Coronavirus & Business Interruption Disputes

The effects of COVID-19 (coronavirus) have swept across the US and most other countries. While the initial focus was on learning about the coronavirus and our public health systems’ response to it, the trickledown effect of coronavirus-initiated lawsuits didn’t take long to make its way into the U.S. court system. March 2020 was a pivotal moment in the US response to the coronavirus: escalating travel restrictions, declarations of national and regional emergencies, and stay-at-home orders. While governments, companies, and individuals were grappling with how to adjust to these rapid developments, the first coronavirus-related lawsuits were popping up.

As more stay-at-home orders were put in place nationwide, businesses began filing business interruption claims with their insurers to recoup their losses from those closures. Insurance providers denied the claims, stating the policy coverage must be triggered by physical damage, like a fire or earthquake. Some business owners found their insurance policies specifically excluded virus-related losses, language added by some insurers to their policies following a string of million-dollar claims from the SARS outbreak in the early 2000s.  The recent rioting has spurred a large number of physical damage related claims but some are finding the response mixed.  These claims, like the business interruption claims, are sure to be complicated and lead to litigation.

Insurers have also denied claims related to state or municipality stay-at-home orders and asserted under civil authority clauses. Civil authority coverage is tied to a government order prohibiting access to the business property due to physical damage of a nearby property. Civil authority coverage was strictly interpreted in 9/11-related insurance litigation, where courts found travel closures resulting from the attacks did not directly cause damage to the policy holders because they were put in place based on fear of future attacks.  Similar to business interruption coverage, civil authority coverage usually has a physical damage requirement that is the crux to insurers denial of claims.

Lawsuit claims quickly followed after businesses began to receive coverage denials from their insurers or after stay-at-home issues were ordered. One of those first lawsuits was filed by Oceana Grill in late March against its insurer in Oceana Grill v. Certain Underwriters at Lloyd’s, London. The New Orleans-based restaurant saw coronavirus-related orders issued by the Louisiana governor as a qualifying event for their all-risk policy.  Filed the same day as the Oceana suit, the Choctaw and Chickasaw Nations brought claims against their insurers arising out of their casino closures, just hours after the Oklahoma governor announced a stay-at-home order. Since March 24^th, a variety of businesses across several states have filed business interruption and civil authority coverage suits (wig shops, movie theater operators, scuba stores). The restaurant industry is so heavily affected by this issue that leading chefs and restaurateurs, such as Wolfgang Puck, founded the Business Interruption Group, a non-profit focused on advocating for insurance payouts caused by losses from the coronavirus.

Insurance companies’ statements regarding business interruption coverage in relation to the coronavirus reiterate the physical damage requirement for coverage, along with policy-specific exclusions that would preclude coverage in a pandemic. One insurance company has even filed its own declaratory judgment action against a law firm policy holder in federal court, saying the insurance claims by the defendant were not covered under the policy because there has been no physical damage to the law firm.

While most of these suits have been filed in state court, there are at least two plaintiffs asking the  U.S. Judicial Panel on Multidistrict Litigation to consolidate cases due to the volume of similar cases being filed. These two petitions are scheduled to be reviewed by the Multidistrict Litigation Panel in late July.

As these cases work their way through the court system, state and federal governments may try to resolve these issues via legislation. Several states, including New Jersey, New York, and Pennsylvania, have proposed bills that would require insurers to pay out coronavirus-related claims. At the time of this writing, none of the bills have passed and are being opposed by the insurance industry.

The sweeping nature of the coronavirus pandemic and how it has affected business will play out in the courts system over time, as will any potential legislation. While they procedurally work through their respective systems, it will be interesting to see if there is a rise in demand for pandemic-specific insurance policies.  Organizers of Wimbledon had the foresight to take out such a policy after seeing the effect of SARS, resulting in a payout of more than four times what they paid in insurance premiums after the 2020 tournament was cancelled because of the coronavirus. We will ultimately have to wait and see how the courts, legislation, and the insurance industry respond to these unprecedented times.

*To read more about the impact of coronavirus in the legal profession, check out this article on Deploying D&O and Cyber Insurance Coverage Against COVID-19 Claims.