Insurance has long been used by businesses to cover losses caused by unexpected disruptions. However, they have faced an uphill battle in getting carriers to pay out on one of the most significant ever: pandemic shutdowns.
Insurers that sold “business interruption” coverage denied claims from companies that experienced lockdowns or other consequences of the Covid-19 pandemic, and many courts dismissed subsequent lawsuits. According to the courts, the presence of the virus was insufficient to trigger the policies, which generally require some kind of physical damage to property.
Businesses, on the other hand, continue to sue in the hopes of receiving a settlement.
“What has happened to policyholders across the country has been fundamentally unfair,” said Robin Cohen, chair of Cohen Ziffer Frenchman & McKenna. She hopes to persuade New York’s highest court that insurance companies have attempted to avoid paying her client, Consolidated Restaurant Operations Inc., which operates dozens of restaurants and employs over 3,200 people.
“They accepted these premiums and assumed the risk,” she explained of the insurers. “If they made an incorrect assumption, the mom-and-pop restaurants should not be penalized.”
So far, federal appeals courts have dismissed cases like Consolidated Restaurants. The Second Circuit Court of Appeals in New York dismissed an appeal from ITT Inc., a diversified manufacturer based in Stamford, Conn., on Tuesday. That decision came after the same court ruled against a Manhattan art gallery in 2021.
A federal appeals court in Philadelphia ruled against a number of businesses in January. Businesses had suffered losses in 11 federal appeals courts, whose jurisdictions spanned nearly the entire country, as a result of that decision.
Business interruption insurance policies are typically written to be contingent on physical property damage. For example, a water main break may flood a sales floor, or a fire may force a business to close. However, many courts have stated that Covid-19 is not the same.
In June, a federal appeals court in Boston denied a group of restaurants’ Covid insurance claim. “Evanescent presence of a harmful airborne substance that will quickly dissipate on its own, or surface-level contamination that can be removed by simple cleaning,” the court stated.
However, courts have long recognized that some similarly fleeting events, such as an invisible ammonia leak, can trigger a payout from business interruption insurance, according to Scott Godes, a partner at Barnes & Thornburg LLP. Clients suing for Covid-related losses are also represented by his firm.
Many policies expressly exclude virus coverage. According to the National Association of Insurance Commissioners, a standards-setting organization, after the 2003 SARS outbreak caused massive losses to insurers, many protected themselves going forward by writing viruses out of their policies. Many insurers tightened policy language in response to large payouts, such as a $16 million business interruption claim paid to the Mandarin Oriental Hotel Group International Ltd.
However, not all policies cover losses caused by viruses. Despite setbacks in federal court for some policyholders, the cases that are still pending could result in large payouts if the courts rule in their favor—the restaurant operator represented by Ms. Cohen, for example, has a $50 million policy with no virus exclusion, according to a legal brief.
Nonetheless, policyholders are unlikely to win a decisive victory in a single court decision. Because the insurance industry is governed at the state level, dozens of state and federal courts can weigh in and reach different conclusions.
“There are a lot of moving parts,” Mr. Godes explained. “There can be standardized language sold across the country, and yet you could have dozens, if not hundreds, of decisions with different results and analyses.”
The amount of money at stake in each case is difficult to calculate. According to the Insurance Information Institute, if virus exclusions were removed from existing policies, as proposed in 2020, insurers could be forced to pay up to $150 billion in claims per month. According to the institute, this could bankrupt insurers.
That scenario has not occurred. However, at least 2,300 lawsuits seeking coverage have been filed, according to an estimate from a tool developed by University of Pennsylvania law professor Tom Baker.
The American Property Casualty Insurance Association, a trade group, expressed satisfaction with the decisions and maintained that business interruption policies were not intended to cover diseases.
According to Laura Foggan, a lawyer at Crowell & Moring LLP who has represented the association in some cases, federal appeals courts have overwhelmingly sided with insurance companies.
“Having this many decisions that have all come to the same conclusion is such a strong wall of authority,” she said.
Some insurance companies are already preparing for the next pandemic. Marsh LLC has teamed up with insurer Munich Re to offer PathogenRX, a product that can be triggered by “outbreaks, epidemics, and pandemics.” That insurance, however, is intended for midsize to large businesses, and its pricing is customized, according to a Marsh spokeswoman.
Many experts believe that private insurance alone cannot cover pandemic-related risks because such threats are “systemic, correlated, and non-diversifiable,” according to an NAIC survey. That is, pandemics, by definition, occur everywhere at once.
RIMS, a risk management society, has lobbied Congress to pass legislation that would make the federal government a financial backstop for insurers that offer pandemic-related coverage in the future.
However, the proposed legislation does not have a lawmaker on board to champion it, according to Lynn Haley Pilarski, chair of the group’s public policy committee.
“A lot of Covid burnout,” she explained.