,” which impacts available coverage as well as pricing.

If nothing else, the recent litigation and questions surrounding business interruption insurance provide a wake-up call for insurers and businesses alike, Halprin says.

With the former, there is hope that insurance companies will clarify the verbiage that may confuse policyholders (and the courts). For the latter, Halprin expects that the experience will drive them to more carefully review insurance policies and press their insurers for straightforward language.

“Policies need to be clearer and less complicated,” Halprin says. “There is an obligation to make sure this product is user-friendly.”

Karen Epper Hoffman is a freelance business writer.

Business interruption insurance, loss, pandemic, property insurance