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