Insurance coverage works when risk is spread across a large number of policyholders.  But for the insurance market to function properly losses must be somewhat predictable and experienced by only small percentage of insureds. Claims models for accidents everyone knows will happen – auto collisions and trees falling on houses – are acceptably accurate. In this relatively predictable world, that means an accident happens, a claim is filed, and, usually, the insurer pays.

But when claims fly off the actuarial charts – e.g. when predictions of hundreds of billions of dollars in claims from the majority of policyholders loom over the entire industry – insurers tighten up, claims are denied, and policyholders take them to court. This famously happened when companies were sued for diseases brought on by exposure to asbestos and for environmental pollution. Today, insurers are faced with a slew of business interruption and other claims relating to COVID-19 shutdowns, social distancing, and government orders, particularly from restaurants, bars, and other retail shops which have been most impacted by the crisis.

Insurance is a hedge against unexpected losses, but policies may be ambiguous when the cause of injury is unprecedented. One issue many policyholders are facing is that business interruption needs to be tied to a direct physical loss or damage to property, which requires a tangible change in physical property and is a difficult showing to make.  But strategic and creative policyholders and attorneys will likely find persuasive arguments that such damage has occurred, for example, if they can do forensic tests to show that there is physical viral contamination to premises.

Key coverage questions include:

Was the business halted as a result of the pandemic, because of government shutdown orders, or some other reason? Some insurers have taken the position that commercial policies do not cover interruptions caused by disease. Others argue that pandemics are uninsurable; yet there are pandemic policies. But even if a policyholder has pandemic coverage, is COVID-19 a named disease under the policy? Will insurers argue that a virus is a pollutant, and therefore excluded? Will policyholders have to provide proof that their property was damaged, e.g. contaminated, by COVID-19? Or was access to the policyholder’s property blocked? Civil authority coverage applies when access to property is prevented by government action. Does the policy contain that language? Whatever the answers, policyholders  are suffering existential business losses and have paid premiums, collectively many billions’ worth, and now some insurers appear to be turning their backs.

Small and mid-sized policyholders typically cannot afford to wait for answers, yet many policies require that claims are filed within a certain number of days from the triggering event. Many have already sued their carriers for declarations of coverage and improper refusal to honor their insurance contracts. Claims include bad faith, failure to investigate, failure to promptly pay claims, unfair settlement practices, breach of contract, and violations of various state insurance codes. Questions around trigger of coverage are being raised. Would coverage be triggered by a government order, by losses arising as soon as news of the outbreak spread, or some other event?

Below is a chronological sampling of recent filings and denials:

• March 24 – Two tribal nations, the Chicsaw Nation and the Choctaw Nation, filed separate declaratory judgment actions in Oklahoma state courts against Lexington Insurance Co.; various Lloyd’s syndicates, underwriters, and Lloyd’s Aspen Specialty Insurance Co.; Homeland Insurance, Hallmark Specialty Insurance; Endurance Worldwide Insurance Ltd., T/AS Sompo International; Arch Specialty Insurance Co., Evanston Insurance Co.; Allied World National Assurance Co.; Liberty Mutual Fire Insurance Co.; and XL Insurance America, Inc.
• March 25 – A Humble, Texas, wig shop owner sued Twin Cities Fire Insurance Company in Harris County District Court.
• March 25 – A Napa County, California, restaurant sued Hartford Fire Insurance Co. and Trumball Insurance Company in Napa County Superior Court.
• March 26 – “Why Are Insurance Companies Denying Restaurant Claims in Wake of Pandemic?” – Eater.com
• March 31 – Billy Goat Tavern sued Society Insurance in U.S. District Court for the Northern District of Illinois.
• March/April – A Louisiana restaurant sued Lloyd’s Underwriters and State of Louisiana for a declaratory judgment of coverage.
• April 2 – “Chicago Bars, Restaurants Challenge Denial of COVID-19 Insurance Coverage.”– Top Class Actions
• April 2 – Prime Time Sport Bar sued Lloyd’s Underwriters in Federal Court in Tampa.
• April 3 – “Fort Wayne restaurant owner upset over COVID-19 insurance claim denial.”— Fox 55 Fort Wayne, Indiana
• April 6 – “San Diego Chef’s Insurance Claims Denied Following COVID-19 Closures.” – 10 ABC News, San Diego
• April 6 – “Canadian Insurers Hit with Lawsuit on Refusal to Pay COVID-19 Biz Income Claims.” – Insurance Journal
• April 8 – “Cinema Owner Sues Insurer Over COVID-19 Claim Denial, Despite Pandemic Coverage.”– KHOU-11.com
• April 12 – “UK Insurers Face Legal Action From Small Firms Over Covid-19 Claims.” — The Guardian
• April 13 – “San Antonio Barbershops Sue State Farm After Coronavirus Insurance Claims Denied.” – San Antonio Express-News

Insurers are making their position on coverage clear.

The Hartford website says: “Most property insurance includes business interruption coverage, which often includes civil authority and dependent property coverage. This is generally designed to cover losses that result from direct physical loss or damage to property caused by hurricanes, fires, wind damage or theft and is not designed to apply in the case of a virus.”

Travelers says: “Insurance for business interruption can provide coverage when a policyholder suffers a loss of income due to direct physical loss or damage to covered property at its location or another location. It does not cover loss of income due to market conditions, a slowdown of economic activity or a general fear of contamination. Nor does the policy provide coverage for cancellations, suspensions and shutdowns that are implemented to limit the spread of the coronavirus. These are not a result of direct physical loss or damage. Accordingly, business interruption losses resulting from these types of events do not present covered losses under our property coverage forms. Even if there has been direct physical loss or damage to property, your policy contains a number of exclusions that are likely to apply to business interruption losses. The most important exclusion to note is the exclusion for losses resulting from a virus or bacteria, which would include coronavirus.”

Congresswoman makes her position clear, too.

News of claims denials has caught the attention of U.S. Congresswoman Pramila Jayapal (D-WA), who sent a letter on April 13 to leadership at: Chubb Group, QBE Holdings, Tokio Marine Insurance Group, Liberty Mutual Insurance Co., Mutual of Enumclaw Insurance Co., Oregon Mutual Insurance Co., Traveler Indemnity Co., BankDirect Capital Finance, and Nationwide Mutual Insurance Co. In the letter, she expressed her concern over the devastation small- and medium-sized business face when carriers deny coverage for such significant business losses under their commercial insurance policies. Rep. Jayapal said insurers “should honor all clearly covered coronavirus-related losses” and work with states to resolve disputes quickly.

“Business owners buy commercial insurance in order to be responsible to their customers, employees and communities and to ensure they have protection from unforeseen crises. These businesses have invested hundreds or even thousands of dollars each month in commercial liability and business interruption insurance policies. However,” the congresswoman wrote, “many business owners report that their insurers are not interpreting their commercial liability insurance policies to cover losses related to COVID-19. Instead, business owners report that they are now being denied coverage.”

Rep. Jayapal asked the companies to provide a list of all business interruption, contingent business interruption, and civil authority coverage claims made, broken down by those accepted and those denied. She asked for their policies on treating claims related to COVID-19, force majeure, viral or wide-spread disease; COVID-19 related property damage claims for covered peril; and related government orders. The congresswoman also asked whether each company had a “virus and bacteria, pollutant, fungi and bacteria, pathogen, communicable disease or related insurance coverage exception for small and medium-sized businesses.”

States are also taking action. According to Insurance Journal, bills have been introduced by legislators in Massachusetts, New Jersey and Ohio that would require carriers to pay business interruption claims.

The insurance industry ready for a fight.

Should legislatures push laws making them pay claims they say fall outside their insurance agreements the industry will put up substantial resistance.

The American Property Casualty Insurance Association (APCIA) says such legislative action could drive some carriers into insolvency.  “Many commercial insurance policies, including those that include business interruption coverage, do not include coverage for communicable diseases or viruses such as COVID-19. There are some who are calling for actions that would retroactively rewrite existing insurance policies to add new risks to the promises that were made to insurance customers. These types of proposals could have dramatic repercussions for families, individuals, motorists and businesses, potentially compromising the financial ability of insurers to meet their existing promises. If policymakers force insurers to pay for losses that are not covered under existing insurance policies, the stability of the sector could be impacted and that could affect the ability of consumers to address everyday risks that are covered by the property casualty industry. Any action to fundamentally alter business interruption provisions specifically, or property insurance generally, to retroactively mandate insurance coverage for viruses by voiding those exclusions, would immediately subject insurers to claim payment liability that threatens solvency and the ability to make good on the actual promises made in existing insurance policies,” the APCIA says.

The National Association of Insurance Commissioners (NAIC) has also expressed concern. “Given the current condition of the financial markets, state regulators and the NAIC are also closely monitoring the financial health of insurers to ensure their continued strength and resilience,” the NAIC says. But, the association says, “[A]s Congress considers further legislative proposals to address the devastating impacts of the COVID-19 pandemic, we would caution against and oppose proposals that would require insurers to retroactively pay unfunded COVID-19 business interruption claims that insurance policies do not currently cover.”

“Business interruption policies were generally not designed or priced to provide coverage against communicable diseases, such as COVID-19 and therefore include exclusions for that risk,” the NAIC says. “Insurance works well and remains affordable when a relatively small number of claims are spread across a broader group, and therefore it is not typically well suited for a global pandemic where virtually every policyholder suffers significant losses at the same time for an extended period.  While the U.S. insurance sector remains strong, if insurance companies are required to cover such claims, such an action would create substantial solvency risks for the sector, significantly undermine the ability of insurers to pay other types of claims, and potentially exacerbate the negative financial and economic impacts the country is currently experiencing.”

Whichever way courts interpret insurance contracts in the context of the current pandemic, litigation is certain to proliferate given the enormity of the claims and the novel issues raised. Time will tell whether it will rise to the level of the asbestos and environmental insurance wars, but the signs are there.

Edited by Tom Hagy for MoginRubin LLP.