Business Interruption
11.06.2020
By: Safran Staff
It's no surprise that COVID-19 has had a significant impact on our economy. With a significant portion of the economy closed during the early months of March and April, our real GDP growth fell during the second quarter by 31.4%. However, the estimated GDP for the third quarter projects an increase of 33.1% reflected by the reopening of businesses. This second-quarter downturn has had long-term significant impacts on business, primarily small businesses that may have closed their doors for good as a result. In return, policyholders are turning to their insurers in hopes of finding relief for the additional expenses and lost business income caused by COVID-19.
As mentioned in Part 1, the physical loss or damage requirement included in some of these business interruption policies is one of the key issues policyholders are facing when submitting a claim. Before the pandemic, courts were split as to what constitutes physical damage within the meaning of the policy. Through the pandemic, however, courts remain split, yet there is a trend emerging.
With over 1,250 lawsuits filed, there are only approximately 47 court rulings on motions to dismiss regarding business interruption insurance claims. As of late September, there were only 23 decisions made on motions to dismiss, with 6 of these decisions favoring the policyholders. In comparison, of the 47 decisions to date, 14 of these decisions favored policyholders by denying the insurers’ motion to dismiss. Thus, only about 29.8% of insurers’ merits-based motions to dismiss are being denied. In other words, when the courts take the facts pleaded by the policyholders as to be true, the court believes that there might be some argument to be made for coverage. However, there has been a shift in trends as more motions to dismiss are brought, leaving more policyholders surviving.
Shift in Trends of Business Interruption Decisions
In the early decisions, insurers were favored due to the pleading deficiencies of policyholders or the presence of a virus exclusion provision within the policy. Policyholders were failing to allege any direct physical loss or damage to the property, such as the presence of COVID-19 on the premise, and failing to allege that the government orders were precluding access to the insured property.
Yet, in these later decisions, as depicted in the chart below, the dominant rationale for this conclusion was based on the ordinary meaning of “physical loss or physical damage” and policyholders plausibly pleading direct physical loss. Additionally, concerning the virus exclusion, one seminal case in Florida, Urogynecology Specialist of Florida LLC v. Sentinel Insurance Co. Ltd., the US District Court denied the insurer's motion to dismiss due to the lack of binding case law regarding the effects of COVID-19, along with the ambiguous language of the policy that seems to not logically exclude COVID-19 based on the exclusions the policy would have anticipated.
In sum, the complaints that survive motions to dismiss properly allege that COVID-19 is a physical substance that is readily transmissible and emphasize that physical loss and physical damage have separate meanings within the policy. Ultimately, surviving the motions to dismiss (getting the motion denied) is the first step for these policyholders, with surviving a motion for summary judgment and then establishing coverage at trial being the next hurdles. However, a North Carolina state court recently addressed not only the insurer's motion to dismiss but also summary judgment.
North Carolina
A North Carolina state court recently ruled in favor of 16 commercial property policyholders. This decision is the first of its kind in the United States where Superior Court Judge Orlando F. Hudson, Jr. (1) denied the insurer's motion to dismiss the policyholders' complaint and (2) granted the policyholders' motion for partial summary judgment for declaratory judgment, ruling “the Policies provide coverage for Business Income and Extra Expenses for Plaintiffs’ loss of use and access to covered property mandated by the Government Orders as a matter of law.”
The policyholders contended that the North Carolina executive order mandating the suspension of business operations, which included the policyholders’ 16 restaurants, forced them to lose the physical use and access of their property and premise, thus constituting a direct physical loss under their policy provisions.
The Court determined that the ordinary meaning of "direct physical loss" in the context of the policies would provide coverage for a scenario where "business owners and their employees, customers, vendors, suppliers, and others lose the full range of rights and advantages of using or accessing their business property.”[1] Ultimately, the Court found that the loss of business income was caused by North Carolina’s government orders.
In response, the insurer argued that direct physical loss does not include pure economic harm without some physical alteration to the property. Yet, the Court rejected this argument on the basis that the policies provide for coverage of “accidental physical loss or accidental physical damage” and the inclusion of both physical loss and physical damage insinuates there is a different meaning to both terms. The Court held that if physical loss requires a structural alteration, then the inclusion of the term physical damage would be meaningless.
Now, it is likely that the insurer will appeal the superior court’s ruling, however, this is still a major victory for policyholders seeking coverage for business interruption arising out of COVID-19 orders or other similar government restrictions.
Legislative Initiatives
Briefly, I would like to mention a few of the federal legislative initiatives currently in session.
· In April of 2020 the Never Again Small Business Protection Act of 2020 was introduced to the House with the aspiration of requiring insurers who offer business interruption coverage to provide additional coverage for losses that result from a government order to close during a national emergency.
· In April of 2020, The Business Interruption Insurance Coverage Act of 2020 was introduced to the House and would require insurers who provide business interruption insurance to provide coverage for losses from a viral pandemic, government-ordered business closure or evacuation, or a power disruption conducted for public safety purposes.
· In May of 2020, The Pandemic Risk Insurance Act of 2020 was introduced to the House. This bill would establish a federal program to protect insurers from excessive losses in the wake of a pandemic or public health emergency.
· In June of 2020, The Business Interruption Relief Act of 2020 was introduced to the House. This bill would create a voluntary program for insurers to cover a policyholder’s COVID-19-related business interruption claim and be reimbursed by the federal government.
Additionally, in light of the increase of business interruption claims, many state legislatures have drafted bills that would require insurers to retroactively cover business interruption claims and also require coverage for specified perils resulting from COVID-19, even if claimants’ policies contained a virus exclusion.
Conclusion
In conclusion, we are still early in the COVID-19 litigation and although we are seeing how courts are responding to these business interruption claims, the true testament is seeing the final court decisions. Be on the lookout for any of these cases that have survived motions to dismiss to see if they will survive summary judgment and ultimately receive a favorable final decision.
[1] North State Deli, LLC v. The Cincinnati Ins. Co., 2020 WL 6281507 (2020)
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