STATE OF LITIGATION: BUSINESS INTERRUPTION DURING COVID-19 PANDEMIC

CURRENT FILINGS OF BUSINESS INTERRUPTION CLAIMS, BIGGER WAVE COMING

The state and federal governments’ temporary closure and premiums in the absence of emergency situations, only to then disruption of business across the country was an inevitable deny coverage on occasions when those incidents seem to occur. consequence of a strategic response to the COVID-19 pandemic. Business interruption coverage claims have been no different, As revenue streams vaporized, business owners sought financial and business owners, after years of paying high premiums, refuge by claiming coverage through their business interruption are being forced into litigation to recover under their existing insurance coverage policies. This special form of property policies. insurance coverage specifically protects against business interruption or disruptions that are beyond the business owner’s control.

Yet, the traditional insurance business model often operates by With the litany of cases continuing to be filed, selling coverage for a broad range of maladies and pocketing high there is uncertainty regarding potential outcomes that could easily vary between jurisdictions.

Dozens of Individual and Proposed Class Actions Filed uptick in cases will continue if the middle of the country begins to have increased infection rates, as currently By the end of July 2020, as the virus seems to have ebbed in predicted by health experts. previous hotspots like New England and Washington and bloomed in other areas like Florida, Texas, and Arizona, there Little Insurance Case Law on Pandemics have been at least 954 insurance-related lawsuits filed across the country since the beginning of the pandemic. The majority of Like so much with regard to the pandemic, legal claims present these lawsuits are seeking declaratory relief, asking courts to novel questions requiring resolution without much historical declare that a given insurance policy covers claims for business guidance — there is a dearth of relevant legal precedent to assist cessation due to the pandemic. in tackling coverage claims related to pandemics. Judge Nora Barry Fischer of the Western District of Pennsylvania While insurers argue that no actual property damage has been remanded a business interruption coverage case — DiAnoia's incurred to trigger coverage or that virus and bacteria exclusions Eatery v. Motorists Mut. Ins. Co., 2:20-cv-00706-NBF — back to apply to prevent coverage, plaintiffs allege that those provisions state court on grounds that, inter alia, such cases are matters of are inapplicable, because they were forced to shut their doors as first impression, involving state law claims that should first be a result of state and/or local civil authority orders and/or because decided by state court. And although multidistrict consolidation the virus itself has caused property damage. in the federal courts will likely occur, plaintiffs’ attorneys are not Multiple lawsuits also allege wrongful denial of covered losses all in agreement because claims involve different insurance and misrepresentation of policy provisions. As of mid-May, policies in various states with differing laws. cases had been filed in at least 12 states. With the surge of virus With the litany of cases continuing to be filed, there is across the South and Southwest, however, the number of uncertainty regarding potential outcomes that could easily vary lawsuits has increased and expectations are that a continued- from jurisdiction to jurisdiction. — 1 — State of Litigation / Lanier Law Firm Other Dangerous Substances Have Been Deemed to Likewise, in Gregory Packaging Inc. v. Travelers Prop. Cas. Of Cause Property Damage Am., the court found that unsafe ammonia levels at the facility rendered it unfit for occupancy and coverage was ordered for Insurers and policyholders have debated, and courts have been the business interruption until the ammonia dissipated, even forced to interpret, the meaning of policy language requiring though no structural alteration or physical loss or damage to the “direct physical loss or damage” to property that is typically facility was found. No. 2:12-cv-04418, 2014 U.S. Dist. LEXIS the first hurdle for obtaining business interruption coverage. 165232 (D.N.J. Nov. 25, 2004). While the insurance industry is quick to argue that coverage is inapplicable because COVID-19 does not cause physical, Other examples of courts finding “direct physical loss or structural property damage, there is legal precedent to the damage” despite no structural damage have included cases contrary. involving gasoline vapors, carbon monoxide leaks, odors from methamphetamine labs and releases of sulfuric gas. Critically, For instance, the often-cited Third Circuit decision concerning whether or not the presence or threat of COVID-19 will be the presence of asbestos — Port Authority v. Affiliated FM considered a loss to property will be jurisdiction-dependent. Ins. Co., 311 F.3d 226 (3d Cir. 2002) — found that “sources unnoticeable to the naked eye,” such as asbestos in the air, could be a direct physical loss if the building has become “uninhabitable and unusable” as a result. Other courts have found in damaged electrical grid cases that the physical damage requirement was met for coverage during a blackout because the grid was physically incapable of performing its essential function The Congressional of providing electricity. See Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 968 A.2d 724 (N.J. App. Div. 2009). Budget Office estimates the economic cost of the COVID-19 pandemic IMPACT OF COVID-19: will be upward of $8 BUSINESSES AFFECTED While developments have changed week to week and even day to day, the trillion. ongoing business trends resulting from the COVID-19 pandemic have been overwhelmingly bleak for organizations of all sizes. Companies large and small have been forced to navigate a gauntlet, balancing the safety of employees, clients and customers with their bottom line and economic survival. Supply shortages due to panic buying, increased usage of goods such as medical supplies and PPE, and delayed shipments of goods to consumers have been a constant trend.

As early as February 28, 2020, stock markets worldwide saw their largest declines since the financial crisis of 2008. As the pandemic spread, revenues from global business conferences, sports, technology and fashion events, as well as the travel, tourism and trade industries, have sharply declined. The monetary impacts have yet to be determined, but the economic hit is estimated by the Congressional Budget Office to be upward of $8 trillion. The vast majority of businesses are suffering or being forced to drastically alter existing business models to compensate for the new collective reality.

THE TOP 3: PERSONAL SERVICES, HOSPITALITY AND MANUFACTURING

Three business sectors have been especially impacted by the pandemic. Personal services, such as the beauty and wellness industry, including hair salons, spas, tattoo parlors, gyms and massage outlets, cannot function without physically touching or having close interaction with clients. Much of the workforce in these professions has only had sporadic

— 2 — State of Litigation / Lanier Law Firm income throughout these first few months of the pandemic. nationwide, with at least 76 filed pursuits as of mid-May 2020. These services were largely not considered essential services, and An estimate by the National Restaurant Association indicates the financial impact due to forced closure has been substantial. that if insurance payouts are not provided to this business sector, The manufacturing sector has likewise been gravely affected. For approximately 40 percent of restaurants will not survive the example, car sales in the United States have declined as much as pandemic. 40 percent, and the largest U.S. automobile factories from Detroit’s “Big Three” – Ford, General Motors and Fiat Chrysler – had to temporarily shut down production. Similarly, the SMALL BUSINESSES ARE largest plane manufacturers, Boeing and Airbus, had to suspend DEVASTATED production at multiple plants. Small businesses are especially vulnerable to the risk of The sector with the most currently filed claims for business permanent closure. Losses to United States small businesses was interruption insurance coverage has been the hospitality calculated as high as $431 billion per month during the economic industry, especially restaurants. Prior to the pandemic, the lockdown. The American Property and Casualty Insurance National Restaurant Association projected 2020 sales in the Association indicated that the closure of businesses with fewer United States’ restaurant industry to be in the neighborhood of than 500 employees is costing them from $393 billion to $668 $900 billion. As of February 2020, the industry employed more billion per month. Small businesses represent up to 30 million than 15 million people, representing up to 10 percent of the at-risk jobs in light of the pandemic, a disproportionate share of American workforce, and is the nation’s second-largest private vulnerable positions. And at least half of the jobs at companies employer. Indirectly, restaurants employ close to another 10 with fewer than 100 employees are susceptible to unemployment percent of the workforce in dependent businesses such as food – these are businesses that are and will be the hardest hit. producers, distributors and trucking companies. As a driving force of the American economy, without assistance, With stay-at-home orders and forced government closures, a combination of lost revenue, the necessary termination or Forbes estimated as early as March 19, 2020, that the restaurant furloughing of employees, and the inability to cover expenses industry would lose millions of jobs, and the National Restaurant has created a perfect storm of economic disaster for smaller Association specifically estimated job losses would affect 5 enterprises that may not have the reach, economic diversity or million to 7 million workers. In March 2020, monetary losses resources to stay afloat. Yet, insurance companies with hundreds were forecast in the range of $225 billion in direct losses and of billions of dollars in reserves remain steadfast that payouts for $675 billion when indirect business revenues were included. Not business interruption coverage would undermine the solvency of surprisingly, restaurateurs have garnered a plurality of business the insurance industry. interruption lawsuits

force ma∙jeure FORCE MAJEURE /fôrs mä ZHеr/ noun

Can Insurers Rely on It? 1. unforseeable circumstances that As business interruption policyholders seek coverage for the cessation in prevent someone from fulfilling a contract business caused by COVID-19, questions have circulated about whether policies containing a force majeure clause will preclude coverage claims. The phrase “force majeure” is a French term that literally translates to a “superior force.” In American jurisprudence, the meaning is understood as an unanticipated and uncontrollable event. Generally, a majority of commercial contracts contain force majeure clauses that define particular events or circumstances that will excuse or delay the contracting parties’ performance obligations because they would be too difficult, impossible or commercially impracticable. The precise scope and effect of the clause depend on the specific contract, or insurance policy, at issue, and the events triggering the clause must be deemed beyond the control of the contracting parties.

While force majeure seems, at the outset, like a boon to insurance companies, such clauses are to be narrowly construed with the policy’s plain language. Courts are typically reluctant to excuse performance unless the force majeure event — e.g., a pandemic — is specifically stated in the clause. Moreover, the party relying on the clause usually has the burden to prove that the force majeure event qualifies as an event specifically stated in the contract, the event was beyond its control, and was not due to its own fault or negligence. Determinations in this regard are fact-specific to each individual insurance policy, and—good news to policyholders— force majeure clauses rarely mention pandemics. Still, insurance companies may attempt to invoke force majeure clauses, causing business interruption claims to end up in court.

— 3 — State of Litigation / Lanier Law Firm TYPES OF INSURANCE CLAIMS

1 BREACH OF CONTRACT 2 FORCED BUSINESS CLOSURE/ Courts review insurance policies under state GOVERNMENTAL ACTION contract law – each insurance policy is treated In addition to general business interruption coverage, like a contract between the insured and its insurer. some insurance policies include a civil authority Policyowners contract to pay premiums, and in return, the extension of coverage that is intended to apply to insurer contracts to pay for losses covered by the policy. scenarios when access to an insured’s property is Many of the current lawsuits brought by policyholders prevented by a governmental order as a direct result claiming coverage for business interruption include of physical damage, caused by a covered peril, to other breach-of-contract claims against their insurer for denying property in the vicinity of the insured’s property. Such coverage under their policies. Courts will be required to coverage is supposed to cover the loss of business interpret the precise policy language at issue and weigh the caused by the forced closure. These clauses usually have competing interpretations of policyholders and their a geographic limitation, requiring that the physical insurers. In these suits, policyholders will emphasize any damage that triggered the civil authority order be policy language that could be interpreted as expanding within a stated distance of the insured’s location. In coverage, while insurers will narrowly construe coverage COVID-19 cases, the primary point of contention will provisions and broadly construe policy exclusions in order be if the virus caused physical property damage. In one to deny coverage for business cessation due to COVID-19. of the first business interruption cases, the famous French Laundry restaurant in California’s Napa Valley is arguing the specific language of the shutdown order to its advantage: “[t]he [civil authority] [o]rder specifically states that it is being issued on evidence of physical 3 damage to the property ... in the immediate area of the LACK OF INGRESS/EGRESS [i]nsured [p]roperties.” Depending on the jurisdiction, Ingress/egress insurance extensions cover the outcomes in these cases will likely vary. business interruption losses when the insured is unable to access its own premises in absence of a civil authority order. Like most business interruption policy provisions there is typically a physical-loss or damage- to-property trigger for coverage to apply. Thus, while a fear of contamination will likely not trigger coverage, 4 LOSS OF BUSINESS INCOME actual contamination might. Business interruption insurance is supposed to compensate for lost business income as a result of a disaster or emergency. Usually, business income refers to the net income that would have been earned or incurred and continuing normal operating expenses incurred, including payroll. Again, the most common trigger for 5 EXTRA EXPENSE COVERAGE coverage to apply is a direct physical loss to the property. While business interruption coverage may cover Most policies will list the types of events that trigger normal expenses during a shutdown, an extra expense coverage and those that the policy excludes. Nearly all rider covers expenses above and beyond a business’s claims currently being litigated revolve around whether normal operating costs that are incurred to minimize the the business will be compensated for lost income due to suspension of business, to continue operations, and to the pandemic and cessation of business. repair or replace property. In other words, the coverage generally applies during a “period of restoration” of the property caused by the damage. In the COVID-19 context, extra expenses might include the cost of sanitizing the property and testing conducted on the property.

—— 4 — State of Litigation / Lanier Law Firm INSURANCE POLICIES

Limitations Post-SARS Importance of Individual Review

SARS, which infected 8,000 people, mostly in Asia, and Whether or not coverage applies is dependent on the precise foreshadowed the current pandemic, led to millions of dollars language in individual insurance policies. Taken as in business interruption insurance claims. Among the claims individualized contracts between the insured and the insurer, was a $16 million payout to one hotel chain, Mandarin Oriental courts must generally interpret whether or not there is insurance International. As a result, insurers began adding exclusions to coverage in accordance with each policy’s plain and ordinary standard commercial policies for losses caused by viruses or language. Coverage determinations must, therefore, be made on bacteria. a case-by-case basis, as they are factually dependent on the precise policy inclusions and exclusions for each individual relationship. Additionally, questions concerning contract interpretation are governed by state law and, thus, can vary depending on the jurisdiction. These changes in policy language will potentially allow insurance companies to avoid hundreds of billions of dollars in Triggering Events, Exclusions, Notice Requirements business interruption claims generated by the COVID-19 pandemic. As with all forms of insurance coverage, there must be a triggering event to justify coverage – here, the triggering event claimed by policyholders is COVID-19 and/or the forced governmental shutdown of the economy. The key to insurance coverage is that the triggering event is designated in the policy For policy owners with insurance policies that contain this and that the policy does not contain an exclusion for that event. type of exclusion, there may still be a legitimate legal Insurance companies, as well as policyholders, are combing workaround to require coverage. Plaintiffs’ attorneys argue through their policies for clauses that will either include or that, despite the exclusionary language, coverage nonetheless exclude coverage for business interruption caused by the exists because the cessation of business was caused by the pandemic. Extensive legal review of each policy must be made. government shutdown, not the presence of the virus, thus precluding the applicability of the exclusion. The success of What constitutes a “business interruption” also varies, as some these arguments is yet to be determined. policies may require the total cessation of business in order to trigger coverage, whereas others may only require a slowdown or a reduction of business capacity. A policy may also specifically exclude certain occurrences such as civil disturbances and power service failures or may only cover certain business locations. All these considerations are heavily dependent upon the jurisdiction and the policy language at issue.

— 5 — State of Litigation / Lanier Law Firm For instance, in the United States, most property-related policies are “all-risk” property damage policies, meaning they are to cover all risks of loss except for those that are expressly and specifically A voluntary shutdown will potentially excluded. Common exclusions to all-risk policies, however, include losses from communicable diseases, pandemics, or negate a civil authority clause if done viruses, bacteria and other microorganisms. prior to an official governmental closure.

Such exclusions may be deemed inapplicable in the case of stay- at-home orders and the emergency governmental shutdown of business if the policy has a civil authority clause that would Policyholders must also take heed that their policy may include provide coverage for monetary losses when the orders of civil certain notice provisions that will preclude coverage if not authorities make it impossible for the business owners to access accounted for. In other words, an alleged delay in providing the their commercial premises. insurance company proof of a claimed loss may void coverage; thus, notice should be given as soon as possible to avoid this There is a catch-22 to these provisions, however, as on one hand, defense to coverage. the policyholder must wait to shutter its business until the authorities actually require closure, and on the other hand, staying open could open the door for liability to patrons because the owner is aware of an exposed danger.

The Key to Coverage: Property Damage or Physical Loss of Use

Under most business interruption policies, coverage is only implicated when there is direct physical damage to or destruction of the insured property such as a hurricane or fire. Moreover, because courts generally interpret coverage in accordance with the policy’s plain and ordinary language, insurers may dispute that any business interruptions resulting from COVID-19 trigger coverage due to a lack of actual physical damage to insured property itself. Courts across the country are, therefore, being asked to grapple with the question of whether or not COVID-19 causes physical damage to the property to trigger business interruption coverage.

Shrewd plaintiffs’ attorneys argue, however, that a property is in fact, damaged by ongoing contamination from the virus. COVID-19 presents a situation where every person coming into the business puts the physical space of the property at risk. damaged until it can be sanitized. Alternatively, policyholders Quite technically, COVID-19 is a physical substance capable of argue that the loss of use of the property should alone be remaining active on inert, physical surfaces and that, arguably, considered property damage — the virus denies access to the causes direct physical loss by rendering the property unsafe for property and eliminates or destroys its sole function and/or any persons in contact therewith. causes a suspension of business operations on the premises.

In other words, the presence, or even the danger, of Covid-19 on a property makes it unusable — the property is rendered

— 6 — State of Litigation / Lanier Law Firm What is the latest?

Insurance Companies Do Not Want Blanket Denials May Be Potential Legislative Actions to to Pay Bad Faith Broaden/Restrict Business Interruption Claims Property and casualty insurance companies These sorts of blanket denials of are facing pressure to tap into the industry’s coverage prior to any evaluation Eleven states, plus the District of Columbia, more than $800 billion in cash reserves to of particular policies could have introduced legislation to benefit small fund business interruption claims caused by make the insurance company businesses who opted to purchase business the pandemic. Despite the pressure, the susceptible to bad-faith claims, interruption insurance. The proposals would industry is either delaying payment or being depending on the jurisdiction. require insurers to cover losses attributable to completely resistant to paying on these Some jurisdictions require the virus, regardless whether policies included claims. In fact, two of the largest property a claimed loss to be covered exclusions for such events or whether policy insurance companies – The Hartford and under a policy as a prerequisite language required direct physical loss or Travelers – both declared in blanket to successful bad-faith litigation. damaged property. Insurers would then be statements that business interruption But in other jurisdictions, a able to seek reimbursement through the states’ coverage is generally designed only to cover finding of bad faith can be found regulatory authorities. This proposed losses due to physical damage and is not regardless whether coverage legislation essentially rewards small businesses applicable to business cessation caused by a actually applies or not – if the with the foresight to purchase business virus. Some insurers even sent prophylactic carrier refused to conduct proper interruption insurance but for which no such letters to policyholders informing them that investigation into the claim, bad coverage is currently offered. Insurers argue, their insurance policies exclude losses from faith may lie. Policyholders of course, that this legislation impedes upon causes linked to viruses or bacteria, should, therefore, hold carriers their freedom of contract. Legislative including COVID-19. These actions, accountable if they choose not to watchdogs predict that some sort of bailout of however, appear contrary to contract review investigate their claims or the insurance sector will occur if such principles underpinning judicial thoroughly explain coverage legislative aims are passed. determinations that mandate individual denials. policy review.

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— 7 — State of Litigation / Lanier Law Firm