Business Interruption Insurance Update

In the legal battle over whether business interruption insurance policies cover business losses due to the COVID-19 pandemic, a pair of recent cases have sided with the policyholders. This is positive news for theatres, restaurants, hotels, sporting teams, and other businesses that purchased business interruption insurance with the expectation that a pandemic such as COVID-19 would be covered under the policy. Business interruption insurance generally covers revenue lost while the property is out of commission due to some physical damage or loss to the business premises.

In North State Deli, LLC v. Cincinnati Insurance Co., No. 20-CVS-02569 (N.C. Sup. Ct. Oct. 7, 2020), the court granted the plaintiffs motion for a declaratory judgment and concluded that the business interruption insurance policies provide coverage for COVID-19 related losses. The court ordered the insurance providers to provide coverage for the increased expenses policyholders had to incur as a result of the pandemic, and for the loss of income to the policyholders due to being forced to close their premises during the pandemic.

The legal disputes over business interruption insurance frequently turn on the court’s evaluation of whether being mandated to temporarily close a business because of the pandemic constitutes a “physical loss.” In North State Deli, LLC, the North Carolina superior court stated that “the ordinary meaning of the phrase ‘direct physical loss’ includes the inability to utilize or possess … the full range of rights and advantages of using or accessing their business property.” No. 20-CVS-02569, slip op. at *6. As the businesses in this case were “expressly forbidden” by a government order to access their properties and use their business premises to generate income, the court concluded that this was a “direct physical loss” that the defendant insurance companies must provide coverage for. While the court determined that the businesses did not suffer any “physical damage,” the court determined that the plaintiffs suffered a “physical loss.” The court stated that the government orders “resulted in the immediate loss of use and access without any intervening conditions,” which constituted a “direct physical loss.”

Additionally, in Urogynecology Specialist of Fla. LLC v. Sentinel Ins. Co., No. 6:20-cv-1174-Orl-22EJK, 2020 U.S. Dist. LEXIS 184774 (M.D. Fla. Sept. 24, 2020), the court denied the insurance providers’ motion to dismiss plaintiff gynecologist’s claim to demand coverage under his business interruption insurance policy. Even though the insurance policy stated that any loss or damage regarding the “presence, growth, proliferation, spread, or any activity of … [a] virus” is excluded, the court stated that denying coverage for “losses stemming from COVID-19 … does not logically align” with the exclusions listed in the provision, such as “fungi, wet rot, dry rot, [and] bacteria.” The court also emphasized that COVID-19 has had a dire effect on our society, and therefore is distinguishable from prior cases that have analyzed exclusions to business interruption insurance.

The primary factor in these cases is the interpretation of “physical loss” and “physical damage.” Some states have determined that “physical loss” can exist “even in the absence of structural damage,” while other states have adopted narrower interpretations. David Yaffe-Bellany, U.S. Businesses Are Fighting Insurers in the Biggest Legal Battle of the Pandemic, Bloomberg Businessweek (Nov. 2, 2020). If the court determines that the business suffered “physical loss,” the court will then analyze whether the insurance provider intended to exclude a virus such as COVID-19 from the policy.

The fight over business interruption insurance providing coverage for COVID-19 related losses is still in the early stages. As of October 5, 2020, there are 1,288 lawsuits in the United States alleging that the plaintiff businesses should be provided coverage for COVID-19 related losses. Covid Coverage Litigation Tracker, U. Penn. L. Sch. (last updated Oct. 5, 2020). While 71.6% of the 60 cases that have entered the motion to dismiss stage have been dismissed, courts have sided with the policyholders on multiple occasions.

Business Interruption Insurance Update

On August 13, 2020, the Superior Court of New Jersey denied defendant’s argument that business interruption insurance does not cover financial losses due to the COVID-19 pandemic. Optical Servs. USA/JCI v. Franklin Mut. Ins. Co., No. BER-L-3681-20, (N.J. Super. Ct. Aug. 13, 2020). Defendant’s made two primary arguments. Its first argument was that the COVID-19 pandemic did not create a “physical alteration or change” plaintiffs’ premises, rather the pandemic created only a risk for retail businesses with no physical alteration to the premises. Defendant’s Motion to Dismiss, Optical Servs. USA/JCI, No. BER-L-3681-20, at *3. The second argument was that defendant’s business interruption insurance policy only covers businesses physically unable to access the premises due to events such as a “fire, collapse, or other loss to an adjacent premises,” and the pandemic did not prohibit people from accessing the premises. Id. at *9.

Plaintiffs in Optical Services are one of many businesses looking to have their losses from the pandemic covered by its business interruption insurance policy. Although the court in Optical Services denied defendant’s arguments, most courts so far have agreed with insurers’ legal arguments in concluding that losses from the pandemic are not covered under business interruption insurance policies. As of September 1, 2020, insurers have had policyholders’ claims dismissed in “state courts in California, Michigan, and the District of Columbia, and in federal courts in Texas and California.” Leslie Scism, Insurance Firms Gain Early Lead in Coronavirus Legal Fight With Businesses, Wall. St. J. (Sept. 1, 2020).

According to University of Pennsylvanian Carey Law School’s Covid Coverage Litigation Tracker, business across the United States have filed 1,230 cases seeking coverage from their business interruption insurance. Ten of these cases have been dismissed and decided in favor of insurance companies, while four of these cases have denied an insurance company’s motion to dismiss. Large quantities of insurance policies explicitly exclude coverage of claims arising from viruses, and many policies state that coverage under business interruption insurance require “direct physical loss or damage.” The courts have generally interpreted “direct physical loss or damage” to explicitly require “some form of actual, physical damage to the insured premises to trigger loss of business income and extra expense coverage.” Newman Myers Kreines Gross Harris, P.C. v. Great Northern Ins. Co., 17 F. Supp. 3d 323, 331 (S.D.N.Y. 2014).

Many businesses are attempting to work around the physical-damage requirement by arguing that COVID-19 particles “stick to surfaces and renders workplaces unsafe.” Leslie Scism, Companies Hit by Covid-19 Want Insurance Payouts. Insurers Say No., Wall St. J. (June 30, 2020). A federal court in Missouri agreed with this argument when the court asserted that the plaintiffs “plausibly alleged that COVID-19 particles attached to and damaged their property, which made their premises unsafe and unusable.” Studio 417, Inc. v. The Cincinnati Ins. Co., No. 20-CV-03127-SRB, at *12 (W.D. Mo. Aug. 12, 2020).

While courts have leaned towards insurers on this issue, the court in Optical Services illustrated that coverage of business losses and additional expenses from the pandemic is still an open issue, with many states and federal courts yet to have decided on the issue.

Business Interruption Insurance Update

This is an update on the business interruption insurance claims related to the COVID-19 shutdowns as of May 29th, 2020. Across the United States, businesses are calculating both the sunk and future revenue losses resulting from the COVID-19 pandemic. Numerous businesses have filed complaints against their insurers for wrongful coverage of certain losses due to the government-mandated shutdowns of regular business operations.

As of March 16th, The Oceana Grill of New Orleans, LA was the first business to sue an insurance company on the grounds of wrongful coverage of monetary loss as a result of the Coronavirus. In the case of Cajun Conti, LLC et al. v. Certain Underwriters at Lloyd’s of London, the owners of The Oceana Grill argue that Lloyd’s is responsible for insuring their restaurant because they hold an “all risks” policy, which does not specifically exclude losses incurred from a pandemic or virus. All risk policies are most often used in reference to physical damages, however, at this time many businesses are arguing that contamination from the virus constitutes physical damage. There have not been any further proceedings with this case, however, a variety of other businesses have followed suit and filed complaints against their insurers as well.

Currently, there have been eight lawsuits in six different states, including Louisiana, Illinois, California, Texas, Florida and Oklahoma. All eight of the pending complaints are from small business owners, six of the suits being from restaurant and bar owners. A majority of these cases claim that the national government shutdowns have majorly impacted their business operations and earnings.

In Chicago, movie theatre and restaurant owners are collectively suing their insurance carrier for wrongful coverage of work interruptions due to the pandemic. In this case, Big Onion Tavern Group, LLC v. Society Insurance, Inc., the small business owners claim that Society Insurance is wrongful in denying their businesses coverage from losses incurred due to “necessary suspension” of daily business when their policies explicitly promise coverage of government shutdowns. Furthermore, Society Insurance did not conduct coverage investigation which is required under Illinois law. Insurance companies in Illinois, like other states, are claiming that the existence of COVID-19 in a business does not qualify as property damage. In the state of Illinois, this is contradictory to laws as courts have held “dangerous substances” in the past to constitute “physical loss or damage.” Insurance industries are creating specific exclusions related to losses consequential to COVID-19, which would not be necessary if, in fact, the virus did not result in “physical loss or damage.”

In California, French Laundry Partners, LP et al. v. Hartford Fire Insurance Co. et al. (Napa County), argues that the government issued stay-at-home order was instituted as a result of evidence that the Coronavirus can live on surfaces and damage property. Many state guidelines are requiring businesses to fumigate their property before reopening to the public, furthering the argument that the Coronavirus has physically impacted business and thus insurance companies should be held accountable for upholding their policies regarding damaged property. Many of the business interruption insurance cases are filing similar claims for the wrongful representation of existing policies.

As the Coronavirus continues to ebb and flow over time and affect daily business procedures, it is expected that other policyholders will take similar legal action against their insurers. Certain states such as Massachusetts, New Jersey and Ohio have acknowledged this trend and have proposed laws related to insurance companies paying certain claims to support small businesses as a result of the economic strains caused by the COVID-19 pandemic. Currently, no bill has been passed.

Can Broker-Dealers and Funds Claim Trading Losses Due to the COVID-19 Governmental Shutdowns Under Business Interruption Policies or Contingent Business Interruption Policies?

Business interruption insurance, also known as business income insurance, is commercial property insurance designed to cover loss of income incurred by an organization due to a slowdown or suspension of its operations at its premises, under certain circumstances.  Business interruption insurance may include coverage for a suspension of operations due to a civil authority or order, pursuant to which access to the policyholder’s premises is prohibited by a governmental authority. Business interruption insurance is often paired with extra expense insurance, designed to provide coverage for additional costs in excess of normal operating expenses an organization incurs in order to continue operations following a covered loss. Contingent business interruption insurance is a related product and is designed to provide coverage for lost profits resulting from an interruption of business at the premises of a customer or supplier. The contingent property may be explicitly named, or the coverage may apply to all customers and suppliers.

Business interruption coverage is generally triggered when the policyholder sustains physical loss or damage to insured property by a covered loss as defined in the policy. In the event of a claim for a business interruption related to COVID-19, insurance carriers and policyholders will dispute whether the physical loss requirement has been satisfied. In the aftermath of previous viral outbreaks early this century (e.g., SARS, rotavirus, etc.), the insurance industry responded by adding exclusions designed to preclude coverage for such losses. The insurance coverage arguments are many, and those arguments will be the subject of litigation over the coming years.

Most business first-party property insurance policies include coverage not only for the property damage but also for loss in profits resulting from that damage.

The coverage for profits often covers loss resulting from:

  • Damage to the policyholder’s own property (business interruption)
  • Damage to the property of a customer or supplier or a supplier’s supplier (contingent business interruption)
  • Government action such as evacuation orders (order of civil authority)
  • Damage to properties that attract customers to the policyholder’s business (leader property)

The event that triggers any of these coverages is property damage — without which there will be no coverage for lost profits under a first-party property policy.

In Gregory Packing, Inc. v. Travelers Property Cas. Co. of America, a federal court in New Jersey found in 2014 that covered property damage had occurred when ammonia was accidentally released into a facility, rendering the building unsafe until it could be aired out and cleaned.

In reaching its decision, the court stated that “property can sustain physical damage without experiencing structural alteration.” Similar subsequent decisions in Oregon and New Hampshire have found property damage in the absence of structural damage.

Thus, many may argue that property damage has occurred in places where the virus is present.

Closures of public gathering places and all nonessential business activity in major cities worldwide may trigger coverage for “order of civil or military authority” — that is, for loss due to the prohibition of access to a business’s premises if caused by property damage within a specified distance of the insured property, such as one or five miles. Arguably, these closures have caused economic collapse and significant losses, particularly for companies that make their money trading securities.

That poses the question as to whether securities firms can use business interruption insurance to claim losses from the collapse of markets. Certainly, a more direct correlation arises from losses suffered because the trading firm physically shut down. While of course insurance companies will defend such claims on multiple grounds, these claims are much more direct.

But, what about trading losses or lost banking deals caused by the market meltdown arising from the pandemic, and related governmental shutdowns? While less direct, an answer could lie in the banks of the Mississippi River.

In the summer of 1993, the Mississippi and its tributaries experienced unprecedented flooding that affected nine Midwestern states. Twenty million acres of farmland were damaged, resulting in $6.5 billion in crop damage (See Doc. 35, Tab 28 at A172) (The Great Flood of 1993 Post-Flood Report U.S. Army Corps of Engineers September 1994). Total damage from the flood is estimated to be between $15 and $20 billion. Id. River, road, and rail transportation systems were disrupted on a large scale. Id.

Archer Daniels Midland Company and its subsidiaries (collectively, “ADM”) process farm products for domestic and international consumption. As a result of the Great Flood of 1993, ADM incurred substantial extra expenses and losses of income because of increases in both transportation costs and the cost of raw materials. ADM submitted claims to its insurance providers, who paid ADM approximately $11 million for losses sustained from the flooding. (See Compl., Doc. 1, Exhs). The insurance companies denied approximately $44 million in additional claims submitted by ADM. ADM brought suit, under multiple policies in the Southern District of Illinois, and the insurance companies defended.

According to the Southern District of Illinois, business interruption insurance is insurance under which the insured is protected in the “earnings which insured would have enjoyed had there been no interruption of business.” Archer-Daniels-Midland Co. v. Phoenix Assurance Co. 975 F. Supp. 1124 (S.D. Ill. 1997). In other words, business interruption insurance protects earnings that are lost or diminished because of a business interruption. ADM prevailed at the District Court.

On a related appeal, the 8th Circuit took up the issue. Archer-Daniels-Midland Co. v. Aon Risk Services. 356 F.3d 850 (8th Cir. 2004). The insurance companies argued that ADM could not recover because it did not suffer any business interruptions as a result of the flood. The insurance companies argued that Archer had actually continued production at its plants.

The 8th Circuit stated that “interruption of business” did not require ADM to show that its corn processing plants stopped or slowed down. “An interruption of business means some harm to the insured’s business” but the damage could have been caused to the property of a supplier. Most hedge funds, broker-dealers, and RIAs continued to trade during the governmental shutdowns, but the interruption to their business through the market meltdown, other than those hedged on short, was significant.

Under the ADM decision, coverage may be available, even where the policyholder incurred lost income or losses unrelated to the shutdown of its premises. While these issues are complicated, the flood of the Mississippi may provide securities trading firms with arguments that the shutdown of the economy is damage done to a supplier, above and beyond losses incurred from the physical closing of any offices. Thus, the trading losses caused by the government shutdown arising from COVID-19 could be seen as “harm to the insured’s business.” Of course, these issues will develop once the crisis subsides, but a battle looms on the scope of the insurance and the economic losses covered, including trading and securities losses.

 

Can Broker-Dealers and Funds Claim Trading Losses Due to the COVID-19 Governmental Shutdowns Under Business Interruption Policies or Contingent Business Interruption Policies?

Business interruption insurance, also known as business income insurance, is commercial property insurance designed to cover loss of income incurred by an organization due to a slowdown or suspension of its operations at its premises, under certain circumstances.  Business interruption insurance may include coverage for a suspension of operations due to a civil authority or order, pursuant to which access to the policyholder’s premises is prohibited by a governmental authority. Business interruption insurance is often paired with extra expense insurance, designed to provide coverage for additional costs in excess of normal operating expenses an organization incurs in order to continue operations following a covered loss. Contingent business interruption insurance is a related product and is designed to provide coverage for lost profits resulting from an interruption of business at the premises of a customer or supplier. The contingent property may be explicitly named, or the coverage may apply to all customers and suppliers.

Business interruption coverage is generally triggered when the policyholder sustains physical loss or damage to insured property by a covered loss as defined in the policy. In the event of a claim for a business interruption related to COVID-19, insurance carriers and policyholders will dispute whether the physical loss requirement has been satisfied. In the aftermath of previous viral outbreaks early this century (e.g., SARS, rotavirus, etc.), the insurance industry responded by adding exclusions designed to preclude coverage for such losses. The insurance coverage arguments are many, and those arguments will be the subject of litigation over the coming years.

Most business first-party property insurance policies include coverage not only for the property damage but also for loss in profits resulting from that damage.

The coverage for profits often covers loss resulting from:

  • Damage to the policyholder’s own property (business interruption)
  • Damage to the property of a customer or supplier or a supplier’s supplier (contingent business interruption)
  • Government action such as evacuation orders (order of civil authority)
  • Damage to properties that attract customers to the policyholder’s business (leader property)
  • The event that triggers any of these coverages is property damage — without which there will be no coverage for lost profits under a first-party property policy.

In Gregory Packing, Inc. v. Travelers Property Cas. Co. of America, a federal court in New Jersey found in 2014 that covered property damage had occurred when ammonia was accidentally released into a facility, rendering the building unsafe until it could be aired out and cleaned.

In reaching its decision, the court stated that “property can sustain physical damage without experiencing structural alteration.” Similar subsequent decisions in Oregon and New Hampshire have found property damage in the absence of structural damage.

Thus, many may argue that property damage has occurred in places where the virus is present.

Closures of public gathering places and all nonessential business activity in major cities worldwide may trigger coverage for “order of civil or military authority” — that is, for loss due to the prohibition of access to a business’s premises if caused by property damage within a specified distance of the insured property, such as one or five miles. Arguably, these closures have caused economic collapse and significant losses, particularly for companies that make their money trading securities.

That poses the question as to whether securities firms can use business interruption insurance to claim losses from the collapse of markets. Certainly, a more direct correlation arises from losses suffered because the trading firm physically shut down. While of course insurance companies will defend such claims on multiple grounds, these claims are much more direct.

But, what about trading losses or lost banking deals caused by the market meltdown arising from the pandemic, and related governmental shutdowns? While less direct, an answer could lie in the banks of the Mississippi River.

In the summer of 1993, the Mississippi and its tributaries experienced unprecedented flooding that affected nine Midwestern states. Twenty million acres of farmland were damaged, resulting in $6.5 billion in crop damage (See Doc. 35, Tab 28 at A172) (The Great Flood of 1993 Post-Flood Report U.S. Army Corps of Engineers September 1994). Total damage from the flood is estimated to be between $15 and $20 billion. Id. River, road, and rail transportation systems were disrupted on a large scale. Id.

Archer Daniels Midland Company and its subsidiaries (collectively, “ADM”) process farm products for domestic and international consumption. As a result of the Great Flood of 1993, ADM incurred substantial extra expenses and losses of income because of increases in both transportation costs and the cost of raw materials. ADM submitted claims to its insurance providers, who paid ADM approximately $11 million for losses sustained from the flooding. (See Compl., Doc. 1, Exhs). The insurance companies denied approximately $44 million in additional claims submitted by ADM. ADM brought suit, under multiple policies in the Southern District of Illinois, and the insurance companies defended.

According to the Southern District of Illinois, business interruption insurance is insurance under which the insured is protected in the “earnings which insured would have enjoyed had there been no interruption of business.” Archer-Daniels-Midland Co. v. Phoenix Assurance Co. 975 F. Supp. 1124 (S.D. Ill. 1997). In other words, business interruption insurance protects earnings that are lost or diminished because of a business interruption. ADM prevailed at the District Court.

On a related appeal, the 8th Circuit took up the issue. Archer-Daniels-Midland Co. v. Aon Risk Services. 356 F.3d 850 (8th Cir. 2004). The insurance companies argued that ADM could not recover because it did not suffer any business interruptions as a result of the flood. The insurance companies argued that Archer had actually continued production at its plants.

The 8th Circuit stated that “interruption of business” did not require ADM to show that its corn processing plants stopped or slowed down. “An interruption of business means some harm to the insured’s business” but the damage could have been caused to the property of a supplier. Most hedge funds, broker-dealers, and RIAs continued to trade during the governmental shutdowns, but the interruption to their business through the market meltdown, other than those hedged on short, was significant.

Under the ADM decision, coverage may be available, even where the policyholder incurred lost income or losses unrelated to the shutdown of its premises. While these issues are complicated, the flood of the Mississippi may provide securities trading firms with arguments that the shutdown of the economy is damage done to a supplier, above and beyond losses incurred from the physical closing of any offices. Thus, the trading losses caused by the government shutdown arising from COVID-19 could be seen as “harm to the insured’s business.” Of course, these issues will develop once the crisis subsides, but a battle looms on the scope of the insurance and the economic losses covered, including trading and securities losses.

Updates to Business Interruption Insurance

Here is an update on Business Interruption Insurance claims related to COVID-19 as of April 15, 2020.  First, some businesses are now looking at cancellation coverage as a means to recover COVID-19 related losses. For example, organizers of the Wimbledon Championship expect to receive a large insurance payment as COVID-19 resulted in the cancellation of the tennis tournament. The pandemic insurance policy will pay out an estimated $141 million following the decision to cancel Wimbledon.  

     Second, several businesses have already filed lawsuits seeking declarations that they are entitled to recover business losses resulting from the COVID-19 pandemic. The lawsuits allege that a civil authority, either a county or state official, ordered the business to cease normal operations to contain the spread of COVID-19 and that potential COVID-19 contamination constitutes physical damage or loss, which is either expressly covered by the policy or is not expressly excluded by the policy.

  In some cases, the plaintiffs rely on policy language that, they claim, specifically covers loss or damage caused by a virus. For example, the owner of the French Laundry and the Bouchon Bistro in the Napa Valley community of Yountville filed an action on April 15, 2020 that asserts a claim for civil authority coverage and alleges that the insurance policy “specifically extends coverage to direct physical loss or damage caused by a virus.” The lawsuit states the policy with The Hartford Fire Insurance Co. not only does not have an exclusion for a viral pandemic but, in fact, a “Property Choice Deluxe Form” in the policy extends coverage for a loss or damage due to virus. The suit says the restaurants had to furlough 300 employees after shutting down because of an order issued by the Napa County public health officer on March 18 allowing take-out and delivery only. The suit asks the Napa County Superior Court to declare that the order constitutes a prohibition of access to the restaurants and that it triggers coverage under the insurance policy.

The California lawsuit follows a similar suit by the Oceana Grill in New Orleans against a Lloyd’s of London insurer. In addition, a complaint filed in the Southern District of Texas seeks coverage under a “Pandemic Event Endorsement,” which expressly covered, among other diseases, “Severe Acute Respiratory Syndrome-associated Coronavirus (SARs-CoV) disease” and its mutations and variants, but alleges that the insurer denied coverage because it concluded that COVID-19 is not a mutation or variant of (SARs-CoV) disease. 

         On the other side of the spectrum, restaurants and movie theaters in the Northern District of Illinois allege that the businesses are entitled to insurance coverage because the Illinois Governor ordered their businesses to close and their insurance policies do not expressly exclude losses “caused by a virus.”  The Northern District of Illinois suit alleges that if the insurer wished to exclude pandemic-related losses, it could have done so, as many insurers have.

 

Can Broker Dealers and Funds Claim Trading Losses Due to the COVID-19 Governmental Shutdowns Under Business Interruption Policies or Contingent Business Interruption Policies

Business interruption insurance, also known as business income insurance, is commercial property insurance designed to cover loss of income incurred by an organization due to a slowdown or suspension of its operations at its premises, under certain circumstances.  Business interruption insurance may include coverage for a suspension of operations due to a civil authority or order, pursuant to which access to the policyholder’s premises is prohibited by a governmental authority. Business interruption insurance is often paired with extra expense insurance, designed to provide coverage for additional costs in excess of normal operating expenses an organization incurs in order to continue operations following a covered loss. Contingent business interruption insurance is a related product and is designed to provide coverage for lost profits resulting from an interruption of business at the premises of a customer or supplier. The contingent property may be explicitly named, or the coverage may apply to all customers and suppliers.

Business interruption coverage is generally triggered when the policyholder sustains physical loss or damage to insured property by a covered loss as defined in the policy. In the event of a claim for a business interruption related to COVID-19, insurance carriers and policyholders will dispute whether the physical loss requirement has been satisfied. In the aftermath of previous viral outbreaks early this century (e.g., SARS, rotavirus, etc.), the insurance industry responded by adding exclusions designed to preclude coverage for such losses. The insurance coverage arguments are many, and those arguments will be the subject of litigation over the coming years.

Most business first-party property insurance policies include coverage not only for the property damage but also for loss in profits resulting from that damage.

The coverage for profits often covers loss resulting from:

  • Damage to the policyholder’s own property (business interruption)
  • Damage to the property of a customer or supplier or a supplier’s supplier (contingent business interruption)
  • Government action such as evacuation orders (order of civil authority)
  • Damage to properties that attract customers to the policyholder’s business (leader property)

The event that triggers any of these coverages is property damage — without which there will be no coverage for lost profits under a first-party property policy.

In Gregory Packing, Inc. v. Travelers Property Cas. Co. of America, a federal court in New Jersey found in 2014 that covered property damage had occurred when ammonia was accidentally released into a facility, rendering the building unsafe until it could be aired out and cleaned.

In reaching its decision, the court stated that “property can sustain physical damage without experiencing structural alteration.” Similar subsequent decisions in Oregon and New Hampshire have found property damage in the absence of structural damage.

Thus, many may argue that property damage has occurred in places where the virus is present.

Closures of public gathering places and all nonessential business activity in major cities worldwide may trigger coverage for “order of civil or military authority” — that is, for loss due to the prohibition of access to a business’s premises if caused by property damage within a specified distance of the insured property, such as one or five miles. Arguably, these closures have caused economic collapse and significant losses, particularly for companies that make their money trading securities.

That poses the question as to whether securities firms can use business interruption insurance to claim losses from the collapse of markets. Certainly, a more direct correlation arises from losses suffered because the trading firm physically shut down. While of course insurance companies will defend such claims on multiple grounds, these claims are much more direct.

But, what about trading losses or lost banking deals caused by the market meltdown arising from the pandemic, and related governmental shutdowns? While less direct, an answer could lie in the banks of the Mississippi River.

In the summer of 1993, the Mississippi and its tributaries experienced unprecedented flooding that affected nine Midwestern states. Twenty million acres of farmland were damaged, resulting in $6.5 billion in crop damage (See Doc. 35, Tab 28 at A172) (The Great Flood of 1993 Post-Flood Report U.S. Army Corps of Engineers September 1994). Total damage from the flood is estimated to be between $15 and $20 billion. Id. River, road, and rail transportation systems were disrupted on a large scale. Id.

Archer Daniels Midland Company and its subsidiaries (collectively, “ADM”) process farm products for domestic and international consumption. As a result of the Great Flood of 1993, ADM incurred substantial extra expenses and losses of income because of increases in both transportation costs and the cost of raw materials. ADM submitted claims to its insurance providers, who paid ADM approximately $11 million for losses sustained from the flooding. (See Compl., Doc. 1, Exhs). The insurance companies denied approximately $44 million in additional claims submitted by ADM. ADM brought suit, under multiple policies in the Southern District of Illinois, and the insurance companies defended.

According to the Southern District of Illinois, business interruption insurance is insurance under which the insured is protected in the “earnings which insured would have enjoyed had there been no interruption of business.” Archer-Daniels-Midland Co. v. Phoenix Assurance Co. 975 F. Supp. 1124 (S.D. Ill. 1997). In other words, business interruption insurance protects earnings that are lost or diminished because of a business interruption. ADM prevailed at the District Court.

On a related appeal, the 8th Circuit took up the issue. Archer-Daniels-Midland Co. v. Aon Risk Services. 356 F.3d 850 (8th Cir. 2004). The insurance companies argued that ADM could not recover because it did not suffer any business interruptions as a result of the flood. The insurance companies argued that Archer had actually continued production at its plants.

The 8th Circuit stated that “interruption of business” did not require ADM to show that its corn processing plants stopped or slowed down. “An interruption of business means some harm to the insured’s business” but the damage could have been caused to the property of a supplier. Most hedge funds, broker-dealers, and RIAs continued to trade during the governmental shutdowns, but the interruption to their business through the market meltdown, other than those hedged on short, was significant.

Under the ADM decision,  coverage may be available, even where the policyholder incurred lost income or losses unrelated to the shutdown of its premises. While these issues are complicated, the flood of the Mississippi may provide securities trading firms with arguments that the shutdown of the economy is damage done to a supplier, above and beyond losses incurred from the physical closing of any offices. Thus, the trading losses caused by the government shutdown arising from COVID-19 could be seen as “harm to the insured’s business.” Of course, these issues will develop once the crisis subsides, but a battle looms on the scope of the insurance and the economic losses covered, including trading and securities losses.

Will Federal and State Governments Alter Insurance Contracts to Require Coverage for COVID-19 and Should Congress Fund Insurance Companies to Help Provide Coverage?

Business interruption insurance, also known as business income insurance, is commercial property insurance designed to cover loss of income incurred by a business due to a slowdown or suspension of its operations at its premises, under certain circumstances.  Business interruption insurance may include coverage for a suspension of operations due to a civil authority or order, pursuant to which access to the policyholder’s premises is prohibited by a governmental authority. Business interruption insurance is often paired with extra expense insurance, designed to provide coverage for additional costs in excess of normal operating expenses an organization incurs in order to continue operations following a covered loss. Contingent business interruption insurance is a related product and is designed to provide coverage for lost profits resulting from an interruption of business at the premises of a policy holder or supplier.

Business interruption coverage is generally triggered when the policyholder sustains physical loss or damage to insured property by a covered loss as defined in the policy. In the event of a claim for a business interruption related to COVID-19, insurance carriers and policyholders will dispute whether the physical loss requirement has been satisfied. In the aftermath of previous viral outbreaks early this century (e.g., SARS, rotavirus, etc.), the insurance industry responded by adding exclusions designed to preclude coverage for such losses. The insurance coverage arguments will be the subject of litigation over the coming years.

On March 10, 2020 members of the United States House of Representatives requested that four major insurance trade organizations cover business interruption claims arising from  COVID-19. The letter was addressed to the CEOs of the following organizations:

– The American Property and Casualty Insurance Association;

– The National Association of Mutual Insurance Companies;

– The Independent Insurance Agents & Brokers of America; and

– The Council of Insurance Agents & Brokers.

Members of Congress stated that business interruption insurance is intended to protect businesses against income loss as a result of operational disruption, and covering losses resulting from COVID-19 would “help sustain America’s businesses through these turbulent times, keep their doors open, and retain employees on the payroll.”

In response, the CEOs stated, “Standard commercial insurance policies offer coverage and protection against a wide range of risks and threats that are vetted and approved by state regulators. Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.” While recognizing the impact of the pandemic, the CEOs argued: “The proposed retroactive application legislation would fundamentally change the agreed-upon transfer of prospective risk-of-loss exposure to coverage for a known and presently occurring loss, something the parties did not agree to, the insurer did not rate for, and the policyholder did not pay for.”

New Jersey has taken preliminary steps to directly alter the terms of insurance contracts issued to insureds in New Jersey. On March 16, 2020, New Jersey Bill A-3844 was introduced with the goal of assisting businesses impacted by COVID-19.

The principal provision of draft Bill A-3844 states:

“Notwithstanding the provisions of any other law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption in force in this State on the effective date of this act, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic, as provided in the Public Health Emergency and State of Emergency declared by the Governor in Executive Order 103 of 2020 concerning the coronavirus disease 2019 pandemic.”

While no other state has taken any measure as extreme as the draft bill in New Jersey, it is possible other states will seek to influence whether insurers provide coverage for claims relating to COVID-19. On March 10, 2020, the New York Department of Financial Services mandated property casualty insurers provide to the department, “Certain information regarding the commercial property insurance it has written in New York and details on the business interruption coverage provided in the types of policies for which it has ongoing exposure.” Insurers must also provide the same information to policyholders. Several observers have noted this move could be a precursor to a draft bill similar to NJ A-3844 being introduced in New York.

With the anticipated passage (not finalized yet at the time of this article) of a $2 trillion economic relief package, it seems appropriate that Congress should assist insurers if they are going to ask insurance companies to pay for business interruption arising from COVID-19. By encouraging insurance companies to honor such claims, Congress seeks to support business and provide capital to the economy. Other industries such as the cruise industry and the aviation industry are receiving large bailouts as a result of COVID-19, under the theory that it’s “not their fault.” Perhaps given the extraordinary situation, the insurance industry can receive similar help in exchange for increasing the scope of coverage. In that way, the insurance industry would be required to be more reasonable when it considers coverage claims for COVID-19.

Business Interruption Insurance and COVID-19: Ocean Grill.

Business interruption insurance, also known as business income insurance, is commercial property insurance designed to cover loss of income incurred by an organization due to a slowdown or suspension of its operations at its premises, under certain circumstances.  Business interruption insurance may include coverage for a suspension of operations due to a civil authority or order, pursuant to which access to the policyholder’s premises is prohibited by a governmental authority. Business interruption insurance is often paired with extra expense insurance, designed to provide coverage for additional costs in excess of normal operating expenses an organization incurs in order to continue operations following a covered loss. Contingent business interruption insurance is a related product and is designed to provide coverage for lost profits resulting from an interruption of business at the premises of a customer or supplier.

Business interruption coverage is generally triggered when the policyholder sustains physical loss or damage to insured property by a covered loss as defined in the policy. In the event of a claim for a business interruption related to COVID-19, insurance carriers and policyholders will dispute whether the physical loss requirement has been satisfied. In the aftermath of previous viral outbreaks early this century (e.g., SARS, rotavirus, etc.), the insurance industry responded by adding exclusions designed to preclude coverage for such losses. The insurance coverage arguments will be the subject of litigation over the coming years.

The first case involving a business interruption loss due to COVID-19 has been filed. Cajun Conti LLC, et al. v. Certain Underwriters at Lloyd’s, London, et al., No. 2020-02558 (La. Dist. Ct., Orleans Parish, complaint filed March 16, 2020). The Plaintiffs, owners of a popular restaurant in New Orleans, Ocean Grill, seek a declaration from the court that this insurer, a Lloyd’s syndicate, must cover business interruption losses. New Orleans Mayor LaToya Cantrell ordered all restaurants in the city to limit operations to delivery only. That followed an order by the governor that barred any congregations of more than 250 people. Louisiana’s governor also closed bars and restricted restaurants to takeout orders until April 13 to prevent the disease’s spread. The policy at issue provides coverage for “property, business, business income, and extra expense…” The Complaint alleges that the policy is an “all risk policy” which covers all risk unless clearly and specifically excluded. The policy has only excluded losses due to biological materials such as pathogens in connection to terrorism. According to the Complaint, the policy therefore provides coverage for other viruses or global pandemics. Plaintiffs allege that Lloyd’s have accepted the policy premiums with no intention of provding coverage due to physical loss and/or from a civil authority shut down due to a “global pandemic virus.”

Also, according to the Complaint, the coronavirus is “physically impacting public and private property, and physical spaces in cities around the world” and “any effort by Lloyd’s to deny the reality that the virus causes physical damage and loss would constitute a false and potential fraudulent misrepresentation that could endanger policyholders and the public.”

The lawsuit maintains that the virus physically infects and stays on surfaces for up to 28 days and that contamination of the insured premises by the virus would be a “direct physical loss needing remediation to clean the surfaces of the establishment.”

It likens the coronavirus infection to cases where the intrusion of lead or gaseous fumes has been found to constitute a direct physical loss.

Plaintiffs ask the court to affirm that because the policy provided by Lloyd’s does not contain an exclusion for pandemic viruses, the policy provides coverage to Plaintiffs for any future civil authority shutdowns of restaurants in New Orleans due to physical harm from coronavirus contamination.

While Lloyd’s has not yet had the opportunity to respond, the CEOs of the four large insurance trade organizations sent a letter to Congress on March 18, 2020 stating, “Standard commercial insurance policies offer coverage and protection against a wide range of risks and threats that are vetted and approved by state regulators. Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.”

Commentators supporting the insurers have suggested that any business interruption claims may be denied because government shutdowns are usually ordered as a precaution, not because of known contamination. Coverage can also be limited by the duration of any contamination. Commentators have argued that “in some ISO forms, the period of restoration has a waiting period, such as 72 hours, before coverage begins. And the period lasts only as long as it should take to repair the physical loss or damage using due diligence and dispatch. If the ‘physical damage’ is the particles of virus on surfaces of a building, how long should it reasonably take to use soap and water, or bleach, to clean those surfaces? It seems as though the battle lines are being drawn, and that the business interruption claims will be met with a fight.

 

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