WHY THE EMPEROR HAS NO CLOTHES: COVID-19 “BUSINESS INTERRUPTION” COVERAGE MAY BE AVAILABLE

Providing Notice To Clarify Potential Coverage Makes Sense

Insurance brokers throughout America are being urged by major insurers to just say “no” to Corona Virus claims when they have not authority to do so. These same insurers assert that no pathway to “Property” policy benefits arise because evidence of “physical property damage” is unavailable

The Insurers Finesse What They Cannot Address

Several recent articles by law firms serving as insurance coverage counsel for insurers take aggressive positions about why no possible coverage for “business interruption” claims for COVID-19 risks. See https://www.reuters.com/article/us-otc-covid19-idUSKCN21W2YE (“Zelle”) and https://www.jdsupra.com/legalnews/carrier-considerations-business-28075/ (“Shepard”) Upon reflection, their arguments ignore evolving scientific evidence about the genesis and dissemination of the COVID-19 virus. Closer review of these insurer arguments reveals that potential coverage may arise for a number of policyholders, as a number recently filed coverage lawsuits confirm.

These 3 cases typically typify the litigants pursuing COVID-19 coverage cases:

Big Onion Tavern Group, et al. v. Society Ins., Inc. (N.D. Ill. Mar. 27, 2020) – Chicago Restaurants and Theaters Sue Business Property Insurer

Mace Marine Inc., dba Conch Republic Divers v. Tokio Marine Spec. Ins. Co. (Fla. Cir. Ct. Apr. 6, 2020) – Scuba Shop Added to List of COVID-19-related Business Income Plaintiffs.

Snowden dba Hair Goals Club v. Twin City Fire Ins. Co. (Tex. Dist. Mar. 26, 2020) – Wig and Hair Extension Store Seeks Business Income Coverage.

Insurer Arguments About “Business Interruption” Coverage Are Subject To Attack

First, a recent opinion piece in The Wall Street Journal, by the Chubb’s CEO, Evan Greenberg, asserts that “physical injury or property damage.” He claims that it must be demonstrated to show “Business interruption” coverage under the vast majority of “Property” policies, including those issued by Chubb and its constituent companies. Not so. This direct proof of “physical damage” approach presumption ignores the diffuse manner in which The COVID-19 virus is disseminated, as well as the length of time surfaces it touches are contaminated. As Doctor Gupta on CNN explained, distant participants in a group meeting were infected by air currents released through the HVAC as airborne virus particles are “genetic material” released into the atmosphere by a simple sneeze.

Similarly, the Shepard article, characterizes the coverage sought or based solely on the “prophylactic shut down” not “physical loss or damage.”  But this construction limits the test is what can be readily observed. That is not a fair test. As Anthem Elecs., Inc. v. Pac. Emplrs. Ins. Co., 302 F.30 1049, 1056 (9th Cir. (Cal.) 2002) explained in analysis “property damage” coverage where circuit boards supplied by Anthem unexpectedly failed – evidence of missed electronic connections not visible to the naked eye, can cause compensable injury.

Insurers also claim that, even under what they characterize as the “more liberal approach”, there must be a “demonstrable physical alteration of the [insured’s] property.” (Shepard) This same article, however, concedes that this is not the primary way the indirect injury “virus” spreads (Shepard). The negative pregnant of this argument leaves unanswered, the supposition – that any “property damage” to a surface by the virus, meets the applicable legal standard.

A recent decision from Ontario, Canada, MDS Inc. et al v. Factory Mutual Ins. Co. (FM Global) Ontario Sup. Ct. of Justice 2020 ONSC 1924 (March 30, 2020) concluded that a disruption in supply caused lost profits “directly resulting from ‘physical loss or damage’ of the type insured by this Policy.” id at 182. The court explained that “a broad definition of ‘resulting physical damage’ was ‘appropriate… [and would] include impairment of function or use of tangible property cause by an unexpected [event]” id at 518-519. So understood, this test only requires interference with access to “Property” caused by unexpected event, such as the Pandemic Virus.

In an article entitled The Bearer of Good Coronavirus News by Allysia Finley of the Wall Street Journal Saturday/Sunday April 25/26, 2020, the author observed that “Stanford scientist John Ioannidis finds himself under attack for question the prevailing wisdom about lockdowns.” His study, co-authored with his wife, a Stanford epidemiologist, determined that the absence of testing may have under-reported the number of cases of confirmed COVID-19 infections.

As Finley’s article observed:

“Based on blood test of 3,300 volunteers in the county – which includes San Jose, California the third largest city, during the first week of April they estimated that between 2.49% and 4.16% of the county’s population had been infected. That is 85 times the number of confirmed cases and applies a fatality rate of between .012% and 0.2% consistent with that of the Diamond Princess…A study published this week by the University of Southern California and the Los Angeles county the department of public health estimates that the virus is 28 to 50 times as prevalent in that county as confirmed cases are. A New York study released Thursday estimates that 13.9% of the state and 21.2% of the city had been infected, more than 10 times the confirmed cases.”

Accepting the premise of this article, premature denials by insurers rely on untested presumptions – that policyholders cannot produce evidence of “direct physical injury” because they cannot establish the exact locations where contaminated surfaces exist. There is, however, no ultra-violet tracking light that reveals the presence of the virus as it adheres to a surface. Forensic reconstruction of the dissemination of the virus, as well as modeling of results that reveal their likely presence can address concerns about this “missing” evidence as they have historically in other damage traceability insurance coverage disputes. 

 Second, the Zelle article, acknowledges that virus exclusions vary. Few, if any, expressly address epidemics, much less a pandemic. While waiting periods and sub-limits may apply to these “Property” coverages that does not mean that coverage is unavailable.

While many insurers view the Corona Virus “business interruption” claims as an “existential” threat, it is not a policy holder’s job to protect insurers from their improvident grant aware of that coverage. According to Business Insurance, President Trump observed that some insurance policies specifically exclude pandemic coverage, "in a lot of cases, I don't see it. I don't see reference, and they don't want to pay up. I would like to see the insurance companies pay if they need to pay." Many companies, including restaurants and others, have paid business interruption premiums for years and then “when they finally need it, the insurance company says, ‘We're not going to give it.' We can't let that happen.”

This is the ultimate response to Evan Greenberg’s query “why hold any single industry accountable for human and financial consequences no one saw coming,” is that insurers have sold express insurance coverage for Pandemic claims expressly conducting any “Corona Virus” since the SARS outbreak of 2003. Insurers concede that COVID-19 insurance was available in the form of a “Pathogenix” policy.

The issue of whether a “virus” exclusion precludes any coverage also runs counter to the views of laypersons. Many are surprised to learn that insurers contend that the word “virus” buried in a mold focused bacteria exclusion could encompass pandemic virus injury. This very construction was challenged by the Massachusetts legislature when it passed a statute declaring it unenforceable. Mass. Bill (50.2888)

Addressing “public safety, health and convenience”, the statute provides:

SECTION 1. (a) …[N]o insurer in the commonwealth may deny a claim for the loss of use and occupancy and business interruption on account of (i) COVID-19 being a virus … or (ii) there being no physical damage to the property of the insured or to any other relevant property.”

While legislatures may seek to structure future insurance programs to bolster the reinsurance market, in a manner analogous to how TRIA addressed terrorist attack risks, this effort should not deter courts from extending coverage under “Property” insurance provisions, where facts evidence potentially covered claims. A recent article by Kathleen Sullivan entitled “State Laws Cannot Retroactively Rewrite Insurance Contracts” does not support a contrary view, where a legislative approach like that followed by Massachusetts is adopted.

CONCLUSION

Taking at face value insurer’s desperate denials of Corona Virus claims gives too much credence to insurer arguments lack scientific support. Those who prepare properly their claims to best preserve their rights to pursue them, and secure appropriate assistance from coverage counsel to better articulate those claims, are most likely to secure insurance benefits.