Five Takeaways for Insurance Companies from Early COVID-19 Business Interruption or Income Complaints

Commercial property policyholders seeking coverage for COVID-19-related losses have filed the first wave of declaratory judgment actions in state and federal courts across the country. These lawsuits offer insight into how insurers and reinsurers may be affected by policyholder strategy at this early wave of what is destined to be a tsunami of COVID-19 related claims. Complaints will evolve, but already some key takeaways have emerged.

Businesses are making claims under commercial property policies for business interruption and civil authority coverage in the wake of the COVID-19 crisis. Insurers are already denying these claims based on the lack of direct physical loss or damage as well as the application of exclusions and other policy terms. Where massive financial losses fall outside of coverage, litigation is sure to ensue. Policyholders have filed lawsuits in state and federal courts across the country, including in California, Florida, Illinois, Indiana, Louisiana, Oklahoma, Pennsylvania, Texas, and Washington, DC.

Here are five observations from a thorough review of these complaints. Please visit Clark Hill’s COVID-19 Insurance Coverage Claims resource center to see the latest lawsuits and read the complaints discussed.

1. Plaintiffs Will Come in All Shapes and Sizes

Taverns, theaters, and casinos have been the first to sue their property insurers, but businesses from every effected industry will follow suit. We have already seen a dental practice, business center, a wig shop, and a scuba shop petition courts to declare coverage exists for COVID-19 losses. 

Notable differences have emerged in the pleadings. Just among the policyholders in the handful of tavern lawsuits, plaintiffs have filed as a single tavern, a restaurant group, a regional group of taverns and theaters, or a proposed class action.

Renowned chef Thomas Keller joined forces with other respected restaurateurs and a property policyholder attorney to form Business Interruption Group (BIG), “a nonprofit that insists insurers pay owed business losses caused by the coronavirus.” BIG’s general counsel represents Keller’s restaurant group in coronavirus litigation in California state court as well as Oceana Grill in Louisiana state court. He previously represented multiple property policyholders in litigation following Hurricane Katrina and Superstorm Sandy.  

We expect policyholder plaintiffs’ pleadings to vary based on industry, size of the business, any prospective government intervention, and theories of property damage. The development of class actions is particularly worth monitoring.

2. Property Damage Is Key

Commercial property policies differ in language and terms, but business interruption and civil authority coverage universally require some direct physical damage or physical loss to the properties listed in the policy’s declarations. Policyholders bear the burden of establishing that a claim falls within coverage (direct physical damage or loss) in the first instance. 

In these initial complaints, plaintiffs primarily contend that coronavirus infects and remains active on surfaces for days, or lingers in the air for hours and that this condition is a dangerous environment constituting direct physical damage or loss. In so doing, they liken the (actual, probable, suspected, possible) presence of coronavirus on surfaces to the presence of ammonia or other gases which some courts have found constitutes direct property damage or loss. 

Policyholders will have a difficult time meeting the physical damage requirement by analogy. They must establish that the mere presence of the virus is physical damage or loss, even though it may immediately be wiped clean from surfaces and dissipates from ambient air somewhat quickly. The anticipation of harm or “damage” that can be readily wiped clean are not anticipated forms of direct physical damage or loss under these policies, as supported by the case law addressing the issue. Significantly, the restoration period (time required for property remediation during which the insurer is responsible for lost income) is not immediately triggered after physical damage but is effective only hours or days after the loss. Regardless of the subject business, policyholders will have a tough time credibly arguing surfaces cannot be wiped clean during this elimination period, which generally ranges from zero to 72 hours after the onset of direct physical damage or loss. 

3. Plaintiffs Are Adopting Language Used in Local Civil Orders

Plaintiffs also attempt to meet the direct physical damage or loss requirement by citing to government orders issued by local officials. Certain governmental authorities have crafted their orders to dovetail with the terms of commercial property policies. Civil authority coverage applies where access to an insured’s premise is precluded by a civil order issued as a direct result of physical damage from a covered cause of loss. Policies often contain geographic limitations as well. 

Some officials have expressly stated that property damage from the novel coronavirus is at least one reason for government action. For example, the stay-at-home order issued by Napa County states, as amended on April 2, 2020:

"This Order is issued based on evidence of increasing occurrence of COVID-19 within the County and throughout the Bay Area, and also its proclivity to attach to surfaces and cause temporary physical damage to property."

Although not yet cited by a complaint, the Broward County, Florida directive similarly states:

"WHEREAS, this Emergency Order is necessary because of the propensity of the virus to spread from person to person and also because the virus is physically causing property damage due to its proclivity to attach to surfaces for prolonged periods of time…"

Drafting civil orders to trigger coverage may be ineffective. For an analysis of the role of politicians in mandating coverage, see a recent article from Risk & Insurance.

4. The Virus or Bacteria Exclusion Is Important but It’s Not Everything

In each of the lawsuits filed to date, the plaintiff-policyholders either expressly allege that the commercial property policies do not include an applicable virus or bacteria exclusion, or understandably remain silent on the issue. Although the exact form of potentially-applicable exclusions varies, the ISO form virus or bacteria exclusion states:

"We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease."

In the complaints filed to date, plaintiffs have argued that if the novel coronavirus cannot constitute property damage and thereby trigger coverage, then insurers would not have created the virus or bacteria exclusion. 

However, the exclusion’s history makes clear that the industry intended it as a “belt-and-suspenders” strategy to absolutely foreclose the impossible task of globally indemnifying losses stemming from a universal calamity where ex post facto efforts are made to expand coverage. Thus, while insurers utilizing the virus or bacteria exclusion have a strong and clear defense against coverage, the lack of such an exclusion does not satisfy the policyholder’s burden to demonstrate direct physical damage or loss. 

5. Insurers Do Not Need to Deny Claims to Be Sued

Some plaintiff-policyholders have filed declaratory judgment actions against their insurers without first reporting their claim or receiving a formal denial. This is not surprising given that millions of businesses need immediate funding just to stay alive. Moreover, through trade organizations, lobbying, and denials, the insurance industry has made clear that COVID-19 is not a cause of loss anticipated under business interruption coverage. 

Insurers and policyholders have both made their positions clear, and will likely litigate these coverage disputes in numerous venues absent sweeping government intervention. Clark Hill will continue to monitor and analyze developments. Please visit our daily-updated COVID-19 Insurance Coverage Claims resource center to see the latest lawsuits and read the complaints.