We have hit the one-year anniversary of the start of nationwide lockdowns as a result of the COVID-19 pandemic.
On March 20, 2020, we published coronavirus insurance coverage considerations. These highlighted, among other things, the lack of clarity that lay ahead for businesses trying to determine how their business interruption insurance coverage may supplement their efforts to comply with government shutdowns and other consequences of the COVID-19 pandemic.
But as we cross this one-year anniversary, that lack of clarity persists as insurance carriers and courts apply policy considerations in strikingly differing manners. This is resulting in wildly varying outcomes for insureds. Most claims against insurers for denial of business interruption insurance claims turn on 1) the issues of whether a “physical loss” has occurred, or 2) whether virus exclusions preclude coverage.
In the case of Society Insurance Company COVID-19 Business Interruption Protection Insurance Litigation, in the Northern District of Illinois, several insureds made a claim for business interruption coverage. They argued that they suffered a “direct physical loss of or damage to” their property caused by the COVID-19 pandemic. In a Feb. 22, 2021, order, the court allowed those claims to move forward. The court ruled that a reasonable jury could find that governmental closure orders resulting from COVID-19 imposed a physical limit on the business, which could be a “direct physical loss” required for coverage to be triggered.
In Soundview Cinemas v. Great American Insurance Group et al., a New York court came to a different conclusion. The court held on Feb. 10, 2021, that loss of use resulting from COVID-19 closure orders does not constitute a “direct physical loss of or damage to property” that would trigger business interruption coverage.
An Oklahoma court came to a similar conclusion, holding in Goodwill Industries Of Central Oklahoma Inc. v. Philadelphia Indemnity Insurance Co. that “direct physical loss” does not occur when something, such as governmental closure orders, simply renders a property unsuitable for its intended purpose. The court ruled that showing a “direct physical loss” would require some tangible damage.
The landscape is just as contradictory with respect to virus exclusions (a very common exclusion frequently relied upon by insurers in similar COVID-19 claims). In a Jan. 8, 2021, order, a Florida court in Digital Age Marketing Group, IMC v. Sentinel Insurance Co. Lmtd. d/b/a The Hartford held that a virus exclusion served as an absolute bar to damage caused directly or indirectly by COVID-19.
Just one day earlier, a Chicago court held the same in The Riverwalk Seafood Grill Inc. d/b/a Riverside Banquets v. Travelers Casualty Insurance Co. of America. A census of cases addressing common virus exclusions shows this to be the most common outcome.
Some courts have come to a different conclusion. In McKinley Development Leasing Co. Ltd. et al v. Westfield Insurance Co. in Ohio, a commercial landlord made a claim for business interruption coverage, which its insurer denied. The landlord sued its insurer, and the insurer sought to have the suit dismissed, arguing that the virus exclusion barred coverage. The court rejected that argument, holding that a virus is not the same as a pandemic; if the insurer intended pandemics to be excluded, it should have stated as much in the policy.
Applying similar logic, a Texas court held in Independence Barbershop, LLOC v. Twin City Fire Insurance Co. that the insurer, in its efforts to justify its claim denial, was improperly conflating “SARS-CoV-2, COVID-19, the COVID-19 pandemic, and government shutdowns related to the COVID-19 pandemic,” when these terms and phrases may actually refer to four separate things.
These cases are only a small sampling of outcomes we are seeing across the country, but they are illustrative of the unpredictable landscape that lies ahead of those seeking to make claims. But, despite the fact that outcomes remain unpredictable, trends are beginning to arise to inform some best practices in making claims.
The most important lesson learned to date, and one that serves as a guiding light in otherwise murky waters, is that insureds must take cautious steps in making claims under business interruption coverage by using careful language that accounts for the particular terms of the policy under which claims are being made. It is imperative to parse out the various factors constraining your business operations:
The pandemic, as an ongoing event.
The actual, physical presence of COVID-19 at your business, or
It is also imperative to understand, before making a claim, how some combination of these factors has actually given rise to losses within your business. Consider whether there is some physical barrier or damage, or whether there is merely a financial loss.
Nick R. Herrick is an attorney in Denver-based law firm Moye White’s litigation section. He can be reached at [email protected].