The legal assault by US policyholders on business interruption (BI) policies to seek redress for the massive losses incurred by the Covid-19 pandemic has been stepped up a notch as four leading law firms filed a series of actions against six insurers, including underwriters at Lloyd’s of London, in what they describe as the “broadest effort yet” to force insurers to pay up on BI policies.
The insurance industry in the US and worldwide was quick to deny coverage under BI policies, pointing out that the pandemic risk had been excluded from virtually all policies since the SARS outbreak in 2003. Insurance associations in the US have warned that legislative efforts in seven states so far to retroactively open up the BI policies to the risk coupled with legal action could bankrupt the sector. The insurers also argued that such a retroactive change in contract law would be unconstitutional.
But these latest class actions and other recent suits being prepared in the US and UK suggest that many plaintiffs may not actually need a retroactive change in the BI contracts to win damages. It seems that the BI policy wordings issued by many insurers are not as watertight as they originally claimed and the plaintiff lawyers clearly smell blood.
“In all instances, these coverages either included or did not expressly or effectively exclude losses caused by viruses such as Covid-19, which caused state and municipal governments to mandate widespread business closures,” reads the statement issued by the four law firms carrying out the class actions.
In this case, the plaintiffs are represented by DiCello Levitt Gutzler, The Lanier Law Firm, Burns Bowen Bair, and Daniels & Tredennick. The insurers named in the lawsuits are Lloyd’s of London, Aspen American Insurance, Auto-Owners Insurance, Society Insurance, Oregon Mutual Insurance, and Topa Insurance Company.
Initial plaintiffs include a San Diego restaurant and nightclub; a Cleveland-area bridal retailer; a Wisconsin-based bakery and cafe; a local Minnesota chain of restaurants and bars; a St Paul, Minnesota dental practice; a Portland, Oregon restaurant; and a New York restaurant group and pizzeria.
The law firms issued a joint statement on 17 April that states: “US businesses decimated by the Covid-19 pandemic today filed federal class-action lawsuits against six insurance companies for denial of policy claims they had purchased to protect against business interruptions. The suits represent the broadest effort yet to compel insurance companies to fulfil promises made to hundreds of thousands of US businesses that purchased insurance coverage to protect against precisely this situation.
“Businesses nationwide have, for years, purchased expensive insurance policies to protect them from losses exactly like those they are currently enduring. Each of the lawsuits claims that the businesses purchased special property insurance coverage to protect against business interruptions or disruptions outside of their control. These policies included business income coverage, which promises to pay for losses due to necessary suspension of operations. In all instances, these coverages either included or did not expressly or effectively exclude losses caused by viruses such as Covid-19, which caused state and municipal governments to mandate widespread business closures.
“Despite these facts, the insurers have, on a broad and uniform basis, refused to uphold their contractual responsibilities for losses suffered due to Covid-19, as well as losses caused by executive orders by civil authorities and any efforts to prevent further property damage or to minimise the suspension of business and continue operations.”
Adam Levitt, co-counsel to the plaintiffs and a partner at DiCello, Levitt Gutzler, said: “For many small business owners trying to provide for their families and employees, this type of insurance coverage was an additional expense that they would have preferred not to carry but felt a responsibility to do so. For insurers to now tell them, in the most challenging of times, that the joke was on them and their policies were worthless, is unethical and abhorrent.”
The statement said that most property insurance policies sold in the US, including those sold by the defendants, are all-risk property damage policies. These types of policies cover all risks of loss, except for risks that are expressly and specifically excluded.
“Insurers will deny almost every claim – even the most legitimate ones – because that’s just how they operate,” said Mark Lanier, co-counsel to the plaintiffs and founder of The Lanier Law Firm. “But at the end of the day, this really is a straightforward issue about honouring their agreements. As our nation emerges from this horrific pandemic, businesses of all sizes will be critical to restarting the economy. In playing their usual claim-denial games, these insurers are threatening the welfare of not only small-business owners and their families, but the entire US economy.”
Timothy Burns, a partner at Burns Bowen Bair, added: “Countless businesses across the United States are pinning their hopes of reopening and rehiring laid-off or furloughed employees on proceeds from insurance. Insurance companies thrive by selling protection against maladies of all kinds. They pocket huge profits when material events are avoided but must bear the responsibility of honouring their policies on the rare occasions when these events occur. By refusing to do so, they are not running a business at all, but a large-scale rigged carnival game where no matter the scenario, the customer always loses. It’s just not right, and we will do everything in our power to ensure that these businesses are made whole.”
As suggested above, US insurers and international surplus lines insurers do appear to face a serious threat from these suits because of the nature of the all-risks policies sold in the US and a building case for the pandemic to be determined as a form of physical damage.
The suit filed on behalf of New York-based Gio Pizzeria against underwriters at Lloyd’s shows the scale of the threat posed to the BI policies.
It states: “In many parts of the world, property insurance is sold on a specific peril basis. Such policies cover a risk of loss if that risk of loss is specifically listed (such as hurricane, earthquake, H1N1, etc.). Most property policies sold in the United States, however, including those sold by underwriters insurance, are all-risk property damage policies. These types of policies cover all risks of loss except for risks that are expressly and specifically excluded. Under the heading ‘covered causes of loss’, underwriters agreed to pay for direct physical loss ‘unless the loss is excluded or limited’ in the policies.”
The suit continues: “Underwriters did not exclude or limit coverage for losses from viruses in plaintiffs’ policies or those of the other class members. Losses due to Covid-19 are a covered cause of loss under the underwriters’ policies with the special property coverage form.
And it adds: “In the special property coverage form, underwriters agreed to pay for insureds’ actual loss of business income sustained due to the necessary suspension of their operations during the ‘period of restoration’ caused by direct physical loss or damage. A ‘slowdown or cessation’ of business activities at the covered property is a ‘suspension’ under the policy, for which underwriters agreed to pay for loss of business income during the ‘period of restoration’ that begins 72 hours after the time of direct physical loss or damage.
“The presence of virus or disease can constitute physical damage to property, as the insurance industry has recognised since at least 2006. When preparing so-called ‘virus’ exclusions to be placed in some policies, but not others, the insurance industry drafting arm, ISO, circulated a statement to state insurance regulators that included the following: ‘Disease-causing agents may render a product impure (change its quality or substance), or enable the spread of disease by their presence on interior building surfaces or the surfaces of personal property.’
“When disease-causing viral or bacterial contamination occurs, potential claims involve the cost of replacement of property (for example, the milk), cost of decontamination (for example, interior building surfaces), and business interruption (time element) losses. Although building and personal property could arguably become contaminated (often temporarily) by such viruses and bacteria, the nature of the property itself would have a bearing on whether there is actual property damage. An allegation of property damage may be a point of disagreement in a particular case.”
For some time now, senior claims experts in the London market in particular have warned of the lack of investment made in recruitment, training and education of claims specialists as the insurers fought hard to win business and tightly control costs during the long soft market. Those insurers that shifted investment away from the claims function towards sales may soon be regretting the decision. It seems increasingly likely that equity analysts may soon be basing their advice to investors on which insurers and reinsurers to invest in based on the quality of their claims and wordings staff.