Alex Kosyla, Esq.
5/18/20
According to a leading litigation analytics company, certain trends have emerged recently with regard to lawsuits being filed as a result of the COVID-19 pandemic. These COVID cases range from breach of contract actions where COVID-19 was the excuse or defense for non-performance, to employment cases filed by out-of-work employees or by those who contracted COVID-19 while working, to claims of wrongful insurance coverage denial. Based on the research we have available, as well as through a commonsense assessment of potential COVID-19 issues, we expect contract cases, insurance denials, and employment issues to be the three areas of the law with the most significant increase in litigation activity. This article will focus its discussion on potential insurance claims in areas in which we expect to see an increase in litigation.
A number of recent insurance-based lawsuits cite a loss of business income due to the COVID-19 pandemic, and a resulting denial in coverage by the insurance carrier as the stated cause of action. Insurance companies are also seeking declaratory judgments, i.e. legal directives from the court, as to whether or not they are required to cover certain claims. Regardless of which party actually filed the lawsuit, the predominant scope of litigation in these cases will be the interpretation of what constitutes a “direct physical loss or damage to property.”
A Business Income Insurance policy (“BI Policy”) protects a policy holder from losses to property or profits. These policies typically cover all losses unless specifically excluded, or unless coverage is specifically enumerated in the “named perils” (ex: wind, fire, or lightning). These types of policies can cover lost revenue, rent or lease payments, relocation costs, employee wages, taxes, and loan payments. Although it would be reasonable to assume that a BI Policy would cover income loss due to COVID-19, there may be certain exclusions in the policy that would allow the insurance company to deny coverage.
A BI Policy often requires that the loss the insured is seeking coverage for be for a “direct physical loss.” These types of provisions are ripe for litigation since there are arguments for, and against the COVID-19 pandemic being a direct physical loss. The majority of businesses have not closed due to worker shortages or COVIID-19 outbreaks, but instead are closed by government order shuttering all “non-essential” businesses. Losses also can occur from supply chain interruption if a particular business depends on outside products to operate. In many cases, insurance companies will likely argue that COVID-19 is not a direct physical loss, and that business closure by government order constitute valid reasons to deny coverage.
It is also possible that some policies contain express virus exclusions. These exclusions began appearing more commonly in the marketplace around the time of the SARS outbreak, and would act as a further barrier to BI Policy coverage. A further obstacle would be any exclusion related to a general slowdown of the economy or “unfavorable business conditions.” The entire world is in the midst of a global economic slowdown, so an insurance company may be successful in arguing that the business loss was inevitable, and not covered.
As a response to these denials, state and local governments have already begun taking steps to address these shortfalls and gaps in BI Policy coverage. New Jersey, Pennsylvania, Louisiana, New York, Ohio, and Massachusetts have already introduced legislation that, if approved, would go into immediate effect. These bills would force insurance carriers to provide retroactive coverage to their insureds for business losses resulting from the COVID-19 pandemic, regardless of any exclusions or consideration of underwriting terms when the policy was issued.
In opposition to this legislation, insurance companies have argued such legislative acts would be unconstitutional, would violate U.S. contract law precedent, that insurance companies would no longer do business in states with such legislation, and that insurance companies would become insolvent.
There remains a significant legal battle as to whether or not a BI Policy will be required to provide coverage relating to the COVID-19 pandemic. Neither Illinois nor California have introduced legislation responsive to these types of insurance denials, but it is clear that states and the federal government will need to take some action to protect businesses, and the losses they have suffered. We will continue to monitor these evolving circumstances, and will stay current with any subsequent developments from Illinois, California, and/or the federal government.
For more information, contact Alex Kosyla at (312)888-2000 or alex.kosyla@rkfglobal.com.