The Business Interruption Pandemic

Claims for business interruption loss coverage in the wake of covid-19

By Patrick Larkin, Brandon Meshbesher, Eric Steinhoff, and Rick Lind

The economic loss caused by the covid-19 pandemic is and will continue to be devastating to many businesses. The governmental and societal response has been fluid. In Minnesota, Gov. Tim Walz issued a series of executive orders—first closing schools, then closing bars, restaurants (limiting them to only take-out or curbside pick-up), beauty salons, bowling alleys, golf courses, movie theaters, and many other types of business that rely on attracting people to their stores, offices, and premises; and finally, a “stay home” order, ordering all Minnesotans to stay at home unless they are engaged in certain designated “essential activities” or “critical sector” work as defined in the order. The “stay home” order was originally set to expire on April 10, 2020, but was extended through May 18, 2020. Since then, the state government has been making adjustments to these orders to allow more public businesses to operate in varying degrees, but social distancing and modified “stay home” requirements will remain in place through the entire summer. 

Minnesota’s responses to the pandemic—and the similar responses in many states throughout the country—have resulted in a drastic and dire impact on many business operations, both small and large. Major corporations are laying off thousands of employees. Many small and medium-sized businesses are closing down indefinitely, and some have already made the decision to close permanently. More than 20 million American workers have applied for unemployment benefits since this crisis began. Aggregate business losses are astronomical and will continue to grow throughout the pandemic and potentially beyond. 

Although it is still too early to predict the exact nature, extent, and duration of this crisis on most workers and businesses, the future for property and casualty insurers is already beginning to take shape. The widespread shutdown of businesses will lead to an increase in claims under policies containing coverage for business interruption losses and loss of business income. This article will explore some of the expected issues that may arise in the context of claims for business interruption coverage and information concerning ongoing cases and proposed legislation. With lawsuits already underway in several states, insurers, affected businesses, and the lawyers representing them need to be aware of these developments in order to best serve their clients.

What attorneys need to know about business interruption insurance now

State responses to the covid-19 pandemic will cause a significant increase in insurance claims nationwide—especially under policies that provide coverage for business interruption and/or loss of business income. Lawsuits seeking declaratory relief as to insureds’ rights under these policies have already been filed and many more are certain to follow.

There are a number of potentially applicable federal, state, and local laws and regulations that might apply to analyzing insurance coverage for business loss. Of course, insurance coverage is generally governed by the specific terms, conditions, and exclusions contained in each individual policy. Coverage is also dependent on the case law of different jurisdictions. While there is no one-size-fits-all answer for every claim, the general strategies and policy provisions share many similarities. Lawyers should carefully analyze each individual policy and relevant case law in their jurisdiction to determine how courts may rule on the coverage question.

General types of losses covered

Business interruption insurance is included or added to many commercial property insurance policies and provides coverage for loss of income due to a slowdown or suspension of the insured’s operations at its premises. Minnesota courts have described that such coverage is intended “to do for the business what it would have done for itself had no loss occurred.”¹ Although such coverage is generally only available in the event of direct physical loss or damage to the business’s premises, many policies also provide coverage for a suspension of operations due to a civil authority or similar order that prohibits access to a policyholder’s premises. Business interruption insurance often includes coverage for extra expenses that an insured may incur in order to continue operations following a covered loss. Business interruption coverage may also include coverage for business income lost due to the physical loss or damage to a dependent property—such as material suppliers, product manufacturers, and customers. Supply chain disruption could last well beyond the pandemic itself.

Policy language and case law

Because business interruption coverage usually requires that the insured sustain physical loss or damage to its insured property, the coverage determination will often turn on whether the covid-19 pandemic caused physical loss or damage to the insured’s property within the meaning of the policy. An insured may argue its premises sustained damage and that the virus was present within its premises if an employee or customer at the premises was diagnosed with covid-19. Even essential businesses have been shut down due to the presence of the virus at the location, most notably meatpacking operations. Is that enough to prove damage at the premises? Courts will need to interpret what is meant by “physical loss” or “damage” as used in each policy. If these or similar terms are not defined in the policy itself, the interpretation of such terms by case law will also be determinative. 

Although there are no Minnesota cases that directly address this issue, there are some decisions that can provide an indication on how reviewing courts might analyze the issue. First, in Source Food Technology, Inc. v. U.S. Fidelity and Guar. Co.,² the 8th Circuit considered a claim for business interruption coverage brought by Source Food when it was unable to import beef products from its sole supplier, a Canadian company, after the USDA prohibited the importation of beef products from Canada due to the presence of mad cow disease. Source Food conceded that there was no evidence that the products it had ordered were contaminated.³ Source Food’s policy provided coverage for business income losses “caused by direct physical loss” to the insured property or “caused by action of civil authority that prohibits access to the described premises due to direct physical loss to property...”⁴ Importantly, the policy did not define the phrase “direct physical loss to property.” The 8th Circuit affirmed the district court’s grant of summary judgment in favor of the insurer, finding that there was no coverage obligation under the policy. Specifically, the court concluded that “[a]lthough Source Food’s beef product... could not be transported to the United States... the beef product... was not... physically contaminated or damaged in any manner.”⁵ Accordingly, “[t]o characterize Source Food’s inability to transport its… product across the border… as direct physical loss to property would render the word ‘physical’ meaningless.”

In Pentair, Inc. v. Am. Guar. and Liability Ins. Co.,⁶ Pentair asserted a claim for business interruption losses arising out of a power outage caused by an earthquake that shut down two of its manufacturing plants in Taiwan. Pentair’s policy provided coverage for “all risk of direct physical loss of or damage to property described herein” and extended business interruption coverage to both extra expenses incurred to resume normal operations and “damage” to “property of a supplier of goods and/or services to the Insured.”⁷ The 8th Circuit again affirmed the district court’s grant of summary judgment in favor of the insurer that there was no obligation to provide coverage under the policy. In reaching its conclusion the court found that the power outage was not a “direct physical loss or damage” within the meaning of the policy.⁸ Importantly, the court rejected a reading of the policy that “would mean that direct physical loss or damage is established whenever property cannot be used for its intended purpose.”

In reaching the conclusions in both Pentair and Source Food, the 8th Circuit distinguished two decisions from the Minnesota Court of Appeals. First, in General Mills, Inc. v. Gold Medal Ins. Co.,⁹ a substantial quantity of General Mills’ raw oats had been treated with a pesticide that was not approved by the FDA for that use. General Mills’s insurance policy required “direct physical loss or damage to property.”¹⁰ Although the oats were not hazardous for human consumption, they were, nevertheless, unusable in General Mills’s oat products.¹¹ Accordingly, the court found that the contamination rendered the oats unusable, and General Mills was entitled to coverage for “direct physical loss or damage to property.”¹² Second, in Sentinel Mgt. v. N.H. Ins. Co.,¹³ the insured made a claim under its policy arising out of the presence and release of asbestos fibers on its property. The policy provided coverage for “direct physical loss to building(s).”¹⁴ The Minnesota Court of Appeals “conclude[d] that contamination by asbestos may constitute a direct, physical loss to property under an all-risk insurance policy” and affirmed the trial court’s denial of summary judgment.¹⁵ 

In distinguishing General Mills and Sentinel, the 8th Circuit concluded that “actual physical contamination was established” in both cases.¹⁶ While reviewing courts in the wake of the covid-19 pandemic may find reason to distinguish Source Food and Pentair, these cases appear to indicate that business interruption coverage may not be available for businesses that cannot establish that their premises or products were actually physically contaminated by the virus.

Some policies may also provide coverage for business interruption where a civil authority has prohibited access to an insured property. This coverage could apply in states that have ordered specific businesses to close or the population to remain in their homes. However, the orders in most states were made to generally achieve greater social distancing, not because the virus was physically found at any one particular location. Further, not every policy is the same and some may require such an order to be specifically directed at an insured premises. In addition, even if owed, such coverage is likely quite limited. Civil authority-based business interruption coverage is typically only available for four weeks under most policies if standard ISO insurance forms are contained within the policy.

Review all endorsements and coverage extensions

Some policies include endorsements and coverage extensions that may apply. Some of these endorsements and coverage extensions provide coverage for business interruptions and income losses caused by the presence of a contamination or a “communicable disease.” Depending on the policy language, covid-19 may be a “communicable disease” for which coverage may apply. These endorsements and coverage extensions often have limited or specified types of losses identified for coverage. The language in the policy dictates what is covered and what monetary losses are covered. 

Anticipate the creative arguments on all sides

Lawyers for claimants will be extremely creative in trying to broaden and expand coverage for many different types of business loss coverages. For example, a business might argue that the virus effectively damaged its property on a nationwide scale, rendering the business premises unusable even though the physical structure remains undamaged. Insurers will likely advocate for a narrower reading of the policy language and rely upon the ordinary meaning of undefined terms like “damage” and “physical loss.” It is not yet clear whether reviewing courts may be more receptive to broad readings of policy language in the wake of this crisis.

Lawyers representing insurance companies, on the other hand, are likely to advocate for broad interpretations of particular exclusions. Many, but not all, policies added exclusions designed to exclude coverage for viral outbreaks in the aftermath of SARS and H1N1, but not all policies contain such exclusions. Even if a policy does not contain an exclusion related to viral outbreaks, it may contain exclusions related to bacteria, mold, fungi, or pollutants. Although covid-19 is caused by a virus, attorneys should anticipate arguments that these exclusions apply to the current outbreak.

It will be important for lawyers to create and anticipate novel arguments given the unprecedented factual backdrop of the current claims.

Pending litigation and government action

The first lawsuits 

Several lawsuits seeking to enforce business interruption coverage have already been commenced across the country. In Cajun Conti LLC, et al. v. Certain Underwriters at Lloyd’s, London, et al.,¹⁷ a restaurant owner has sought a declaratory judgment that it is entitled to business interruption coverage under an all-risk policy that allegedly does not contain a virus exclusion. The restaurant owner is seeking a declaration that policy provides coverage for its business losses because of a civil authority shutdown of its restaurant business and that the virus contaminated its premises. The owner asserts that the physical damage requirement was met because the virus is physically impacting private property and physical spaces by remaining viable on surfaces which then require cleaning and fumigating before business operations can continue. The complaint claims that any argument by the insurer to the contrary would be a fraudulent misrepresentation that could endanger policyholders and the public.

In French Laundry Partners, LP dba The French Laundry, et al. v. Harford Fire Insurance Company, et al.,¹⁸ venued in the Superior Court for the State of California, County of Napa, two restaurants owned by the Thomas Keller Restaurant Group commenced a lawsuit against their insurer seeking declaratory judgment that its policy covers physical losses and damage caused by the covid-19 pandemic. Similar to the Louisiana case, the restaurants allege they are insured under an all-risk policy that provides coverage for lost business income and extra expenses if access to the insured premises has been prohibited by a civil authority as a direct result of a covered loss in the immediate area. The restaurants further claim that the policy does not include an exclusion for viral pandemic and the “policy’s Property Choice Deluxe Form specifically extends coverage to direct physical loss or damage caused by virus.”

Two separate lawsuits were filed by the Chickasaw Nation and Choctaw Nation in Oklahoma state court alleging entitlement to coverage for business interruption losses for the closure of their casinos under a stay-at-home order. Similar to the above lawsuits, these Native American tribes allege that they have an all-risk policy that provides coverage for business interruption losses.

Another lawsuit, Big Onion Tavern Group, LLC, et al. v. Society Insurance, Inc.,¹⁹ was filed in Illinois after an insurer denied a claim for business interruption coverage to a group of restaurant and movie theater owners. This case has a different procedural posture from the aforementioned cases because the filing of this case occurred after claims were submitted and denied. In the other cases, the insureds filed the coverage lawsuits in anticipation of their claims being denied by their respective insurers. The insureds in Big Onion assert that the insurer’s denial was wrongful, and their pleadings allege the insurer acted in bad faith by either denying the claims verbally or through cursory written responses without conducting a reasonable investigation of the claim as required by Illinois state law. The complaint seeks bad faith damages in addition to their business coverage losses.

In mid-April 2020, two separate motions were filed by plaintiffs’ lawyers with the Judicial Panel on Multidistrict Litigation (JPML) asking the panel to consolidate federal suits seeking business interruption coverage against insurers who were denying claims, accusing insurers of dodging claims by businesses that were shut down by government orders. These motions argue that the question of whether business interruption insurance policies will cover losses incurred by businesses should not be answered in piecemeal by different courts around the country and that the legal issues should be presented and decided in an efficient and centralized manner. 

Also in mid-April, 2020, Travelers Casualty Insurance Company commenced a declaratory judgment action in the U.S. District Court for the Central District of California against a law firm, asserting that the policies it issued to the firm do not cover the firm’s claimed business losses resulting from the pandemic. In Travelers Casualty Insurance Co. of America v. Geragos & Geragos,²⁰ Travelers claims that the law firm did not purchase insurance for the losses that it is now claiming and the policies require direct physical loss or damage to a property, which the virus did not cause. Travelers also states that the policies contain a virus exclusion that bars the business loss claims. 

There are also similar cases recently filed in the federal courts of New Jersey and Florida by restaurant owners seeking to enforce business interruption coverage. In the New Jersey action, Truhaven Enterprises Inc. d/b/a Fiorino Ristorante v. Chubb Ltd.,²¹ the restaurant owner acknowledges its policy has a virus exclusion, but it pleads that the loss of use of its property was caused by a mandatory closure, which itself should constitute a direct physical loss that triggers business interruption coverage. The plaintiffs in these cases are also seeking class action status on behalf of restaurant owners.

In Minnesota and Wisconsin, several lawsuit have been initiated in both state and federal court. In Minnesota, a salon owner initiated a class action against IMT Insurance Company alleging that two of his salons are entitled to business interruption coverage because Gov. Walz’s executive orders closing salons constitute direct physical loss or damage to the insured property.²² Similarly, a series of lawsuits has been initiated in Wisconsin by a number of restaurants, bars, and other hospitality businesses. In Colectivo Coffee Roasters, Inc. and Tandem Restaurant, LLC d/b/a The Tandem v. Society Insurance, A Mutual Company, the plaintiffs allege that the governor’s orders constitute a “necessary suspension” of operations requiring their insurance company to provide business interruption coverage.²³ 

The Colectivo plaintiffs specifically allege in the complaint the existence of a virus exclusion—absent in the policies issued to the plaintiffs—shows that the insurer considers a viral outbreak to be a “physical loss within the meaning of the applicable policy. Other, similar lawsuits have been filed in Wisconsin.²⁴ These lawsuits have been initiated as class actions and will likely raise important questions with respect to class action certification—especially with respect to the commonality of the claims asserted.

These cases are in their infancy, but should be monitored closely by insurers, businesses, and law firms as important test cases for the wave of litigation that will inevitably follow. Further, it is important to remember that each policy is different and courts generally interpret insurance policies broadly and construe any ambiguities in favor of finding coverage. Out of jurisdiction precedent may not be binding, but with this unprecedented and nationwide problem, it is likely the cases will be persuasive.

It is anticipated these cases will involve the use of various experts, including insurance language and coverage experts to discuss the specifics of the policy language at issue and offer opinions on whether the facts of the pandemic fit with the policy language. Other experts will likely include epidemiologists to give opinions about the virus and its ability to remain on surfaces for certain periods of time and the exposures the virus could cause to an insured’s premises. Forensic accounting experts will likely be used to support and critique an insured’s claimed loss calculations.

Legislative and executive actions may influence coverage decisions

In addition, insurers and law firms should closely monitor legislative developments. Although no legislative or regulatory action has occurred in Minnesota at this time, other states have taken actions with respect to insurance policies. Indiana has issued a moratorium on the cancellation of insurance policies due to non-payment. The New Jersey House of Representatives proposed legislation that would require coverage for business interruption losses due to the covid-19 pandemic. The bill sought to retroactively apply to all policies in effect at the time the state’s governor first declared a public health emergency. While the bill has since been withdrawn, it provides insight as to possible future action by state legislatures. The Ohio Legislature, for example, introduced similar legislation. The Ohio bill would require insurers offering business interruption insurance to cover losses attributable to viruses and pandemics.

The New York Department of Financial Services has mandated that insurers gather and produce “certain information regarding the commercial property insurance [they have] written in New York and details on the business interruption coverage provided in the types of policies for which it has ongoing exposure.” The Washington State Insurance Commissioner issued a similar letter to all Washington state authorized property and casualty insurers, instructing each insurer to provide the Washington Insurance Commissioner and policyholders with certain information identifying business interruption or business income type coverages (including civil authority) that may be available under any of their coverage forms.

While no legislation has yet been enacted, the proposed legislative bills in some states show that legislatures are indeed looking for ways to shift some of the mounting business loss costs to insurers. Similarly, although the federal government has not enacted legislation, 16 congressional representatives signed a letter to insurance industry associations urging insurers to provide business interruption coverage for covid-19-related losses. The associations authored a joint response stating, “[b]usiness interruption policies do not, and were not designed to, provide coverage against communicable diseases such as covid-19.” 

In early April 2020, the Global Federation of Insurance Associations responded to such tactics by issuing a statement asking governments not to disrupt the “essential stabilizing force” of the insurance industry. It stated that any legislative action requiring insurers to cover business interruption losses retroactively or in cases where coverage for pandemics or other causes of loss were not included in insurance policies could seriously threaten the stability of the global insurance industry. The constitutionality of any retroactive application would also undoubtedly be challenged. 

Conclusion

Whether a given policy provides coverage for business interruption losses due to the covid-19 pandemic remains an open question. Although applicable Minnesota case law appears to require actual physical contamination, it is not clear whether these decisions will be applied to prevent coverage in the wake of the crisis. Ultimately, each policy is different and the available coverage will turn on the terms, conditions, and exclusions contained therein. Lawyers representing insurance companies and businesses should closely follow the cases that have been filed throughout the country concerning business interruption coverage and monitor any legislative developments.