With much of the economy shuttered for more than a month by governmental orders affecting non-essential businesses, it is no surprise that we are now seeing a slew of lawsuits pitting insured versus insurer in the fight over coverage for COVID-19 related business closures. A review of some of the filed pleadings in these cases reveals the positions being taken on both sides, and suggests possible approaches insureds may consider taking.
The Insurance Industry’s “No Coverage” Position
In speeches, press releases and thousands of denial notifications, numerous insurers and their agents have been advancing the general position that business losses arising in the wake of COVID-19 are not covered by standard property damage policies that provide coverage for business interruption losses, whether or not the particular policy in question contains an explicit exclusion for viruses, pandemics or other organic pathogens. On April 20th, that position was detailed in a declaratory judgment complaint filed by Travelers Casualty Insurance Company of America (“Travelers”) in the United States District Court for the Central District of California (Case No. 2:20-cv-03619) against its insured, Geragos & Geragos (G&G), in which it seeks a declaration that there is no coverage for losses caused by the SARS-CoV-2 virus more commonly known as COVID-19. G&G claimed lost business income and lost rental income stemming from the presence of the virus on its business property, and from the governmental orders that closed down its office and the courts. Travelers denied that there was any coverage for any of G&G’s losses, arguing:
- lost business income is not covered under any policy provision because any suspension of operations was not “caused by direct physical loss of or damage to property at the described premises.”
- the presence of SARS-CoV-2 on a surface would not cause physical damage to that surface.
- lost business income is not covered under the “Civil Authority” provision because the governmental orders were not “due to direct physical loss of or damage to property at locations, other than described premises, that are within 100 miles of the described premises.”
- any closure of the courts in which G&G conducts litigation was the result of governmental actions taken to slow the spread of the COVID-19 Pandemic, not the result of direct physical loss or damage to those properties.
- coverage for all of G&G’s losses are excluded by the policy exclusion 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.” These arguments are the same types of arguments that insurance companies have been making in denying claims, and that they can be expected to assert in response to the many lawsuits being brought by insureds.
The Insureds’ Position
The past few weeks have seen several lawsuits challenging insurers’ denials of coverage, and particularly, the insurance company position that losses resulting from COVID-19 do not constitute “direct physical loss of or damage to property.” Some have been asserted by individual insureds. Others have been asserted as class actions on behalf of allegedly similarly situated insureds.
The Individual Plaintiff Approach
In a complaint filed in a California federal court (C.D.C. case no. 2:20-cv-03890) last week by the Simon Wiesenthal Center (SWC) against the Chubb Group of Insurance Companies (Chubb), SWC argued that its business losses stemming from the COVID-19 pandemic are covered under its “all risk” property damage policy because “coronavirus creates a physical impact and loss on property as it alters surfaces, limiting or prohibiting the intended use of property and causing a dangerous property condition.” In support of that conclusion, SWC points to:
- scientific studies, which recognize that the coronavirus causes physical loss and damage, including certain unspecified “scientific studies” that purportedly show that the virus “physically infects and stays on surfaces . . . for up to twenty-eight days.”
- governmental closure orders, which often contain language acknowledging that the closures are due in part due to the virus’ propensity to attach to surfaces, which is a dangerous property condition that causes property loss and damage;
- judicial decisions from some states that have defined physical loss or damage as an alteration to the property, even if invisible to the naked eye or not structural, that prevents the ordinary intended use of the property.
The SWC complaint also emphasizes that its policy does not contain a virus or pandemic exclusion even though such broad exclusions started being used by the insurance industry following the SARS pandemic in 2002-2004. Thus, SWC argues, Chubb clearly knew how to exclude losses from pandemics such as this, but it chose not to do so.
The Class Action Approach
The class action approach is exemplified in SA Hospitality Group v. The Hartford Insurance Company, which was filed in the S.D.N.Y. (case no. 1:20-cv-03258) on April 24th. In that case, a group of restaurants in New York and Florida seek a declaratory judgment that “the COVID-19 pandemic and the corresponding response by civil authorities to stop the spread of the outbreak triggers coverage, has caused physical property loss and damage to the insured property. . ..” The complaint cites the WHO, scientific studies and newspaper articles that confirm that “the virus can live on contaminated objects or surfaces,” that “doorknobs and table tops can contain the virus,” and that the “virus can remain on metal, glass and plastic for several days.”
The SA complaint also addresses the “virus exclusion” head on, arguing that it does not apply to a claim for losses caused by governmental closure orders because “the efficient proximate cause of Plaintiffs’, and other Class Members’ losses, were precautionary measures taken by their respective States to prevent the spread of COVID-19 in the future, not because coronavirus was found in or on Plaintiffs’ insured property.”
Which Approach Is Right for Insureds?
There is no is no single approach that makes sense for all insureds. Because not all policies have the same language, the first step will be to closely read the entire policy to determine the strength of the case for coverage, and whether the policy restricts the amount of potential recovery in some way that makes it economically prohibitive to challenge a denial of coverage. Even where the case for coverage seems challenging, as might be the case if the policy contains a virus or pandemic exclusion, it might still make business sense to challenge the insurance company’s denial if the stakes are high enough.
For an insured whose policy coverage seems challenging and who has a relatively small amount of recoverable losses, the best course may be simply to file a claim with the carrier without aggressively pursuing the matter if it is denied. Although our experience shows that the claim is likely to be denied, there are at least two reasons for filing a claim anyway. First, legislation has been proposed at the state and federal level that would override virus exclusions and retroactively make business interruption policies cover losses associated with COVID-19 and related governmental closure orders. However, such legislation may not extend the time in which to file a claim. Because most policies have somewhat strict notice requirements, it is advisable to promptly file a claim to avoid the possibility that the claim will be considered untimely, which could disqualify an insured from taking advantage of future legislation. Second, if no claim is made, or it is untimely under the terms of the particular policy, an insured may find itself excluded from participating as a class member in one of the many class actions that have been and will continue to be filed. Although no class has yet been certified in a COVID-19 business interruption case, litigation over class definitions is likely to be hard fought in the coming months. It is entirely possible that the certified class definitions will include only those insureds who filed a claim that was denied, and/or will exclude those whose claims were untimely.
The next step will be to determine the amount of the potential recovery. In addition to coverage limits, deductibles, and self-insured retentions, many of these policies contain a limitation on the amount of business losses that may be recovered as the result of a governmental closure order. For example, one of our client’s policies provides that the coverage for lost business income will begin 72 hours after the civil authority order is issued and will apply for a period of 30 days. Another policy limits the recovery period to three weeks. Some policies cover losses beginning immediately after the civil authority order is issued and continue until the closure is ended. Only by analyzing these policy provisions can an insured make an informed decision as to which course makes economic sense.
Depending on the amount of recoverable losses at issue, the insured has many options in the event of a denial, including asking its broker to assist in challenging a denial of coverage, engaging in an insurance company’s appeals process (which may be required under some policies), or seeking assistance from a state Division of Insurance (or office with similar responsibilities, such as the New York State Department of Financial Services). Finally, if the amount of recoverable loss is substantial, it may be advisable to commence a lawsuit challenging the carrier’s position that losses associated with COVID-19 are not covered, in order to recover the substantial business losses that many insureds have sustained and continue to sustain while the country is on lockdown.
Experienced attorneys at Moses & Singer LLP are prepared to assist in deciding on the appropriate course of action for any insured that has questions about how best to proceed.
Published May 15, 2020.