Insurance Coverage & Recovery

Before the Deluge: Courts Weigh COVID-19 Insurance Coverage Disputes

Matthew D. Fender, a litigator who focuses his practice on representing policyholders in insurance recovery disputes, discusses an array of COVID-19 issues and claims, including a recent federal case in which the court concluded that the coverage trigger “physical loss or damage” is satisfied by the presence of novel coronavirus on surfaces.

CCBJ: What is your first piece of advice to a business facing losses that might implicate different types of insurance coverage? How should they assess their existing coverage?

First and foremost, and this is hardly novel advice, you must put your insurance carriers on notice. Failure to do so can forfeit coverage in many states. Giving notice is simple and easy to do. Just write them a letter citing all potentially applicable policies and tell them the general subject matter of the claim or potential claim. I don’t like to go into a lot of detail about the policy or the coverage in the notice letter. That way the insurer will take the opening position on coverage, and you can respond. I never like to go first in that kind of exchange.

What is the difference between business interruption and contingent business interruption?

Business interruption coverage provides replacement income and expenses when there is damage to your insured property. Contingent business interruption coverage provides the same kind of protection when there is damage to the property of another company in your supply chain, either a customer or supplier. Policy language varies as to how far up and down the supply chain, but that is the basic idea.

Many policies require that losses flow from “physical damage” or “direct physical damage.” How do the courts construe this when it comes to claims arising from COVID-19 and the government response to the pandemic?

That is really the central issue with all the COVID-19 business interruption claims. It was a new issue when all this started, and we aren’t going to have a definitive answer until it has percolated through some appellate courts. Some trial level courts have dismissed cases, finding that the presence of the virus is not sufficient damage to trigger coverage. There was, however, a great, and in my view correct, decision issued by the U.S. District Court for the District of Missouri on August 12, in which the court declined to dismiss a COVID-19 business interruption case. The case is called Studio 417, Inc. v. Cincinnati Insurance Company. The policy in that case, like most of the policies I have read, has “physical loss or damage” as the coverage trigger. The court construed that phrase disjunctively: you can prove coverage by showing either physical loss or physical damage. The court concluded that alleging the presence of the novel coronavirus on surfaces at the property in question was sufficient.

This is particularly interesting because in Studio 417, as in most cases, the bulk of the claim centered around the civil authority coverage in the property policy. Civil authority coverage pays the policyholder for business interruption when a government order restricts access to the insured business property. The policyholder has to show that there was physical loss or damage to someone else’s property that led to the government order. If the presence of the virus is sufficient to constitute physical loss, that won’t be terribly hard to do, as many of the emergency closure orders made in response to COVID-19 expressly recite that the virus was present at property in the state, and there are ample news reports documenting the same. If the reasoning applied in Studio 417 takes hold, and I certainly think it should because it is correct, then carriers are going to be required to pay a lot of claims.

Writing back and asking for more information is an almost universal response from an insurance carrier upon receiving a claim they don’t want to pay.

We have a general liability policy and a directors and officers liability policy. Are these useful for pandemic related claims?

Commercial General Liability (CGL) and Directors & Officers (D&O) policies are not going to pay for business interruption, but they could be very important in the COVID-19 context. Many companies, particularly those in the hospitality and retail sectors, may be faced with liability claims where plaintiffs allege they were infected with the novel coronavirus as a result of the company’s actions. I think there is also a real possibility of shareholder derivative claims alleging mismanagement in response to the virus, and those kinds of claims would implicate the D&O coverage.

When I notified my insurer of a potential claim, it came back with a request for more information – much more. Is this typical?

It is absolutely typical. Writing back and asking for more information is an almost universal response from an insurance carrier upon receiving a claim they don’t want to pay. I have always suspected that they are hoping you will just give up and drop it. Otherwise, they are trying to build a case against your claim. Remember, they are not on your side, and they are not trying to help you. Those letters back and forth are part of the adversarial process, and how you respond may make or break your claim. When in doubt, get help from an experienced coverage lawyer.

It seems that some fundamental issues will need to wind their way through the courts, which could take years. Is arbitration an option?

Some insurance policies have arbitration provisions. Most commercial property policies do not contain arbitration language for coverage issues, but most have an appraisal provision that either side can invoke where the amount of the loss is arbitrated by a panel of three appraisers. If the carrier is willing to stipulate there is coverage, then appraisal to set the amount may be a fine option. As far as the issue of coverage, parties can always voluntarily agree to arbitrate after the fact, but given the uncertain state of the law, I am not sure I would advise a client to arbitrate the question of coverage for a COVID-19 claim if the client had a choice. There is almost always no appeal from an arbitration award.

Are you anticipating a major surge in coverage litigation? What form will that take?

We have certainly seen an uptick in litigation of claims arising from COVID-19, particularly business interruption claims based on the civil authority coverage extension. There are many companies that have given notice to their carrier, received a denial, and are waiting on the sidelines to see how the law develops before committing to litigation. If we see more favorable decisions like Studio 417, I think many of those companies will get in the game by filing suit.

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