Pandemic Policy Provisions

COVID-19 triggers lawsuits in both state and federal courts over business interruption claims.

Fifteen lawsuits have been filed in Alabama seeking compensation from insurance companies for business lost during the Covid-19 shutdown, according to the National Association of Mutual Insurance Companies — 14 in federal court and one in Circuit Court in Jefferson County — and plaintiff attorneys nationwide say they expect the number to increase significantly.

In addition, according to the Claims Journal, the U.S. Judicial Panel on Multidistrict Litigation has received notice of 101 federal lawsuits seeking insurance coverage for business interruption losses caused by the virus.

The American Property and Casualty Association, working from estimates provided by University of Alabama Professor Lawrence Powell, who also heads the Alabama Center for Insurance Information and Research, says firms could be owed between $255 and $430 billion for income lost and expenses incurred due to the virus-caused shutdown.

“My numbers were based on firms that had fewer than 100 employees,” Powell says. “The estimate I made was about $120 billion a month nationwide for firms with less than 100 employees. If you say for all levels of employees, then you are looking at a much bigger number.

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“But I think what everybody agrees on is that it would be a darn big number in comparison to the premiums that were paid and compared to the expected losses when the policy was written.”

Business interruption insurance usually is added to an existing policy and the average cost is about $1,200 a year, depending on location, type of business, amount of coverage and claims history.

Paul Barber

The central question tying the lawsuits together is whether Covid-19 causes a physical loss of property. The cases include hotels, shoe stores, restaurants, taverns, dental practices, day care centers, hair salons and other businesses across Alabama and the rest of America.

Paul Barber, president of Valent Group, which provides business insurance and employer benefit consulting, says business interruption coverage has been part of the insurance business for a long time.

“Business interruption is a pretty fundamental coverage,” Barber says. “It has been around a long time. I think fire insurance became popular in London in the 1600s.” Barber says the idea of a business burning down and losing the ability to generate income gave rise to business interruption insurance.

With a pandemic, however, you can’t see physical damage to the business property, Barber notes.

As for business interruption insurance in the case of a pandemic, Powell says, “It is really hard to think of the loss that would be of the size that insurance companies would say, ‘Yeah, we charged a premium for that so we are going to pay the loss.’”

In addition, says Powell, “the amount of capital that has to be held for any sort of pandemic loss is really, really high, and if an insurance company is going to offer that coverage on purpose, they would have to charge so much just to hold the capital and make a credible promise to pay that it would be so expensive no one would buy it.”

Valent Group’s Barber says, “As far as business insurance, it is real simple coverage and the legal question is not difficult at all. All the policies say coverage is triggered by there being physical damage to your business — it being burned down or the wind blowing it away or whatever. So all the policies are very clear on that. Now, as you know, lawyers can get creative, you can argue over the meaning of the word, and you can put doubt in someone’s mind and I think that is what is going on. I think 99 percent of the cases are going to be dismissed.”

W. Daniel “Dee” Miles III

In what appears to be the first ruling on such a claim, a Michigan judge dismissed the claim saying the restaurant owner plaintiff did not suffer a direct physical loss.

W. Daniel Miles III, head of the consumer fraud section with the Montgomery law firm Beasley Allen, has filed a number of lawsuits around the country on behalf of all sorts of businesses. He says the storm of legal activity can be traced back to a rewrite of insurance policies caused by a similar outbreak of illness and a federal law called the McCarran-Ferguson Act, approved by Congress in 1945, which essentially moved the regulation of insurance companies from the federal government to the states.

“Back in 2005,” Miles says, “we had this SARS pandemic and the insurance industry had to pay on a lot of those claims under business interruption, and they decided that they needed to make a change.”

Most insurance companies rely on the Insurance Services Office Inc. (ISO) to provide written policies. Before 2005, those policies did not include a virus exclusion, Miles says. After the SARS crisis, insurance companies recognized their exposure and moved to put exclusions in the ISO policies.

ISO drafted new language in 2006, eliminating coverage for losses due to virus, bacterium or other microorganism.

Rather than calling it a change, however, which would have required approval from each state’s insurance commissioner, Miles says, the companies identified it as a clarification.

Insurance firms “put this letter in all these files and the commissioners didn’t do anything about it. They didn’t feel like it was a really big deal. And it wasn’t, because everybody just said you are just explaining the coverage you already have. But that was not what they were doing. They were completely changing the coverage,” says Miles.

Plaintiff lawyers, Miles says, are fighting the denial of coverage saying that it’s based on a change in coverage disguised as a clarification. That’s what he calls “the first line of defense.”

In addition, Miles says, insurance companies are saying if there is no virus exclusion, the policyholder must have a physical loss in order for the company to pay under business interruption coverage.

“And they are right about that,” Miles says. “It does say that in the policy, because the way that was designed was, you know, you have fire or something like that, they will pay your business interruption while you are down.

“And they are saying now that if you don’t have a physical loss to your building we are not paying. Well, the problem with that is there are some laws, some cases, in some states, that say that prohibiting access to your business is tantamount to physical loss, because you can’t physically go to the building. That is sort of the second line of defense. We do have a physical loss because we couldn’t get to the building. You wouldn’t let people into our restaurant.”

In addition, some insurance policies have what is known as a civil authority clause, which outlines how the loss of business income applies when a government entity denies access to the insured property.

“In other words,” says Miles, “the city or the state says that you can’t let people into your restaurant or business or whatever.” Miles says a firm suffers a physical loss when civil authority prohibited its operation.

With some businesses, there is the issue of partial opening, take-out business and social distancing, which decreases the number of patrons a business can serve, which leads to lower profits, but mitigates losses for the plaintiff. “But that is not fair to the business owner. You are supposed to be providing insurance. So here is this guy running his business and he entertains maybe only 20-25 percent of his business. That is an interruption,” Miles says.

Powell says, “I have heard some criticism in the way coverage is provided or the insurance industry’s intentions. I was not in the room when those decisions were made, but what I do know is when they were setting their prices they didn’t have this in mind. Now if that is a mistake that they made, by saying their prices are just way too low, shame on the insurance industry, but like I said, if you are going to include coverage for this, I think you would have to charge so much to make that promise to pay credible, that nobody would buy it. The product that Marsh (a global insurance and risk management company) offered in 2006 was exactly this and nobody bought it. They pushed it out and had it on the market for a full year and half and nobody bought it.”

Matt Glover

Matt Glover, an attorney with the law firm Prince Glover Hayes in Tuscaloosa, represents Wagner’s Shoes for Kids, which was forced by the pandemic to close during its busiest time of the year. “We were the first to file in the state,” Glover says.

“Shortly after we filed there was a movement by some lawyers out of state to pull all of the business interruption cases around the nation into what is referred to as Multidistrict Litigation, similar to the opioid cases. There has been a briefing scheduled and everyone has submitted their position on that.”

Coincidentally, both Wagner’s Shoes and the insurer they are suing are opposed to a change to multidistrict litigation.

And, says Glover, “Every insurance policy is different. The way that an insurance company treats a claim is different, there are different exclusions that may apply, there are different types of losses that a business may incur, and there are different state laws that apply.”

“The physical damages issue seems to be a common exclusion for the insurance companies to use to deny claims but there is something unique about the Wagner case. It is what is referred to as an all risk policy. All items are covered, all causes are covered unless they are specifically excluded.”

Glover says the insurance company involved in the Wagner’s Shoes case has a virus exclusion that it uses in some of its policies.

“That exclusion was not applicable and was not in the Wagner’s Shoes insurance policy, so that common exclusion is not applicable.”

Barber says some changes in the insurance industry might come from all the legal maneuvering.

“The problem is, insurance is a funding mechanism,” says Barber, noting that serious flooding brought about a national flood insurance program and that terrorism insurance followed 9-11. “We probably are going to have something called PRIA, after this pandemic, Pandemic Risk Insurance Act.”

Barber explains that terrorism, like war, is fundamentally uninsurable. “You couldn’t collect premiums for a million years to cover the losses that are going to happen,” says Barber. “So what happened with 9-11? I think the losses were $40 billion. There was no coverage. Terrorism was specifically excluded in all property policies. So the government and lawyers intervened and said, terrorism is a reality, so the government worked with the insurance carriers and now, it’s been 20 years since 9-11, but there is over $50 billion in premiums that have been collected. So what you have is a federal backstop. It is limited insurance. If a terrorist hits a building in Birmingham, the owners of the building would not have coverage over $5 million.

“If you looked at the losses suffered by small businesses of 100 employees or less, it would be half a trillion dollars from the pandemic,” Barber says, adding that no insurance company “would write it, because you can’t collect enough premiums to make it work. It is fundamentally uninsurable because it is like an act of war.”

Lawrence Powell

But, Powell says, he doesn’t think much good can come from the onslaught of litigation “because even if the courts agree with insurance companies that there is no coverage, they still are not going to look good coming out the other end.”

Powell also says he thinks the McCarran-Ferguson Act sometimes gets a bad rap.

“That’s a red herring that comes up every time somebody says the whole problem here is state regulators,” he says. “Alabama has some of the best insurance regulators in the entire world,” adding that if someone has an insurance issue, they could talk to a representative of the Alabama Insurance Commission “a hundred times faster than they can get in touch with somebody in Washington, D.C.”

Recovery programs are in the works in Congress, but both Glover and Miles say their cases will not be impacted by the recovery bill, if and when one is approved. “This proposal is to shield people and companies from lawsuits concerning exposure to Covid-19. For
instance, a customer contracts the condition from shopping in a store and then tries to sue the store for damages,” Glover says.   

Meanwhile Wagner’s Shoes is back to selling footwear. But Glover says, “They were shut down through the time of the year that is their most profitable, the Easter holidays. The time leading up to Easter is very profitable. For a while they did curbside pickup. I know the family and they are making it but they definitely took a loss.”

Bill Gerdes is a Birmingham-based freelancer for Business Alabama.

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