Business Interruption Insurance: The Ongoing Case for Coverage

Since COVID-19 swept through the country, numerous articles have commented on the lack of business interruption insurance in commercial property policies based on two key standard policy provisions – (i) the loss of net income caused by “direct physical loss of insured property” and (ii) the Virus Exclusion.  As a general rule of interpretation, most courts will interpret coverage provisions in a policy broadly and, most often, in a way that favors coverage.  Furthermore, courts invariably strictly interpret exclusions and will enforce a plainly written exclusion to support a carrier’s decision to deny coverage. A few lawsuits have now been filed across the country involving policies that allegedly do not contain the Virus Exclusion.  These lawsuits challenge the interpretation of the provision requiring direct physical loss to insured property in order to obtain the coverage afforded under the respective policies.

These cases will become pivotal as their outcomes may establish important precedent that could either strengthen or impede the ability of other businesses to challenge their policies in court. Below is a review of several cases making strong arguments for coverage.

Ocean Grill v Lloyds in Louisiana. A restaurant owner in Louisiana filed suit against Lloyd’s of London seeking a declaratory judgment that he was entitled to lost net income and extra expenses under the business interruption section of his property policy due to the impact of the Coronavirus on his business and the recent shutdown of restaurants by executive order.  In that action, the restaurant, the Oceana Grill,  alleges that the Lloyd’s policy under review does not contain the virus exclusion.  Attorneys for the restaurant allege that, “to avoid payments for a civil authority shut down the insurance industry is pushing out deceptive propaganda that the virus does not cause a dangerous condition to property.”  That attorney also is representing the owner of two restaurants in Napa Valley California insured under a Hartford policy that does not have an exclusion for the viral pandemic. In fact, it is alleged that in that case the Hartford’s “Policy Deluxe Form” actually extends coverage  for a loss or damage due to virus.

Chickasaw v Lexington Insurance and Choctaw v Lexington Insurance in Oklahoma. Two separate lawsuits were filed on behalf of native American tribes for losses incurred from an order shutting down their Oklahoma casinos.  Complaints filed by the Choctaw and Chickasaw Nations Departments of Commerce against multiple insurance companies, including various underwriters of Lloyd’s, Lexington, Homeland, Arch, Endurance Worldwide, Allied World, Liberty Mutual, Hallmark, Endurance, Evanston and XL Insurance Company. In those complaints, the plaintiffs outline losses incurred by the executive orders shutting down their casino operations due to the pandemic.  Although the complaints filed in the Oklahoma State District Court do not specifically allege the lack of a virus exclusion in the various policies involved, it appears the Llyods’ policy form may be similar to the policy form under review in the Louisiana case.

Big Onion Tavern v. Society Insurance in Illinois. Most recently, a group of Chicago restaurant and movie theater owners filed suit in federal court against Society Insurance, Inc., a Wisconsin based insurance company alleging that it denied coverage for their business losses without undertaking the requisite investigation and inspection mandated under the relevant policies (Big Onion Tavern Group, LLC et al v. Society Insurance Company, Case no. 1;20-cv-02005).  The Governor of Illinois ordered the closure of all restaurants, bars and movie theaters in response to the Coronavirus.  The complaint in that case alleges that the Society policy form  does not contain a virus or pandemic exclusion.  The groups attorneys commented, “[I]f Society Insurance had wanted to exclude pandemic related losses under the plaintiffs’ policies-as many insurers have done in other policies- it easily could have attempted to do so on the front-end with an exclusion.”  Here again, the focus of the case will be the provision that requires the loss to be caused by direct physical damage to property. There is some case law that may support the argument that a virus or some other similar event that does not cause visible physical damage to insured property, may nevertheless fall within the policy.

The above lawsuits reveal that even the insurance industry is not infallible and that there may be some policies or policy forms that do not contain the virus exclusion that may be subject to challenge.  Accordingly, we urge all of our clients to review their policies and if they do not contain a virus exclusion consult with counsel regarding your rights to coverage.

Legislative Efforts. On March 27, New York Legislatures introduced a bill to actively override the Virus Exclusion. The bill, A10226, states, “Notwithstanding any provisions of law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, which includes loss of use and occupancy and business interruption, shall be construed to include among the covered perils under that policy, coverage for business interruption during a period of a declared state of emergency due to the coronavirus disease 2019 (COVID-19) pandemic. The bill would only apply to insurance policies in force by March 7, 2020 and issued to businesses with fewer than 100 full time employees.

Similar to the New Jersey bill (A3844), the New York bill would allow carriers that pay out on these policies to seek reimbursement from the State Superintendent of Insurance under a fund. The fund would be created by a special purpose apportionment that the Superintendent would be authorized to collect from all insurers doing business in the state. Carriers will most likely pass the costs on to customers in the form of higher premiums for virtually all insurance products. The insurance industry is pushing back against the New York bill as well as the efforts in New Jersey and other states, such as Massachusetts and Ohio.

We will continue to follow all legislative efforts designed to assist business owners during this crisis.