Only once in U.S. history—during the 1918 influenza pandemic—have so many businesses been forced to close for months due to local and state lockdowns and restrictions. Now, businesses are returning to a changed landscape and struggling to regain the income they have lost over the past year.
To that end, many businesses forced to suspend operations because of COVID-19 have been filing business interruption claims. A typical business interruption clause provides the insurer will pay for lost income sustained as a result of a necessary suspension of operations only if caused by a “direct physical loss” to the enterprise’s premises. Rulings have begun to emerge from both federal and state courts, with claimants finding varying degrees of success based on the venue.
Decisions on COVID-Related Business Interruption Claims
In a majority of cases, state courts across the country are finding coverage for policyholders. Federal courts, on the other hand, have approached business interruption coverage more conservatively and routinely issue opinions finding no coverage. According to these federal courts, viral contamination and civil lockdowns are not “direct physical losses” under business interruption policies. Federal courts in New Jersey, California, West Virginia, Georgia and Indiana have all recently ruled that businesses suffering lost income due to COVID-19 lockdowns experienced no “direct physical losses.”
On March 29, 2021, the U.S. Supreme Court declined to hear the most influential federal case to have recently come out of the district courts. In the case, the Eleventh Circuit found no coverage for Mama Jo’s, a Florida restaurant that suffered dust contamination from nearby road construction. According to the court, the restaurant’s business interruption coverage was not implicated because it suffered no “direct physical loss,” a precondition to coverage under its insurance policy.
Because federal and state courts differ dramatically in their stances on the definition of “direct physical loss,” policyholders are now clamoring to file all cases in state courts. Ultimately, any favorable policyholder decision in a state appellate court will bind that state’s federal court. Since the Supreme Court declined to issue an opinion, it is now up to individual state appellate courts to navigate the coverage mess left in COVID-19’s wake.
Options Other Than Business Interruption Coverage
Regardless of the outcome of litigation over COVID-19 business interruption coverage, businesses must prepare for the next major risk event. Even if a business did not purchase business interruption coverage, it should check if it requested similar coverage from its broker. If the broker failed to procure insurance protecting against business interruption due to viruses, the business may have a “failure to procure insurance” claim.
Because COVID-19 is now a known risk, policies going forward will likely provide no coverage for claims specifically arising from the pandemic. Other than business interruption, not many insurance coverages protect businesses from lost income except for non-standard coverage forms. As pandemics typically present existential danger to the entire insurance industry, insurers cannot offer blanket coverage to all businesses for business interruption relating to viruses. It may be that COVID-19 will force industries, such as hospitality, restaurants and entertainment, to go the way of the construction industry and self-insure, at least for some types of claims.
Looking ahead, these industries may need to seek government help if the commercial insurance market cannot meet coverage needs. This would be similar to the formation of the National Flood Insurance Program. Because floods present extreme risk to a wide swath of properties located in flood-prone areas, it is prohibitively risky for insurers to offer property damage to some homeowners. So that citizens are not left in the lurch, the United States created the NFIP to provide insurance to these homeowners where there is no availability from traditional insurers. Businesses at acute risk have already begun to lobby for a similar program for pandemics in the future.
Policy Changes Going Forward
The very nature of insurance assumes that only a portion of the risk pool will incur a loss at any given time. When the entire risk pool potentially suffers a loss at the same time, as in the case of the COVID-19 pandemic, the insurance industry faces an existential problem.
Whether terrorism, black mold or COVID-19, a serious risk always causes substantial changes to policies. These events shape risk and insurance long-term. For example, prior to 2001, it was rare to see terrorism endorsements and riders contained in commercial policies. Now, finding a policy that does not mention terrorism seems impossible.
Regardless of courts’ coverage determinations, insurers and the Insurance Services Office (ISO) will likely gather to draft new endorsements and exclusions with regard to viruses to avoid excess litigation and defense costs in the future. In fact, the ISO has already developed two new endorsements relating to business interruption coverage and viruses. These new forms provide coverage for business interruptions occurring as a result of a government-ordered closure or quarantine of all or part of a company’s premises, and as a result of the suspension of some forms of public transportation. At this point, the ISO does not expect to include these forms in its form portfolio.