No End in Sight: Business Interruption Insurance Claims in New York After the Second COVID-19 Surge.

• Author: Plaza, Julian

1. INTRODUCTION 818 II. BACKGROUND 818 A. The Current State of the COVID-19 Crisis 819 B. BI Insurance: Presence and Function in New York 821 1. Elements of a BI Claim 822 2. How BI Claims Function in New York 824 III. ANALYSIS 827 A. Force Majeure, COVID-19, and New York Law 827 B. Civil Authority, COVID-19, and New York Law 828 C. Ingress/Egress, COVID-19, and New York Law 830 D. Extra Expense Clauses, COVID-19, and New York Law 832 E. General BI, COVID-19, and New York Law 833 IV. RECOMMENDATIONS 834 A. Policyholder Recommendations 834 1. Civil Authority 835 2. Ingress/Egress 836 3. Extra Expense 837 4. General BI 838 B. Insurer Recommendations 838 1. Direct Loss or Physical Damage 839 2. Virus and Bacterial Exclusions 839 3. Lobby State and Federal Government 840 V. CONCLUSION 841 I. INTRODUCTION

   The novel and cascading effects of the COVID-19 pandemic have left businesses and insurers alike wondering how losses that have been estimated to be nine times greater than those associated with the 9/11 terrorist attacks will be accounted for. (1) This Note intends to examine the effect of the COVID-19 pandemic on business interruption (BI) insurance coverage within the context of New York State law. The scope of the inquiry is limited to the context of New York state law, first, because a Judicial Panel on Multidistrict Litigation has already indicated there will be no centralization of the 263 actions that have named more than 100 insurers so far. (2) Furthermore, the U.S. District Court for the Southern District of New York was one of the first to rule against coverage for business losses related to the COVID-19 pandemic, (3) while the U.S. District Court for the Western District of Missouri cited to an earlier decision made by the Southern District of New York for persuasive authority in a decision to uphold coverage. (4) As a result, New York is an apt focal point. While this Note began with the optimism that the worst effects of the COVID-19 crisis would subside before this Note's publication, the Delta and Omicron variants have proven such optimism ill-founded. (5)

   Intuitively, an unpredictable human catastrophe that is global in scope, like the COVID-19 pandemic, would seem to activate coverage under some form of an insurance policy. On the contrary, the thesis here argues that New York's strict construction of insurance policy clauses renders them particularly ineffective for enforcing BI coverage for pandemic-related losses. As a result, this Note supports the use of a co/reinsurance policy that protects insurers and insured businesses alike. Part I of this Note supports this thesis by contextualizing the scope and depth of the pandemic's impacts in New York before explaining the process and case law surrounding BI claims and examining what establishes a prima facie case. Part II addresses the function and role of the various alternative clauses in New York. Part III analyzes the relationship between these clauses, the New York legal environment, and the ongoing realities of the COVID-19 pandemic. Part IV offers opportunities for insurance companies and policyholders based on clauses that may be present in existing policies and a recommendation on the basis of these revealed relationships: a co/reinsurance policy to aid both insurers and insured businesses.

2. BACKGROUND

   This Part begins with an overview of the COVID-19 pandemic's effects on New York.

   It also contains a review of insurance law as it relates to this Note's specific focus. This Part closes with a review of state and federal legislation drafted in response to COVID-19 that would be likely to affect the process, substance, or enforceability of BI claims.

   1. The Current State of the COVID-19 Crisis

      At the time of writing, the impacts and effects of COVID-19 are ongoing. (6) However, the pandemic's effects on New York, particularly New York City (NYC), cannot be overstated. (7) While the impacts of COVID-19 are diffuse and variable, almost every effect arising from this pandemic implicates the insurance industry in one way or another, and early estimates indicate insurance claims will total in the billions of dollars. (8) In an effort to shore up costs for businesses and the resulting employment impacts of the pandemic, the United States Federal Government (USFG) passed the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act). (9) While the CARES Act did not explicitly target the insurance industry for relief, additional pieces of legislation were introduced that could have impacted the industry early on. (10)

      At the state level, Governor Cuomo officially declared a Disaster Emergency in New York on March 7, 2020. (11) As of December 2020, there have been 87 continuations and amendments to the declared Disaster Emergency. (12) Of the various measures Governor Cuomo enacted, the most significant for the present study are the non-essential business closure and stay-at-home orders, which ordered many business closures and obliged the population to avoid leaving their homes. (13) By September 2020, New York had already seen 6,000 businesses close and a 40% increase in bankruptcy filings. (14) In May 2020, Governor Cuomo announced a phased reopening scheme, New York Forward, in which restrictions were linked to local infection rates. (15)

      As New York and the rest of the country began to emerge from what has been the worst of the pandemic so far, hundreds of businesses looked to their insurance policies to mitigate their losses, many insurance companies rejected their claims, and litigation ensued. (16) New York courts construe insurance coverage for business losses stringently, and the U.S. District Court for the Southern District of New York has already rejected a business policyholder's request for an injunction, pending the lawsuit result, that would require the insurer to pay most of the amount claimed. (17) While the suits are just beginning, the insurance industry will likely see changes of the scale it has not seen since the 9/11 terrorist attacks. (18) Estimates put the total national cost of 9/11 between $50 and $100 billion. (19) By contrast, the COVID-19 pandemic is estimated to cost the nation tens of trillions of dollars. (20) To understand where the legal environment is headed, it is first necessary to understand the current legal environment surrounding BI insurance in New York.

   2. BI Insurance: Presence and Function in New York

      BI is first-party insurance, which means that it covers the direct losses of the party named in the policy. (21) BI "indemnifies the policyholder for lost income which results when the policyholder's operations are interrupted, usually as a result of property damage." (22) Typically, BI is not a separate insurance policy, but rather BI is a supplemental endorsement to a policyholder's property insurance. (23) Unlike standard general liability insurance policies, BI supplements do not have standardized language and often contain language that is unique to the specific insurer and industry. (24) As a part of commercial property insurance, BI is offered either as an all-risk policy or a named-perils policy. (25) Under an all-risk policy, the policyholder may recover for all losses resulting from any cause barring their express exclusion in the policy. (26) Alternatively, a named-peril policy only covers a policyholder's losses for specific causes of loss expressly named in the policy. (27) Although BI contains the word "interruption," more often than not, the interruption must precipitate from actual property damage or loss. (28)

      1. Elements of a BI Claim

         BI claims are typically comprised of five elements: (1) a covered peril, (2) the covered peril results in a loss of covered property, (3) the loss results in an interruption of the policyholder's business operations, (4) the interruption results in a covered loss, and (5) the interruption occurs during the period of restoration. (29) Beyond proving the presence of all five elements, a successful claim will also prove a causal connection between the elements. (30)

         The first element functions differently depending on whether the policy is an all-risk policy or a named peril policy, as the former operates via named exclusions and the latter via inclusions. (31) Since all-risk policies are assumed to cover all risks, the burden falls on the insured to prove a loss occurred, but the burden then shifts to the insurer to prove that cause of loss is excluded by the policy. (32) The burden shifts in named peril policies, however, where the policyholder will have the burden to prove that the cause of loss arose from one of the enumerated perils in the policy. (33) When constructing the language of an included or excluded cause of loss, "New York follows the maxim of contra preferentem in insurance cases: where the plain language of a policy permits more than one reasonable reading, a court must adopt the reading upholding coverage." (34) Essentially, contra preferentem allows courts to interpret insurance policies as providing coverage where the policy language is indeterminate.

         The second element, loss of covered property, refers to physical losses of, or damage to, commercial or personal property within or touching commercial real estate listed in the policy. (35) This element typically addresses what commercial or personal "property" is covered by the terms of the policy, as property is increasingly digital or otherwise intangible by its nature. (36) Barring indeterminate language or language to the contrary, New York typically requires physical property damage. (37) This element will be of particular importance, as many all-risk policies explicitly exclude viral or bacterial causes of loss, many named peril policies do not name pandemics, and in any event, physical damage may be difficult if not impossible to prove for COVID-19-related business losses. (38)

         While causal links between each element are a requirement, the third...