Insurance in the Time of Coronavirus: Litigation Claims and Government Help

This continues our series on insurance issues related to disaster resilience, especially with regard to the coronavirus pandemic and the summer hurricane season.  Part 1 can be found here.

As noted in my earlier post, every insurance policy is different. Given the different needs and sophistication of businesses and the ultimate policy that comes out of the discussion you’re your insurance agent, the first thing to do is to take a deep dive into your policy (preferably with a professional).  But since your business interruption policy is likely tied to physical loss, there’s likely to be a lot of litigation to get the courts to decide what really is covered, and government assistance, trying to find a legislative way to help insureds. And as the claims move through the courts, states around the country are trying to help.

Litigation

Your insurance coverage is likely different in some ways from every other policy, but the terms of the policy, and the resulting coverage, may be determined through the courts as to whether coverage is available.  And as you can imagine, there are big fights a-brewin’ here.

On the one side, the many, many businesses that are suffering greatly and are looking to their insurance policies to help, even where the language isn’t clear on its face.  Government aid can only go so far, and as we’e seen so far, isn’t going far enough.  Given the extent of the damages from the pandemic to businesses, many policyholders aren’t holding back from fighting insurance company’s claims.  Many lawsuits have been filed and many more are expected.

On the other side are the insurance companies, who are worried about the financial damage from paying potentially billions of dollars of claims on policies that they weren’t expecting to cover.  Insurance companies are nervous – this pandemic is different from your typical catastrophe.  Even hurricanes causing billions of dollars in damage are limited in location, and because insurers know where these high-risk areas are, they can determine their potential loss and limit their exposure.

They don’t want the bad PR from denying all the claims, but they may have trouble approving them all.  Many are now looking to the government to provide a backstop on the claims.  Then they can feel more comfortable paying claims that they weren’t prepared for, since they’ll be reimbursed for those payments that weren’t expressly provided for in the insured’s policies.

The current and future litigation will be fought intensely on both sides.

As discussed in Part 1 of this series, direct physical loss or damage is a key element to business income claims.  Many lawsuits are being filed that argue that contamination of the property by the coronavirus is physical damage.

Other claims relate to the civil authority coverage in the policy and take the argument further that contamination of coronavirus is physical damage.  The argument is that government (civil authority) ordered closures are the result of physical damage to property other than the insured property by the virus.  In other words, contamination of other properties required the governments to shut the insured’s business down.

Remember that there are two types of policies: named risk (where the specific perils are listed in the policy) and special causes of loss (fka “all risk”) that generally cover all claims except the ones that are exempted.  Several lawsuits have been filed that argue that the all risk policies, do exactly that – cover all risks. And if viruses aren’t exempted, then they are covered.

Recently, a suit was filed in Federal Court in Florida against an insurance company that attempts to create a class action.  The claim? Since virus exclusion forms were created about 15 years ago in response to the SARS epidemic, the insurance companies should be using them if they truly don’t want to cover claims for virus events.  So, if your business income policy doesn’t have a virus or pandemic exclusion, then virus claims are covered. The claim is broad, the class is broad and the concerns of the individual class parties may be different depending on their jurisdiction and what their governments’ laws and executive orders say.  But we’ll wait and see what the court has to say.

Other lawsuits have been filed requesting class action status.  A class action in Wisconsin argues that the insurance company breached its contract with its business policyholders by denying the claims.  A Florida case argues that the civil authority policy provides coverage once the Governor forced businesses to shut down. Other cases around the country are making similar claims.

So what is the government doing to help?

Understanding that insurance coverage will likely be limited and already seeing most companies deny claims, states are looking to help.  Several states are working to pass legislation or enact executive orders that either expressly prohibit insurers from denying claims related to the pandemic, or require full disclosure by insurers as to what is covered, or at least are requiring insurers provide flexibility with premium payments and non-coverage cancellations.  Like everything else, these laws and orders will be subject to litigation so nothing will be decided for some time.

A bill introduced in New Jersey in March which ended up getting pulled, would have required retroactive coverage to policyholders.  New Jersey Assembly Bill 3844 provides:

  1. a. Notwithstanding the provisions of any other law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption in force in this State on the effective date of this act, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic, as provided in the  Public Health Emergency and State of Emergency declared by the Governor in Executive Order 103 of 2020 concerning the coronavirus disease 2019 pandemic.
  2. The coverage required by this section shall indemnify the insured, subject to the limits under the policy, for any loss of business or business interruption for the duration of that declared State of Emergency.

The bill quickly was attached by insurance companies and did not make it further. Other states are still trying.

Massachusetts has a pending bill that requires insurers to pay out business interruption policies to companies with 150 or fewer employees under their policies, even if those policies had virus exclusions or if there is no physical damage to the insured’s property or any other property.  The bill includes a provision allowing insurers to apply to the commissioner of insurance for reimbursement from the State.

Ohio has filed a bill that benefits companies with 100 or fewer employees that have a business interruption policy. It too provides money for reimbursement from the State through a Business Interruption Insurance Fund that was recently created. Like several other states, the bill seeks to apply coverage retroactively back to the beginning of March.

Pennsylvania has similarly tried to pass legislation forcing insurers to cover claims despite a “direct physical loss or damage” condition or even an explicit virus exclusion. Additional bills have been proposed that go even further to create coverage by defining terms in the insurance contract that, as we discussed in Part 1 of this series, are rarely if ever defined contractually. The vagueness that has been to insurance company’s advantage, is now being limited by broad definitions for property damage, civil authority order, ingress and egress order and communicable disease, that give an advantage to insureds.

Insurance companies argue that this legislation is unconstitutional as it would alter contracts already voluntarily entered into between the parties.  They also are fearful of an economic collapse of the insurance industry from having to pay out millions and billions of dollars of claims that they never accounted for when determining premiums.

New York has asked insurers to provide details of their business income policies and the coverage each policy provides with regard to coronavirus claims.  The goal is to ensure policyholders with the same policies are getting the same analysis and result as each other. A bill introduced in March goes further and specifically states that business interruption policies include coverage “during a period of a declared state emergency due to the coronavirus disease 2019 (COVID-19) pandemic.” Insurers are already lobbying to ensure this doesn’t pass. And if it does, to fight it in Court up to the Supreme Court if necessary.   Don’t expect any payouts soon.

Other states are working to protect insureds from losing their policies, at least in the short term, even if they don’t actually cover the losses the insureds are suffering from.  Wisconsin has asked insurers to offer flexibility to those suffering hardship from the pandemic by offering the opportunity to defer premium payments, offering non-cancellation periods and allowing for the acceleration or waiver or underwriting requirements. Similarly, California and Georgia have asked insurers to provide a 60-day grace period for paying premiums in order to help avoid policies getting cancelled.

Many other states are looking at liability policies, working to ensure that certain businesses, such as child care centers, are not unduly harmed by having to remain open. Florida’s Governor is considering how to make it easier on its businesses to reopen-including limiting the ability to sue them.  Some are concerned that such legislation could go too far and give businesses and facilities the okay to ease back on the safety measures they’re taking. But supporters of this type of liability protection argue that it would only protect those who are operating within the bounds of the state’s various executive orders on closing, reopening, and safety precautions required.  The Florida Legislature’s general session doesn’t begin again until March 2021.