When a friend advised Brian Strange over a year ago to buy business interruption insurance, a type of coverage that replaces lost revenue when a disaster forces a firm to suspend operations, he did just that.
“March 15 is when everything started to kind of unravel with groups canceling, rescheduling,” Strange said. “Whoever thought you’d have a pandemic? But here we are.”
In late April, he filed a claim against the policy to help recover the loss of half his business. The claim was denied.
“My policy does not have a COVID or communicable disease exclusion and I’m one of the very few that don’t have that,” Strange said. So he thought he would be covered. But the contract does have a “pollution exclusion,” he said, and Cincinnati Insurance Co. based its denial of the claim on that.
So like hundreds of businesses across the country, from restaurants and hair salons to dental practices and even an NBA team, Strange is taking his case to court.
As of Aug. 24, there were 1,167 business interruption cases related to COVID-19 filed in U.S. courts, according to the COVID Coverage Litigation Tracker. Most were filed on behalf of food and beverage businesses.
Whether they prevail depends on a number of factors, including how the policy was written, how the case is argued, and how the first cases that are heard might establish legal precedent.
In San Antonio, a judge ruled last month in favor of an insurance company in a business interruption case filed on behalf of a group of barbershops.
Attorney Shannon Loyd is representing Diesel Barbershops along with clients in 35 other similar cases she has filed or is preparing to file. She said the pandemic has prompted more business insurance lawsuits than she’s ever handled in her 15 years of practicing insurance law.
It’s a novel phenomenon for the courts as well. “These cases are really cases of first impression … which is why we filed because we felt like we had good coverage arguments,” Loyd said. “I’m sure the carriers feel like they have good coverage arguments.”
A case of first impression is one in which a question of interpretation of the law has never arisen. In these cases, the courts are being asked to decide whether a claimant can claim physical loss due to a virus spread and state and municipal orders to shut down.
But because every business interruption policy is different, the courts will have to interpret “physical loss,” the two words common to almost all of these policies, Loyd said, and whether it applies to a virus outbreak.
“Physical loss, we argue, is something different than physical damage,” she said. “There’s lots of case law [regarding physical loss] and the court in my Diesel Barbershop case even admitted there are other jurisdictions that find that physical loss doesn’t have to be a tangible physical alteration of the property.”
But Senior District Judge David Ezra of the U.S. District Court for the Western District of Texas wrote in his opinion that while there is no doubt the Diesel Barbershops owner suffered losses because of the mandated closures, “State Farm cannot be held liable to pay business interruption insurance on these claims as there was no direct physical loss, and even if there were direct physical loss, the Virus Exclusion applies to bar Plaintiffs’ claims.”
A State Farm spokeswoman responded to a request for comment from the defendant’s attorney in Dallas: “We accept the court’s sound decision since we do not collect premiums to protect against viral pandemics. Commercial losses caused by, or resulting from viruses are not covered and are, in fact, specifically excluded within our commercial policy,” she said in a written statement.
Not all business interruption insurance policies have such an exclusion. But most cover physical damage, such as when a hurricane demolishes a place of business, forcing it to close until repairs are made.
Strange views the damage to his business as very apparent. “Well, if you can see all this business that we lost in a matter of weeks, you can see the physical toll on my business,” he said.
Business interruption claims are not as clear-cut when a business is shuttered due to governmental order during a public health crisis, said Ramona Lampley, associate dean for academic affairs and professor of law at St. Mary’s University School of Law.
Lampley said she has been keeping up with business interruption litigation because she knows some San Antonio businesses have been “crushed” by the pandemic. “It is a very interesting legal question to me as to whether there are courts that would look at a different interpretation of a physical loss or damage or allow these claims to move forward,” she said.
While courts in other states have said that it is plausible that the damage is caused by virus particles, Lampley said it’s not a mainstream theory yet. “But … there may be an open window for recovery there.”
Of the court decisions to date, most have sided with the insurance companies, she said. However, many are procedural rulings – motions to dismiss – that find the plaintiff cannot recover as a matter of law because the contract blocks it.
But a recent decision out of the Western District of Missouri supported the policyholders, a hair salon and several restaurants, over Cincinnati Insurance Co. for their losses when the entities were forced to close. “This is a win for retailers looking for any means to recover COVID-19 losses,” wrote attorneys in a recent American Bar Association journal report.
It’s too early to know whether other cases will go that way and what the impact could be on insurance companies.
An attorney writing for the National Law Review said “the damage caused by a pandemic, a global event, is prohibitively large for any amount of underwriting to account for it. Moreover, premiums were never collected for that exposure, except in rare cases.”
“If the courts were to hold the insurance companies responsible for these claims when they had not been anticipating it or writing their contracts to exclude them, we’re going to see ripple effects of that – we’re talking about massive amounts of damages – through the economy,” Lampley said. “And if you were to follow a straightforward market approach, you would expect business insurance costs to go up.”
Lampley recommends that business owners with pandemic-related losses read their
“I think what we’re seeing in the early litigation is that many contracts do exclude this type of coverage, but we are also seeing that some plaintiffs’ cases do move forward, and that’s probably because they have different language in their contract,” Lampley said.
These are “positive, challenging” times, Strange said of how the pandemic has affected Don Strange Catering, which has been in business 70 years. In recent months, the company has had a “drastic staff reduction,” he said, but managed to keep going by catering small events and doing meal deliveries.
“People still want to celebrate – they just have to do it a little differently than we used to. And we’re all navigating through that,” he said.
Strange is pursuing the case against his insurer because he feels that’s why he purchased business interruption insurance in the first place.
“I really wanted to be heard,” he said. “If you asked me what I want right this minute, I just want the case to be heard because I do think we have a case. And I do think others could be helped by it.”