The Law of Business Interruption Insurance

As the United States continues to grapple with the effects of COVID-19, small nonessential businesses that have been forced to shut down during the pandemic are finding that they cannot weather the storm financially. Social distancing continues, and businesses that are unable to function from employees’ homes remain closed, with no income.

You may be breathing a short sigh of relief if you purchased business interruption insurance for just such an occasion. However, when you filed your claim for coverage under your policy, your insurance provider probably denied your claim, asserting “force majeure,” which means that unanticipated circumstances prevent the insurance company from meeting their obligations under your contract. Or they may have claimed that the express terms of your policy do not cover the interruption or loss of income caused by the pandemic.

The business litigation attorneys at Foster Wallace, LLC, do not accept that response from insurance companies. Nor should you. We are ready to help you assert appropriate claims for the insurance coverage you deserve and are paying for. If your business has been shut down or slowed as a result of COVID-19, let us evaluate your insurance policy coverage and determine what is really covered. We know the reasons the insurance companies offer to avoid paying claims and are prepared to litigate those claims on your behalf so you can receive the coverage you need to ride out the storm of COVID-19 and remain in business, just like the insurance companies are doing.

If you have insurance that you believe should cover your loss of income resulting from COVID-19, here are two things you should do immediately:

Obtain a copy of your policy. If you do not have a copy of your insurance policy, the first thing you must do is obtain from your insurance provider a complete copy of your policy.
Contact Foster Wallace, LLC. The attorneys at Foster Wallace, LLC, will evaluate your policy, the type of losses covered, and its exclusions and limitations. We will evaluate the language of your policy and determine any claims you may have for coverage. Many policies place time limitations on notifying the provider of a loss. We will make sure your claim is timely filed and help you build a strong case for you to receive the benefits you deserve.

Below, we explain the reasons the insurance companies give to avoid paying on your claims. We will refute those arguments and discuss how litigation in response to these claims is taking hold. You need to be a part of this litigation if you want to keep your business in operation, and Foster Wallace, LLC, can help.

What Is Business Interruption Insurance?

Business interruption insurance (or business income insurance) is not standard insurance for most businesses. It is usually provided as a separate provision in an existing policy, or as its own policy. When effective, the insurance company pays benefits directly to the business for losses suffered to its property and income.

Under the broadest coverage, the insured is covered for all risk. However, narrower coverage may only cover certain risks that are enumerated within the policy. These are called “named perils.” Provided your policy covers the type of peril you suffered, a business interruption provision can protect you from a suspension or termination of your business operations. If this is triggered, you may recover for damages that may include:

Lost income or revenue
Expenditures
Obligations on a lease
Salaries or wages for employees
Tax payments
Loan payments

Having business interruption insurance guarantees coverage for these losses if the named peril in your policy occurs and causes you to suspend operations. The important issue, of course, is clearly defining the risks for which you are covered within the terms of the policy.

What Does Business Interruption Insurance Cover?

This is the question that scores of small businesses across the nation that have purchased business interruption insurance are asking. More specifically, they are asking why their insurance companies are denying their claims for losses suffered as a result of COVID-19. The answer depends on the express (or interpretation of) language in your policy.

A standard business interruption clause generally provides that

Your insurance company will pay for the loss of business income during the suspension or cessation of business operations until your business can be restored;
Any suspension of operations must be caused by direct physical loss, damage, or destruction of property; and
One of the causes covered in the policy must be the cause of your loss, damage, or destruction of property.

To recover under policies with provisions of this general nature, you must show that your loss of income in your business satisfies the express language of the provision in your policy.

I Pay for Business Interruption Insurance Coverage--Why Is My Insurance Company Denying My Claim?

It should not come as a surprise that with a peril as universally intrusive as COVID-19, insurance companies would assert a blanket denial of business interruption claims. Not only have similar claims been denied historically, the insurance industry is a for-profit industry and is not eager to pay out in damages the financial loss to businesses that COVID-19 will cause, which could reach as high as $300 billion per month. Even in “normal” (non-pandemic) times, insurance companies ultimately pay out to less than 1% of parties.

Historic Failure of Claims

Filing an insurance claim for loss or damage of property is not a modern concept. Such claims have been made since the mid-1800s, when financial backers of freight services insured transported cargo. However, until the early-1900s, there were no cases in which claims were granted for anything other than direct physical damage to the cargo.

It was not until the prohibition era that property owners (soon to become “bootleggers”) raised constitutional theories of contract and government takings to support claims that their property insurance should cover the loss of income they sustained because of prohibition. These claims failed equally consistently.

By the mid-1900s, only a spattering of cases across the country upheld insurance claims for loss of income resulting from the effect of civil authority limitations on access (ingress or egress) to one’s business. Though there were so few cases supporting such claims, at least courts were entertaining the argument that civil authority could play a role in the loss of business income that insurance companies had to cover.

Since then, litigation involving business interruption claims never really gained much traction, especially litigation involving civil authority. It was not until 2005, when Hurricane Katrina struck, that insurance companies consistently had to pay out business interruption claims. During Hurricane Katrina, the insurance industry paid up to $20 billion per month for damage claims.

With events like Katrina and COVID-19, most claims are brought on a class-action basis. It was after Katrina that courts took a more expansive view of insurance coverage for claims of civil authority (evacuation orders) as the cause for interrupted access to one’s business, holding that such claims were covered, even if there were no physical damage to the property. However, insurance companies have taken a different view of civil authority as a cause of business interruption in response to COVID-19, which the industry qualifies as an “extraneous force.”

What Does the Insurance Company Claim?

Here are the claims that insurance companies make to deny business interruption claims:

Business interruption policies cover loss of income only when it results from physical loss or damage to property, and COVID-19 does not qualify as physical loss or damage to property. (Note that there may be a legal difference between loss or damage “to” property and loss or damage “of” property. The exact term in your policy could make a difference in coverage.)
Business interruption policies do not cover loss of income that results from fluctuating conditions in the market or down-turns in the economy.
Business interruption policies do not cover consequences of contamination.
Business interruption policies do not cover government mandates issued in response to the spread of COVID-19.

What is “Direct Physical Damage or Loss”?

The express language of your policy is a key factor in determining whether your loss from COVID-19 is covered.

Loss or damage “of” property is different than loss or damage “to” property
Physical damage is different than physical loss
Physical damage or loss is different than “direct” physical damage or loss.

If your policy uses the term “direct,” then you must show that COVID-19 was the proximate cause of your loss. Because the COVID-19 virus can be spread by existing on the surfaces of the property in your business, it is a viable argument that this qualifies as direct physical damage.

Loss of revenue and expenses for decontamination could be viewed as covered. There are courts that have held that even loss resulting from the risk of property damage, such as a business location that is condemned because of the risk of a snow storm. The court held that even if the building suffers no physical damage in the storm, just the risk of damage was sufficient to qualify as the proximate cause of the loss, rather than the civil condemnation order itself. Likewise, there are several courts that have held that loss resulting from communicable diseases (SARS, MERS, Avian flu) can qualify as physical damage or loss.

Because there are cases supporting both views, it remains to be seen whether courts will consider COVID-19 as causing direct physical loss or damage to the actual businesses that have closed. It will be important to be able to show that there was some risk of contamination within the business itself to assert that it should be covered. However, there is case law supporting “de facto” contamination, which means that a court may assume that there would be contamination in the business.

What about the Exclusions Contained in My Insurance Policy?

Causes of loss that are usually covered in standard insurance policies include:

Fire
Lightning
Explosion
Wind
Hail
Smoke
Civil commotion
Sinkholes
Snow, ice, or sleet damage
Water damage

However, even if the effects of COVID-19 were qualified as physical damage or loss under the express terms of your policy, most policies incorporate specific exclusions that expressly are not covered under the policy. You should review your policy for any of these exclusions. You might look for the following:

Virus exclusions. After the SARS virus in 2003, many business interruption policies began including virus as a category of loss or damage that was excluded from coverage. Insurance companies are now trying to have COVID-19 included within the scope of the applicable virus exclusion.
Unfavorable business condition exclusion. Business interruption policies may also include a provision excluding losses or damage caused by "unfavorable business conditions," such as delay or loss of access to the market. Insurance companies assert that an economic down-turn resulting from COVID-19 is not covered.
Pollution exclusion. Likewise, many business interruption provisions include exclusions for losses resulting from pollution. This includes things like seepage, discharge, or the escape of pollutants that are not otherwise included as covered.
Loss of market exclusion. This exclusion usually means that the insurance company will not cover loss or damage resulting from delay in operation or loss of access to the market.

Just after the COVID-19 pandemic started, the American Property Casualty Insurance Association (APCIA) issued a statement providing:

Any action to fundamentally alter business interruption provisions specifically, or property insurance generally, to retroactively mandate insurance coverage for viruses by voiding those exclusions, would immediately subject insurers to claim payment liability that threatens solvency and the ability to make good on the actual promises made in existing insurance policies.

As with the question of whether COVID-19 qualifies as direct physical damage or loss, it also remains to be seen whether courts will find that COVID-19 falls under any of these types of exclusions. You can be sure that when issuing new exclusions in policies, insurance companies from now on will expressly exclude COVID-19 and other such pandemics from coverage.

Is This the Right Time to Raise a Claim?

Yes. Now is the right time to consult with an business litigation attorney to review your policy and to see how and where COVID-19 may fit within the express language of your policy.

In the meantime, there are numerous class action suits already being filed. For example, in Oklahoma, the Chickasaw and Choctaw nations filed suit against numerous insurers claiming that the financial losses their casinos suffered as a result of COVID-19 closures are covered under their policies. The nations claimed direct physical loss or damage as a result of the infection and interruption by civil authority imposing limitations on access to the casinos (ingress and egress).

In addition, there are several class action lawsuits filed in California, the District of Columbia, Florida, Louisiana, New Jersey, Virginia, and Wisconsin, on behalf of restaurants that have been forced to close but were denied coverage under their respective insurance policies. Other businesses in California have filed suit for coverage for laid-off workers and canceled fundraising events.

In these cases, the businesses claim that they suffered direct physical loss of the use of their property and that coverage does not require that the property be altered. The insurance companies of course claim that coverage requires actual and direct physical damage. With respect to the virus argument, the insurance companies claim that the shut-down was not the direct result of the virus but, rather, the result of the state’s decision to take precautionary measures against the risk of COVID-19, which called for business closures.

Federal lawsuits have been filed in Pennsylvania and Illinois. Each is seeking the federal court to consolidate similar claims brought in nearly 20 other jurisdictions so that the issues may be decided together, by one court. At the same time, even insurance companies are seeking declaratory relief for the court to decide whether COVID-19 is covered or not.

More and more cases will be filed across the country and will be consolidated to avoid inconsistent holdings between courts. Now is the time to speak with your attorney to determine the extent of your coverage under your existing policy and the possibility of joining the litigation.

Resolution by Legislative Mandate?

As business interruption cases continue to be filed around the country, state legislatures are taking it upon themselves to implement a fix by forcing insurers to cover business interruption claims caused by COVID-19. In March 2020, New Jersey became the first state to make such a proposal. The proposed bill would require insurers to cover business insurance claims arising from COVID-19 for small businesses (less than 100 employees working more than 25 hours a week), provided the business had an existing policy. Several other states have introduced similar legislation, including:

District of Columbia
Louisiana
Massachusetts
New York
Ohio
Pennsylvania
South Carolina

Many other states are postured to consider similar bills. However, none of these proposals have made much progress in their respective states. Insurers respond with several arguments against this type of legislation, claiming:

The proposed laws unconstitutionally impose on areas of contract law
The proposed laws will force insurers to move to other states
The proposed laws will put many insurers out of business or make it difficult or impossible to pay other claims

You Need An Experienced Business Litigation Lawyer On Your Side.

When it comes to resolving a business dispute, it pays to work with experienced commercial and business litigation attorneys who will arm you with the information you need to make critical decisions while fiercely representing your interests.. Contact us online or call our Kansas City office directly at 816.249.2101 to schedule your free consultation.