Armed with virus and communicable disease exclusions and high-powered attorneys, insurers are ready to defend their rejection of business interruption claims across the U.S. But lawyers for policyholders see ambiguity in contract language and expect courts to look favorably on their arguments that lean on traditional interpretations of exclusions and claims.
Shuttered businesses across the nation have been filing business interruption claims since government-mandated shutdowns during the coronavirus pandemic, but insurers have largely been denying these claims, citing various exclusions in the policies. Insurers have also maintained that business interruption and other policies were never designed to cover an event like the COVID-19 pandemic, and that paying out the recent claims would bankrupt the industry.
The inevitable legal filings have already begun, and court battles over terms and conditions of policies are likely to drag on for a long time.
"There's no doubt in my mind that there'll be coverage for a lot of these claims, and there's no doubt in my mind that a lot of these carriers are committing bad faith right now by doing these quick denials without a proper investigation," said William Shernoff, a founding partner of California-based Shernoff Bidart Echeverria LLP, which specializes in representing policyholders in bad-faith claims against insurance company denials.
Read more on the coronavirus-related challenges that commercial insurers are facing
Bad faith litigation may exacerbate insurers' business interruption troubles
Outbreaks on cruises, in care homes could leave commercial insurers on the hook
'Ugly' Q2 ahead for US P&C insurance industry, analysts say
Retroactive business interruption cover would make pricing 'astronomical'
Policyholders' lawyers will point to cases that they believe establish a precedent in favor of the businesses seeking coverage, and Shernoff said he believes the courts will rule "liberally" in favor of businesses.
"Quite frankly, the prevailing law on the insurance policies is that coverage is supposed to be interpreted broadly and exclusions are supposed to be interpreted narrowly," Shernoff said. Where there is inconsistency between various sections of a policy, courts generally say it is ambiguous, he said, adding that this typically falls in favor of the policyholder because the insurance companies draft the policies.
The argument for coverage
Business interruption insurance typically pays out for losses suffered as a result of damage to a property. For example, if a storm damages a store's roof, a traditional property policy would pay for the repairs, while a business interruption policy would cover loss of merchandise, revenue or both if the business has had to close.
One of the key arguments insurers have for denying coronavirus-related business interruption claims is the lack of obvious physical damage, but lawyers interviewed for this story said this should not stand in the way of securing payouts, especially in light of rulings given for previous cases. The argument will be that a business with an ill employee or customer will have proof that the virus has infested the property, while for businesses that cannot be certain, expert witnesses could testify that the prevalence of the virus, at least in places like New York, is enough proof that a business has been physically infected.
"A lot of insurance companies have come back and said, 'We don't think that's physical damage,' a lot of my opposing counsel as well as even some insurance agents, and I just looked at them and I thought 'You're just out of your mind,'" said Chip Merlin, a property insurance claim lawyer and founder and president of Florida-based Merlin Law Group, which specializes in litigating insurance claims, including for commercial property.
Edward Susolik, a senior trial attorney at California-based Callahan & Blaine, which specializes in litigating insurance bad faith and complex business cases, gave the example of a landlord who had a tenant operating a meth lab. Damage to the property, if any, would be minimal, but lingering fumes could leave the property unrentable for weeks or months. Courts have found this to be a valid business interruption claim, the attorney said.
Susolik also pointed out that many insurance policies cover shutdowns imposed by governments, which would mean that nonessential businesses ordered to close should be covered regardless of any property damage requirements or virus exclusions.
However, Merlin said that on many policy forms he has seen, businesses would only be eligible for four weeks of expenses and lost income if coverage were awarded due to a shutdown imposed by civil authority.
Although not currently in litigation on the topic, Rob Berg, a partner and insurance coverage attorney at Los Angeles-based business-focused national law firm Michelman & Robinson LLP, has litigated cases on both the policyholder and insurer side. He predicted that insurers will try to lead the way in pushing litigation onto policies where there are direct physical damage requirements under every part of a policy, including the parts regarding civil authority-related shutdowns.
"I think that would be the wise strategic move for them to make so they have precedent that would be beneficial before they have to address policies that are a little broader," Berg said.
Several states have proposed legislation to mandate insurers cover business interruption claims retroactively, despite the industry's strong opposition. In the states that are considering enacting such a law, S&P Global Market Intelligence data analysis found that Travelers Cos. Inc., Chubb Ltd. and Hartford Financial Services Group Inc. hold the largest market share of commercial multiperil nonliability policies, the line under which business interruption is written.
Legal experts interviewed for this story stressed the importance of scrutinizing a policy in question to determine whether a claim is covered. For the most part, the insurance industry tries to standardize policy language by including endorsement forms from Insurance Services Office Inc., or ISO. The language in these forms is typically drafted and vetted by industry experts and helps provide uniformity when the courts interpret policies.
As lawyers comb through business interruption policies, they are noticing different things.
"A lot of these policies have virus exclusions, and a lot of them don't," Susolik said. "A lot of these policies have additional coverages, what's called dependent property coverages, a lot of them don't."
Merlin said that about seven out of 10 policies he has read so far include an ISO virus exclusion, while he has also been finding that a lot of surplus lines policies written through Lloyd's of London did not include an exclusion specifically for virus.
Shernoff also said he has seen several policies, including some covering large companies, that have an actual grant of coverage specifically for infectious diseases. Merlin echoed this and said he is typically finding that the larger and more sophisticated the client, the better the probability that it has the types of coverage that will pay out.
"So it's all over the place; some of them excluded, some of them covered," Shernoff said. "It's going to take the courts to really sort out the interpretation of these things."