Business Insurance Coverage, Litigation and the Coronavirus
In my March 16, 2020 blog post about enforcing contract performance, I wrote about force majeure and other contract clauses that, depending on your role in the contract, might help or hurt you. While writing that post, I started wondering when the first wave of inevitable COVID-19 related lawsuits would start showing up. I assumed they would be contract related, and it turns out I was right. Two restaurants have reported filing lawsuits against their insurers for failure to cover COVID-19 pandemic-related losses. Successful chef and restaurateur Thomas Keller, and New Orleans seafood restaurant, Oceana Grill, have both filed suits seeking declaratory relief from their respective courts that their insurance companies cover civil authority-ordered business closures and related losses. So today, I’m focusing on Business Insurance Coverage, Litigation and the Coronavirus.
TYPES OF INSURANCE THAT COVER BUSINESS REVENUE LOSSES
- Business Interruption Insurance: This type of insurance covers lost revenue, rent or lease payments, employee wages, taxes, loan payments, and relocation costs in the event your business if affected by events that are insured by your commercial property or business owner’s policy coverage.
- Example: If someone broke into my law office and broke windows, leaving the office unsecure-able, I might have to temporarily relocate. Business interruption insurance would cover relocation costs and rent at the new office space while the prior space is repaired.
- Contingent Business Interruption Insurance: If your business’s primary supplier, partner, or customer closes their doors and this affects your ability to operate your business, this rider covers your revolving business expenses while you search for a replacement supplier, etc.
- Example: A parts-sales company relies on a particular machine shop to machine the parts they sell. That machine shop is damaged in a fire and there are no nearby machine shops to replace them. Contingent business interruption insurance could cover the revenue lost while the parts company waits for the machine shop to rebuild.
- Key person insurance: Also known as ‘key man insurance’, this covers income losses as a result of key personnel becoming incapacitated or dying unexpectedly.
- Example: The head of a company has debts that are personally guaranteed. Key person insurance in the amount of the debt would come into play if that person passed away unexpectedly and could not generate business. (Note: this person may need to undergo a medical exam to be coverable.)
- Crisis Management Coverage: This type of insurance helps a business limit the negative impact of certain types of events on the business’s reputation.
- Example: Your restaurant is affected by product contamination or recall, adverse media reports, or a cyber-attack. This insurance would cover the expenses incurred by your business to restore confidence in the business’s product or service, like the hiring of a crisis management team.
- Civil authority coverage: Covers business interruptions mandated by the federal, state, or city government. I don’t think we need an example on this one…
This is of course not an exhaustive list, but these are the types of insurance policies whose language is being challenged in these new lawsuits, because losses unrelated to property insurance claims (specifically, COVID-19-related business losses) are not being covered by business interruption insurance.
LOOPHOLES IN POLICY LANGUAGE
Right now, many business interruption insurance policies do not contain an exclusion for pandemics, so attorneys representing people like Keller in suits against their insurers are arguing that the current language in these policies does provide for coverage on Coronavirus-related claims. The problem is, there currently seems to have to be a physical loss to make the claim, and here, there is no fire or weather disaster, and it’s not clear that a pandemic is included in the definition of ‘other unexpected phenomena’. And after the SARS and Ebola epidemics, some policies began to contain clauses for viruses and bacteria.
So, it seems the focus is on finding creative loopholes in the vaguery of the current policy language. And in Keller’s Complaint for Declaratory Relief, paragraphs 31-33, he is asking the Court 1) to establish whether the Napa County stay-at-home order that affected his restaurant “constitutes a prohibition of access to plaintiffs’ Insured Premises by a Civil Authority as defined in the Policy”, 2) to “affirm that the [order] triggers coverage because the policy does not include an exclusion for a viral pandemic and actually extends coverage for loss or damage due to virus”, and 3) to “affirm that the policy provides coverage to plaintiffs for any current and future civil authority closures of restaurants in Napa County due to physical loss or damage from the Coronavirus and the policy provides business income coverage in the event that Coronavirus has caused a loss or damage at the insured premises.” The complaint is also attempting to work with the requirement that property be damaged to implicate “Civil Authority” coverage by characterizing the impact of COVID-19 on physical spaces as property damage. It is an interesting argument and I’m curious to see what the California court will decide.
But one thing I can’t ignore is that, according to one article, there is only about an $800 billion surplus to work from for insurance payouts, and a claims potential estimate landing between $220 billion to $383 billion per month. Those are some scary numbers. I can only imagine insurance companies will be digging their heels in defending litigation like Keller’s and Oceana Grill’s. A copy of their similar Louisiana petiton is here: https://www.insurancejournal.com/research/app/uploads/2020/03/Oceana-Petition-for-Dec-J-executed.pdf .
REVISITING FORCE MAJEURE CLAUSES
I previously blogged about force majeure clauses, and since the current cases against insurance companies are essentially contract litigation, this clause definitely comes into play. Is COVID-19 an ‘act of God’? Acts of God in relation to force majeure clauses are usually considered things like natural disasters – so is a pandemic a natural disaster? One article I noticed removed the word, “natural” from “natural disaster” and indicated that the pandemic is a man-made disaster. But this same article indicates this disaster was foreseeable, and force majeure clauses usually cover unforeseeable phenomena. I’m in no way leaning on this article for fact, but it does bring unforeseeability into question as it relates to a pandemic.
One 2018 Texas case opinion stated, “[W]hen a risk has been contemplated and voluntarily assumed … foreseeability is not an issue and the parties will be held to the bargain they made.” This was a case on appeal in that the focused on whether the trial court properly considered the foreseeability of changes in the oil and gas market when determining the applicability of the parties’ force majeure contract clause. While this case was related to an economic downturn in the oil and gas industry, it makes me wonder how this applies to our current topic. Could a pandemic possibly be contemplated and voluntarily assumed by a party to an insurance policy? This same case said that force majeure clauses do not relieve a party of the obligation to perform, unless the event that precluded performance was unforeseeable at the time the parties made the contract. It went on to say that when parties to a contract specify certain force majeure events, there is no need to show that the occurrence of such an event was unforeseeable.
And so it seems the outcome of the litigation over COVID-19 coverage, while hopefully benefitting businesses currently experiences pandemic-related loss, will only cause a new exclusion for pandemics to be written into business interruption policies. I plan to blog again on this topic once the decisions come down in the current litigation.
The attorneys and staff at the Alex R. Hernandez, Jr. PLLC hope you stay healthy during this nationwide crisis. If you’ve been turned down by your insurance company after a claim related to the Coronavirus pandemic, or if you are concerned about potential COVID-19-related losses to your business, please contact my firm and let me review your current policy. I’m happy to help.
Alex R. Hernandez, Jr.
 https://www.cnn.com/2020/03/27/business/thomas-keller-lawsuit-coronavirus-losses/index.html accessed March 30, 2020
 See footnote 1.
 https://www.whiteandwilliams.com/assets/htmldocuments/Complaint%20-%20FINAL.PDF accessed March 30, 2020
 https://www.axios.com/pandemic-man-made-disasters-1b887be4-de1a-4433-8541-7ad25b2e66d5.html accessed March 30, 2020
 Eastern. Air Lines v. McDonnell Douglas Corp., 532 F.2d 957 (5th Cir. 1976).
 See footnote 6.
 See footnote 6.