Opening day might be delayed, but first pitches have already been thrown in courtrooms across the U.S. by insureds seeking business interruption cover for Covid-19 related losses. The judges calling balls and strikes in such cases may see some tough pitches, but the general dispute appears clear enough – can the insured prove the damage claimed is the result of a “direct physical loss” to property? For some actions and insurance contracts that might be the ultimate question, for others, even if the insured is able to fit its claim within the insuring agreement, communicable disease, pollution or other exclusions might be applicable. And others may raise questions as to the scope of their coverage for civil authority action or orders.
As reported previously in Locke Lord’s Covid-19 Resource Center the first business interruption coverage action appears to have been filed by a well-known restaurant in New Orleans, Louisiana. See gen., Cajun Conti, LLC et al. v. Certain Underwriters at Lloyd’s London et al. This first action was quickly followed by an action in California, French Laundry Partners, LP dba French Laundry, et al. v. Hartford Insurance Company, et al. (“Hartford”), filed by the same counsel representing the insured in the New Orleans matter. In neither case has the insurer denied the claims. In the California action filed last week on behalf of two well-known restaurants in Napa Valley, it is alleged that the insureds are entitled to coverage under the civil authority provision in their all risk policy with Hartford, contending that a local county order cited evidence that the virus causes physical damage to property and that such damage caused damage to properties in the immediate area of the restaurant. Other such actions have followed in Pontotoc County, Oklahoma (Chickasaw Nation Dept. of Commerce v. Lexington Ins. Co. and Chocktaw Nation of Oklahoma v. Lexington Ins. Co.) and Houston, Texas (Barbara Lane Snowden v. Twin City Fire Ins. Co.) with, no doubt, more to come.
In fact, at the end of last week, another such business interruption coverage action was filed, this time in Illinois, Big Onion Tavern Group, LLC, et al. v. Society Insurance, Inc. In this case, coverage has been denied, and the insured restaurants and movie theater operators have sued for breach of contract and bad faith, contending that orders from the State of Illinois have resulted in the interruption of their businesses. The insureds claim that the presence of a dangerous substance in a property under Illinois law constitutes physical loss or damage to property whereas the insurer has stated that the actual or alleged presence of the coronavirus does not constitute physical loss or damage. Moreover, because the policies in question do not contain an exclusion for loss caused by virus, the insureds contend that they reasonably expected that the policies would cover such claims.
Historically, jurisdictions vary on their treatment of specific claims or issues, but it is a general rule that the insured bears the burden to establish the claim fits within an insuring agreement (while the insurer takes the burden to establish an exclusion is applicable). As to the longstanding requirement of a direct physical damage or loss, the question is whether insureds will be able to establish that a particular claim fits within the specific insuring agreement in the different jurisdictions including, but not limited to, Louisiana, Illinois and California. We shall see.
Proving Direct Physical Loss to Property
An insured seeking coverage faces the substantial burden of proving that there was a direct physical loss to property – a standard contractual requirement for business interruption coverage. Courts have taken different views on just how tangible the injury to the property has to be to constitute a direct physical loss ranging from the literal to mere loss of use, but that question might stay a hypothetical one if there is no proof that the virus was actually present on insured property. It is widely reported that the COVID-19 virus can only live on a surface for a short period of time, some longer than others, but even if assumed present and assumed to physically damage property, when is it considered gone? How do you calculate an interruption period? Can the property be cleaned to eliminate or shorten such a period?
Civil Authority Orders
The challenge in proving a direct physical loss might suggest coverage under a Civil Authority insuring agreement, if a policy includes one, is a better fit, but such coverages generally include the same direct physical loss component as a condition for coverage. Thus, a primary issue in these disputes will no doubt be whether a government-ordered shut down to promote “social distancing” constitutes a physical loss to property. It is expected, however, that these provisions will be subject to challenge by insureds.
It is apparent that these coverage issues, significant as they are, have prompted some lawmakers to try to force the hands of insurers by proposing legislation that requires treatment of alleged COVID-19 business interruption losses as covered claims regardless of the actual contract wording at issue. Such legislation does not appear to stand much chance of passing without significant modifications, but proposals that create a government funded or backstopped program may fare better. Marsh President and CEO John Doyle seems to support the latter, stating in letters to the lawmakers and the Trump Administration that “[t]here are certain risks, like terrorism, that require the full weight of the United States government to manage in partnership with the insurance industry. A public-private partnership is therefore critical to ensuring all businesses and organizations have the ability to manage this risk [COVID-19] prospectively.”
Visit our COVID-19 Resource Center often for up-to-date information to help you stay informed of the legal issues related to COVID-19.