Insuring the "uninsurable": Business Interruption Insurance Coverage & Covid-19

• Jurisdiction: United States,Federal
• Publication year: 2021
• Citation: Vol. 37 No. 5

Insuring the "Uninsurable": Business Interruption Insurance Coverage & COVID-19

Natalie E. deLatour
ndelatour1@student.gsu.edu

INSURING THE "UNINSURABLE": BUSINESS INTERRUPTION INSURANCE COVERAGE & COVID-19

Natalie E. deLatour^*

Abstract

The COVID-19 pandemic has impacted virtually every facet of life in the United States, including the insurance industry. In particular, the number of business interruption insurance coverage lawsuits has continued to climb since March 2020, as insurers are denying coverage for pandemic-related losses and policyholders are seeking indemnification. Courts across the country are faced with answering difficult, novel questions about the interpretation and scope of business interruption insurance policies. Collectively, the conclusions the courts reach are critically important because they will determine the fate of policyholders and the insurance industry, respectively. This Note explores business interruption insurance coverage during COVID-19 by examining past and current judicial opinions, as well as legislative and industry proposals for the future. This Note proposes a framework for courts across the country, state governments, and the federal government to use as guidance for solving problems related to COVID-19 business interruption insurance coverage.

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CONTENTS

Introduction....................................................................................4

I. Background................................................................................6

A. Policy Interpretation...............................................................7
B. Central Issues in Litigation.....................................................8

1. "Direct Physical Loss or Damage"..................................9
2. Civil Authority Provisions..............................................12
3. Policy Exclusions............................................................13

C. Legislative Proposals and Insurance Industry Plans ........... 14

1. Potential Legislative Solutions ....................................... 14
2. Potential Future Plans .................................................... 16

II. Analysis....................................................................................16

A. Interpretation of "Direct Physical Loss or Damage"..........17

1. Argument for Insurers: Narrow Interpretation...............17
2. Argument for Policyholders: Broad Interpretation.........20

B. Interpretation of the "Civil Authority" Provision................23

1. Argument for Insurers: " Direct Physical Loss or Damage" Is Initially Required and Mandated Closures Are Not "Direct Physical Loss or Damage" .................. 23
2. Argument for Policyholders: Mandated Closures Are "Direct Physical Loss or Damage"................................25

C. Application of the Virus Exclusion ....................................... 27

1. Argument for Insurers: Virus Exclusion Bars coverage 27
2. Argument for Policyholders: Virus Exclusion Is Not Enforceable ..................................................................... 28

D. Potential Use of Legislation and Future Plans....................30

1. Mandatory Retroactive Legislation ................................ 31
2. Federal Government Proposed Legislation....................33
3. Insurance Industry Proposals.........................................34

III. Proposal....................................................................................35

A. Emphasis on Policy Interpretation ....................................... 37
B. Suggested Interpretation of "Direct Physical Loss Or Damage" ............................................................................... 38

1. "Direct Physical Damage " Is Not "Direct Physical Loss" ........................................................................................38

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2. The Presence of the COVID-19 Virus Can Give Rise to a "Direct Physical Loss"...................................................39

C. Where Government Shutdown Is Enforced by Civil Authority, Coverage May Be Afforded...................................................41
D. Applicability of Virus Exclusions..........................................42
E. Potential Legislation and Possible Future Trends...............43

1. Insurers Cannot Retroactively Pay Claims....................43
2. Compensation for Current Losses..................................44
3. Pandemic Insurance for the Future................................45

Conclusion.....................................................................................47

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Introduction

The COVID-19 pandemic has severely affected businesses across the country, as some insurance industry professionals are estimating business income losses to be around $350 billion per month with the potential for as many as 30 million claims.¹ In fact, as of August 2021, almost 2,000 COVID-19-related business interruption insurance coverage lawsuits had been filed across the country since March 2020.² Without some kind of compensation, it is unclear whether many businesses will survive the pandemic.³ Thus, policyholders are seeking indemnification for their losses, asserting that the current national landscape calls for unprecedented, novel interpretations of policy language.⁴ However, the insurance industry

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has officially rejected coverage for most COVID-19-related business interruption claims, arguing that there is no coverage for COVID-19-induced losses because businesses cannot demonstrate "direct physical loss or damage" and because most policies include enforceable exclusions.⁵ Simultaneously, state legislatures, the U.S. House of Representatives, and insurance industry groups have proposed legislation and future pandemic plans in an attempt to indemnify businesses for their losses and better prepare for future widespread catastrophes.⁶

Over a year since the onset of litigation, it is clear that the central coverage issues are: (1) whether the business suffered "direct physical loss or damage"; (2) whether there is coverage for losses sustained from a government shutdown order under a civil authority provision; and (3) what the effect of a virus exclusion is on a policy.⁷ This Note analyzes the issues currently being introduced in COVID-19-related business interruption insurance lawsuits, looking to policy interpretation, arguments currently being offered by both insurers and policyholders, and the potential function of proposed legislation and future pandemic plans. Part I explains the general

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function of business interruption insurance and provides an overview of how courts usually rule on common issues in business interruption insurance lawsuits. Part II analyzes how courts are ruling on prominent COVID-19-related issues, highlighting the most compelling arguments and considerations for both insurers and policyholders respectively. Additionally, Part II discusses newly proposed legislation and future pandemic insurance plans, and addresses advantages and disadvantages of each. Finally, Part III proposes a workable framework for courts across various jurisdictions to consider in deciding business interruption insurance lawsuits during a public health emergency and suggests a proper use of legislation and future pandemic programs for state governments and the federal government.

I. Background

The purpose of business interruption insurance is to put a business in the same position as it would have been had no interruption occurred.⁸ Business interruption insurance policies often include a "business income" provision under which "the insurer will pay for the actual loss of business income sustained because of the necessary suspension of 'operations.'"⁹ Many business owners have some form of business interruption coverage that they have paid substantial premiums on over the years.¹⁰ Now, these policyholders are looking to their policies to determine whether different provisions (i.e., business income or civil authority) included in business interruption insurance policies will afford coverage for their COVID-19-related

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losses.¹¹ However, because courts across the country are currently reaching largely differing conclusions, the answer is still uncertain.¹² Further, the COVID-19 pandemic poses an unprecedented threat to the insurance industry and policyholders because catastrophic events are generally confined to certain geographic areas.¹³ Because of the global scope of this catastrophe, the impact on businesses, the economy, and the insurance industry could be detrimental.¹⁴

A. Policy Interpretation

First and foremost, when deciding business interruption insurance coverage cases, a court's holding rests upon the interpretation of the policy language in question.¹⁵ Thus, the specific terms of policies must be closely examined to determine whether coverage is afforded.¹⁶ Coverage will ultimately depend upon "specific facts of the claim, the policy language and the application of the state laws that govern the interpretation of that policy language."¹⁷ In making these decisions, courts adhere to "special rules" of contract

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interpretation that "have been created due to the imbalance of power and knowledge that favors insurers during the creation and sale of insurance policies."¹⁸ As with all insurance contracts, any part of the contract that is ambiguous will be construed in favor of the insured.¹⁹ Additionally, courts consider the contract as a whole and ensure that the interpretation reflects the intentions of all parties.²⁰ Importantly, the policy language in question will be the most important factor in determining whether there is coverage under a business interruption insurance policy.²¹

B. Central Issues in Litigation

Business interruption insurance lawsuits focus on a few issues, including: (1) whether there is "direct physical loss or damage" to a covered property, (2) whether a loss due to an intervening civil authority is...