Insurers denying Covid-19 Business Interruption Claims

(June 23, 2020) – Most insurance companies are now routinely denying businesses’ Covid-19 business interruption claims.  Industry-wide justification for most of the denials has been a virus exclusion which insurance companies quietly inserted into most business interruption insurance policies after the SARS scare in Asia in 2003.

Related: Frequently Asked Questions for Covid-19 Business Interruption Claims

Most business owners, on the other hand, have too much to lose to simply roll over at any first blush coverage analysis and a blanket denial from their carrier. Many are arguing that the government shutdowns of their businesses should trigger coverage; so that the insurance companies’ sly virus exclusions cannot be the last word.

Insurance experts, meanwhile, see that the ongoing fight over Covid-19 business interruption cases could forever change insurance policy interpretations.

Often contrary to the ways in which insurers view policy language, courts in the past have often interpreted the language with little regard for the intention of the policy drafters. Courts have also said, and most states’ insurance law clearly says, that any ambiguity in a policy must favor the insured; because the insurer wrote the language in the policy, it is therefore responsible for honoring anything ambivalent therein.

For their part, insurance carriers are typically required to make coverage determinations based on the nature of the claim, relevant case law, and the intent behind the policy language.

Covid-19 Pandemic Claims

Since insurance carriers have already seen thousands of business owners file claims for business interruption, many legal scholars have weighed in on the issues.  Many have given only a cursory analysis and abruptly concluded that such claims will not be covered for business income losses because the insured property or other premises has not sustained a “direct physical loss.”

But determining the merits of any business interruption claim is much more complex than deciding whether property has sustained a “direct physical loss.”

Different states, different jurisdictions, may bring different insurance policy interpretations. In the past, courts in Georgia and Texas, for one example, reached different conclusions about whether business income losses that stemmed from mandatory (government-ordered) business closings for a hurricane were covered by commercial property policies. Despite their differing conclusions, the court in each case focused on whether the civil authority order which restricted access to the insured’s property was the result of an anticipated threat of property damage or actual property damage.

Though the facts of each case were similar, the outcomes differed.  In both cases, a civil authority issued evacuation and business closure orders to business concerns in the anticipated path of a hurricane. Government entities issued the evacuation orders because the hurricane had previously caused physical damage to property in its path. In each case, the hurricane deviated from the projected path, resulting in no physical damage to insured property. However, businesses suffered losses caused by the mandatory closures. Such businesses sought to recoup their losses pursuant to the civil authority coverage in their property insurance policies. Both carriers denied coverage, in part, on the basis that neither the insureds nor nearby businesses sustained direct physical damage as a result of the storms. Insurers said that damage was required to trigger civil authority coverage.  The civil authority coverage clauses in each policy were nearly identical.

Semantics, Legal Interpretations

Semantics determined the outcome of each case. The Texas court favored the carrier with an analysis of the phrase “due to.”  The court found that phrase required a more direct causal relationship than “arising out of” under Texas law. The court reasoned that coverage was not triggered because the evacuation order was not issued “due to” actual physical damage to property and would have been issued regardless of physical damage to property in the path of the hurricane.

In Georgia, the relevant policy language also required that access was prohibited “due to” direct physical loss or damage to property. The Georgia Court of Appeals, unlike the Texas court, concluded that the decision to issue the evacuation order was “due to” actual damage to property because the group making the decision had evaluated damage which had occurred in the Bahamas.

So in the Texas/Georgia case, the same policy language with similar facts yielded strikingly different results.

Coronavirus regulatory actions

With the Covid-19 shutdowns, government authorities have, in some cases, appeared to issue closure orders with insurance law in mind. In what appears to be an attempt to satisfy the “direct physical loss or damage” language in a business interruption claim, governmental authorities in New York, New Jersey, Massachusetts, and Ohio have issued emergency proclamations stating that Covid-19 is causing property loss and damage. (italics ours) In addition, several state legislatures have introduced legislation to retroactively expand coverage under existing business interruption insurance policies; if passed, these new laws would provide coverage for losses due to Covid-19.

Insurance companies’ blanket denials of business interruption claims could be problematic for them, as they have a duty of good faith and fair dealing.

Insurers denying Covid-19 Business Interruption Claims

As law firms have begun filing business interruption lawsuit petitions against insurance companies that have denied Covid-19-related business interruption claims, it remains to be seen whether insurance companies will honor that duty.