The COVID-19 pandemic was devastating for businesses in 2020. And that devastation will certainly continue into 2021 as government entities enact policies designed to limit the spread of the virus. Since the beginning of the pandemic, the conflict between corporate policyholders and insurers has been whether the business disruptions resulting from government-mandated closures rise to “business interruptions” as defined under insurance policies offering business interruption coverage.
According to the University of Pennsylvania Carey Law School’s Covid Coverage Litigation Tracker, at least 1,453 lawsuits over the availability of business interruption coverage have been filed in state and federal courts throughout the United States since December 28, 2020. By comparison, only 150 business interruption cases were filed relating to losses stemming from 2012’s Hurricane Sandy, the deadliest and most destructive hurricane inflicting nearly $70 billion in damage.
How physical loss or damage is addressed
In response to the SARS outbreak in the 2000s, many insurers added policy endorsements excluding losses stemming from communicable diseases from business interruption coverage. Early in the COVID-19 pandemic, many policyholders filed claims for COVID-19 related losses. As expected, the policy exclusion was enforced by the courts.
Policyholders having policies without a communicable disease endorsement have taken a different approach. They are seeking business interruption coverage for COVID-19 related losses by alleging a “direct physical damage or loss.”
Generally, business interruption insurance applies only where a business must halt operations due to physical loss or damage resulting from dangers such as fire, theft, vandalism, or natural disasters. One approach a court could take is to construe the language “direct physical damage or loss” to mean the loss of use or habitability. Another approach is to narrowly interpret physical loss to mean tangible harm or some type of alteration to the property’s physical integrity or condition.
Policyholders in jurisdictions that take the latter approach face an apparent insurmountable challenge. Judge Valerie E. Caproni in the Southern District of New York in Social Life Magazine, Inc. v. Sentinel Ins. Co. succinctly summed up the gist of those decisions when she wrote, “[the virus] damages lungs. It doesn’t damage printing presses.”
Other judges have written similar language:
Mena Catering, Inc. v. Scottsdale Insurance Co. – “Although the Complaint alleges (with much speculation) that COVID-19 is present on Plaintiff’s properties and has somehow caused an undescribed ‘distinct alteration’ to the premises, even accepting those allegations, the Complaint still fails to allege a ‘direct physical loss of or damage to Covered Property … caused by or resulting from any Covered Cause of Loss.’ There is no ‘direct physical loss’ where the alleged harm consists of the mere presence of the virus on the physical structure of the premises.”
Carrot Love, LLC v. Aspen Specialty Insurance Co. – “As other Courts in this district have noted when considering similar lawsuits, the Plaintiff here simply does not provide the Court with adequate reason to depart from the nearly unanimous view that COVID-19 does not cause direct physical loss or damage to a property sufficient to trigger coverage under the policy at issue here.”
Event cancellation coverage
Where there is specific coverage for event cancellation, the policyholder will likely be able to file a successful claim regarding cancelations caused by government-mandated closures. This means that there could be a positive outcome for theaters, performing arts organizations, and organizations hosting sporting events.
However, for the claim to be valid, the event had to have been scheduled during the government-mandated closure time period, and canceled with that time period at the insurer’s direction, according to Janis Hagenbucher, Managing Director of Crawford Forensic Accounting Services. Support documents, such as signed contracts, would also have to be provided. If these criteria are met, then the insurer can calculate the claim within the parameters of the government mandate order and based on the policy limitations.
Recent judgments that may impact U.S. coverage disputes
On January 15, 2021, the UK Supreme Court issued a judgment in favor of the policyholders in The Financial Conduct Authority v. Arch Insurance. The case interpreted the language of 21 UK policy forms issued by eight insurers, and it is estimated that 370,000 insureds are owed a total of approximately £1 billion.
The ruling states that policyholders are entitled to coverage for business interruption loss incurred due to shutdowns caused by the COVID-19 pandemic and the resulting public health measures taken by UK authorities. Observers believe that while this ruling is great news for UK policyholders, it is unlikely that there will be a significant impact on business interruption coverage disputes in the United States.
That’s because the ruling is based on UK procedural and substantive law and does not address the interpretation or application of the direct physical loss or damage requirement central to the disputes in the United States.
However, on January 19, 2021, an Ohio Federal District Court granted summary judgment to several restaurant policyholders. The ruling in Henderson Rd. Rest. Sys, Inc. v. Zurich Am. Ins. Co. determined that they were entitled to business interruption coverage for closures caused by COVID-19.
In this case, the language in the policy stated that there must be “direct physical loss of or damage to real property.” The court ruled in favor of the plaintiff’s position that, due to the government-mandated shutdown, there was a physical loss of real property.
Crawford is prepared
As the pandemic continues into 2021, more claims will be filed seeking recovery for loss due to mandated closures. Whether the claim takes place in the United States, the UK, or in any of the 70 countries Crawford operates, our adjusters and forensic accountants are prepared. With new in-house capabilities surrounding this issue, and ample resources for scale, Crawford is well-positioned to support insurers with business interruption claims and their complex forensic accounting needs.