Baylis, who furloughed his 450-plus employees, assumed an insurance policy would cover some of his losses during the coronavirus shutdown, which is causing him to miss out on $5 million to $6 million in revenue each month.
He was shocked when he received a letter from his insurance company saying it would not.
“Reading that was probably my lowest point of this experience,” said Baylis, whose Big Onion Hospitality group owns Fatpour Tap Works, Hopsmith Tavern and The Irish Oak, among other establishments.
That’s why you insure, to prepare for the unknown,” he said. “All of a sudden to be told that they’re not going to pay out is immoral, unethical.”
Baylis is among a growing contingent of business owners across the country who are suing insurance companies for denying claims for business interruption insurance as revenues take a nosedive during the COVID-19 pandemic. Without the money, some say they may not be able to reopen or hire back laid-off employees.
Business interruption insurance, part of a property insurance policy, typically is triggered when property is damaged or unusable as a result of a fire or natural disaster. Some policies also contain a civil authority clause that covers income loss if a government denies access to a business, such as if a fire at a neighboring property has made the area unsafe.
Many insurance carriers excluded coverage for viruses after another coronavirus — linked to severe acute respiratory syndrome, or SARS — spread across the globe from 2002 to 2004. But some policies don’t have such exclusions, setting the stage for a legal fight over whether the new coronavirus and related closures constitute the kind of physical damage to property that triggers coverage for business income loss.
President Donald Trump weighed in on the issue during his coronavirus task force press conference last week, saying that when exclusions don’t exist, “I would like to see the insurance companies pay if they need to pay.”
Legislators in several states — but not Illinois — have introduced bills to force insurers to cover COVID-19 related claims for small businesses, even when policies have exclusions. A federal draft bill has been circulating to create a government backstop to share the costs.
‘Pandemic outbreaks ... are uninsurable’
The insurance industry, meanwhile, has warned that it could crater under the magnitude of COVID-19 claims. Collectively, small businesses are losing between $255 billion and $431 billion of income monthly as a result of the pandemic, while monthly premiums for commercial property insurance total $6 billion, according to the American Property Casualty Insurance Association.
“Pandemic outbreaks are uninsured because they are uninsurable,” David Sampson, the association’s president and CEO, said in a statement.
Though the insurance industry maintains an $800 billion surplus to cover all U.S. home, auto, and business insurance claims, keeping it stable is important at a time of “increased natural disasters” such as spring flooding, hurricanes and wildfires, he said.
Restaurants have been driving the business interruption insurance lawsuits — among them decorated chef Thomas Keller of The French Laundry in San Francisco, who sued Hartford Fire Insurance Co. — but other types of businesses also are trying to recoup lost income.
Lake Forest dental office Sandy Point Dental, in its suit against Cincinnati Insurance, said 95% of its business is routine or nonemergency dental work deemed nonessential by the state’s order, resulting in substantial lost revenues.
Baylis’ Big Onion Tavern Group was joined in its suit by six other local hospitality and entertainment groups, including the owners of Headquarters Beercade in River North, Homeslice Pizza in Lincoln Park, Harper Theater in Hyde Park, The Whale in Logan Square, Machine 1846 in Wicker Park and McBride’s Pub and Grille in Joliet.
Their suit, filed in Chicago federal court against Society Insurance, alleges their business interruption policies do not contain a virus exclusion. Society also has been sued, separately, by Chicago’s Billy Goat Tavern and Maillard Tavern. The Billy Goat’s suit is seeking class-action status.
Baylis and his co-plaintiffs, in their suit, allege the presence of the coronavirus on or around the plaintiffs’ properties “has rendered the premises unsafe and unfit for their intended use and therefore caused physical property damage or loss under the Policies.” It also said the state’s stay-at-home order was “issued in direct response to these dangerous physical conditions.”
The suit alleges breach of contract and seeks declaratory judgment that Society must cover their COVID-19 related business losses. It also alleges that the insurance company acted in bad faith in issuing blanket denials of claims without conducting a proper investigation, a violation of Illinois law that carries a penalty of $60,000 per claim as well as attorneys’ fees.
‘I’m hoping they go to jail’
Tony Fox, owner of The New 400 Theater in Rogers Park and Harper Theater in Hyde Park, said his claim was denied within a day of submitting it. His movie theaters, each of which have four screens and typically bring in $3,300 to $3,500 a day, have been closed for a month under the shutdown, with 18 employees laid off.
Fox has little sympathy for insurance companies concerned they could go bankrupt if they are required to cover the claims.
“They are hoping for a government bailout, and I’m hoping they go to jail,” Fox said. “How could they take our fees for 10 years and then not pay out?”
Society Insurance, based in Fond du Lac, Wisconsin, said it does not comment on ongoing litigation.
“We look forward to a favorable resolution of this situation in the near future,” corporate marketing manager Rebecca Kollman said in an email.
The key issue in the COVID-19 cases will be whether the presence of the coronavirus and the state-mandated business closures constitute the “property damage and physical loss of use” necessary to trigger coverage, said Skip Durocher, an attorney at Dorsey and Whitney who represents policyholders but is not involved in the Society Insurance cases.
While there is little insurance case law on viral pandemics, courts have found that the presence of dangerous substances like ammonia or asbestos can be considered damage even if they don’t physically alter the property, Durocher said.
Because it isn’t clear how long the novel coronavirus lingers on surfaces — or if it is there at all — it could be tougher to prove that it causes physical damage, he said. Some policies have a waiting period before coverage kicks in, and carriers could argue that the virus would have dissipated in that time.
Still, Durocher advises businesses to examine their policies, document their losses and make a claim. Even policies with exclusions can be fought if the language is ambiguous, he said. For example, some policies exclude pollution or contamination broadly but don’t specify viruses.
“From a coverage lawyer’s standpoint, ambiguity is my friend,” Durocher said.
Thomas Bentz, an attorney who co-chairs the insurance industry team at Holland & Knight, which represents both insurers and policyholders, said pandemics are not the kind of loss carriers were expecting to cover.
“Insurance works really well when you have a small localized loss and you spread it out,” he said. “Insurance doesn’t work where everyone has the same loss at the same time. If you have 100% loss across your portfolio, it’s not sustainable.”
If courts side with policyholders, property insurance rates are likely to increase, said Everett Cygal, a partner at law firm Schiff Hardin who represents insurance carriers. “As more claims come in, premiums will go up," he said. "It’s inevitable.”
The industry has been alarmed by the introduction of bills in more than a half dozen states that would require carriers to cover business interruption claims related to COVID-19, even when policies exclude viral pandemics. Most of the bills would apply only to claims from small businesses — defined as having fewer than 100, 150 or 250 employees, depending on the bill — and some would allow carriers to seek partial reimbursement from the states.
Bills have been proposed in South Carolina, New Jersey, Massachusetts, New York, Ohio, Pennsylvania and Louisiana. Nothing has been introduced in Illinois.
Cygall said such legislation, if passed, could be challenged on constitutional grounds because the Contracts Clause in the U.S. Constitution says a state can’t retroactively change contracts.
The National Association of Insurance Commissioners, which is made up of state insurance regulators, issued a statement discouraging Congress from “proposals that would require insurers to retroactively pay unfunded COVID-19 business interruption cases,” as that could undermine the insurers’ ability to pay other types of claims.
Asked to weigh in on the matter, Illinois Department of Insurance Director Robert Muriel said in a statement that the agency, which doesn’t have the authority to change exclusions in business interruption policies, “continues to work with insurance companies on methods to provide additional relief to Illinois’ business community."
Meanwhile, federal lawmakers are considering legislation that would create a government backstop for pandemic insurance, similar to a program for terrorism insurance created after 9/11.
According to a draft of the bill, the federal government would cover industry losses in excess of $250 million, up to a cap of $500 billion annually. Participating insurance companies would be charged an annual premium.
The legislative pressure offers another avenue for hope for small-business owners. About 43% of businesses are temporarily closed and have cut payrolls by an average of 40%, according to a paper from the National Bureau for Economic Research. The median business has less than one month of cash on hand.
Baylis, at Big Onion Hospitality, said an insurance payout would allow him to reopen all of his restaurants. Without it, “there’s a strong possibility that we could have to close businesses down,” he said.
Baylis has filled his days applying for every loan and grant available, and writing letters to legislators. This week, at his Fatpour Tap Works location near McCormick Place, he helped cook and create care packages for his furloughed employees.
“I’m going to fight until the end,” he said.