[Podcast] COVID-19: Diagnosing Liability | Ep.2 Business Interruption Insurance: Policies, Provisions, & Exemptions

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Our limited podcast series, COVID-19: Diagnosing Liability, is an open dialogue between industry experts and litigators discussing what negligence looks like in the age of COVID-19, assessing liability across industries, and uncovering insights into the kinds of lawsuits that may be viable.

Ep.2 Business Interruption Insurance: Policies, Provisions, & Exemptions

Many businesses that have been unable to operate during the COVID-19 shutdown have sought financial relief from their insurance providers in the form of business interruption coverage. But many insurers are outright rejecting such claims, leading to an uptick in bad faith lawsuits across the country. In Part 1 of our business interruption coverage, we focus on the policy language and exemptions at the center of debates between insurers and policyholders and whether there might be a path for businesses to win these cases.

Hosted by: Zach Barreto, Vice President of Research at Expert Institute

Special Guests: Craig Andrews, Certified Property and Casualty Underwriter, James Fazio, MBA, Certified Property and Casualty Underwriter, Richard Golomb, Esq., Founding Partner, Golomb & Honik, PC.

Disclaimer: The opinions expressed in this podcast are those of the experts and do not represent the views or opinions of Expert Institute or its members.

Audio Transcription

Mr. Barreto: Hi everyone, welcome back to Expert Institute’s limited podcast series — COVID-19: Diagnosing Liability. My name is Zach Barreto, I’m the Vice President of Research at Expert Institute, and I’ll be hosting today’s episode.

Today we’re discussing business interruption insurance claims related to COVID-19. This is a hot-button topic right now—and we have so much incredible information to share, that we’re dedicating two consecutive episodes of our podcast to COVID-19 business interruption insurance claims.

On this episode, we’ll primarily focus on the policies, provisions, & exemptions at the center of debates between insurers and policyholders. Stay tuned for our next episode covering everything you need to know about upcoming business interruption litigation, legislation, and the ethical considerations of it all.

So just to give a bit of context on the topic—hundreds of businesses across the country, that closed up shop during the COVID-19 shutdown, are filing claims with their insurers demanding coverage for business interruptions they suffered….But the overwhelming majority of insurers are rejecting these business interruption claims, alleging a variety of reasons why the circumstances of this pandemic don’t warrant coverage. Now, businesses are pushing back and pursuing legal action against their insurers.

We are seeing bad faith lawsuits pop up all over the country. In fact, many of the attorneys I’ve spoken with recently have said they’ve never seen so many bad faith cases related to business interruption insurance come through their doors. But the million-dollar question for these attorneys is: are these cases even winnable? I have three guests joining me today to discuss this question and more.

My first guest is Craig Andrews. Craig is a Director and Principal Consultant at a commercial insurance risk advisory firm with more than 30 years of experience in commercial underwriting, reinsurance, and surplus lines insurance. He formerly served as a Producer at Stauffer-Andrews-Mendenhall Agency, as President and General Manager at Andrews Insurance, Inc., and as a Product Development Officer at State Auto Insurance Companies. Thanks for joining us today, Craig.

Mr. Andrews: You’re welcome. It’s great to be here.

Mr. Barreto: Absolutely. My next guest is James Fazio. James is an Engagement Manager for Insurance Vertical and has more than 35 years of underwriting experience in various industries. He is the former Assistant Vice President of wholesale property for a major multinational insurance company, and he is also a licensed property and casualty insurance Broker. James holds an MBA in insurance and finance from St. John’s University. Welcome, James.

Mr. Fazio: Thank you. Nice to be here, nice to see everybody.

Mr. Barreto: My last guest is Richard Golomb, Esq. Richard is a class action lawyer and founding partner of Golomb & Honik, PC. He has more than 35 years of experience representing those who have been injured by defective products, dangerous drugs, construction accidents, consumer banking, and mortgage fraud. Richard has served as counsel in more than 80 cases that resulted in multimillion-dollar verdicts and settlements. We’re very excited to hear from you, Richard.

Mr. Golomb: Thanks, Zach, and thank you for having me. I appreciate it.

Mr. Barreto: So why don’t we kick off this dialogue from a litigator’s perspective? Richard, what kinds of business interruption cases are clients bringing to you right now?

Mr. Golomb: You know, they’re really across the various sectors of the businesses. The cases that we first started getting back in March were mainly restaurants and bars, but at this point we have a full line of clients in various industries: restaurants, bars, hotels, nursing homes, daycare centers, manufacturing companies, a full line of professional services, other law firms, accounting firms, doctors, offices. Really, it runs the full gamut. I mean, as you can imagine, I think that when this litigation peaks, there’s going to be tens of thousands of these cases.

Mr. Barreto: Can you elaborate a little bit on the size of the companies? I mean, is it, I know you touched a little bit on the types, but it doesn’t sound like from your perspective that it’s just small businesses.

Mr. Golomb: It’s not, it’s really it’s across the board. I mean, I represent some mom and pop pizza shops that are doing $30,000–$40,000 a month. And I’m also representing multibillion-dollar hotel chains or manufacturing companies that are doing in excess of a billion dollars a year. So it’s really hitting everybody right across the board, big or small in every sector of business.

Mr. Barreto: Very interesting. Richard. I’d like to hear from our guests who are on the insurance side here. James, I’ll start with you, and then Craig, I’d like to get your perspective as well. Are insurance companies even recognizing these business interruption claims related to COVID-19?

Mr. Fazio: Well, the first response I would give is actually yes. And then, you know, no. But each claim is going to be evaluated on an individual basis. So many of these business interruption policies are triggered only by the occurrence of a physical loss. It has to be a direct loss or a forced closure due the physical damage. So the policies, a lot of them contain exclusions for losses related to pandemics of communicable diseases. Although, a lot of the policies, believe it or not, do not contain these exclusions. So, if you talk about a policy, if it’s an all risk policy, unless it’s specifically excluded, it would have to be covered if it’s not stated.

Mr. Golomb: Yeah, in terms of recognizing the claims, what’s happening is really one of three things, in terms of the recognition of the claim. A lot of these businesses, they have long standing relationships with their agents. So it’s the broker or the agent that they call initially. And one of three things is happening. And that is that the agent makes the claim and the carrier is denying the claim based on the virus exclusion—and we can talk about why as a lawyer for the small businesses, I don’t believe the virus exclusion applies.

The second thing that’s happening is that the broker is making the claim and the carrier is sending back a letter. ‘As you can imagine, you’ve got thousands of these claims we’re investigating the claim. We’ll get back to you.’ And the third thing that’s happening is that the agent is saying it’s really going to be a waste of time. The carrier’s going to deny the claim anyway, and the claims aren’t being made. And so those are kind of the three things that are happening most in terms of the recognition of these claims.

Mr. Barreto: Craig, I’ll let you go.

Mr. Andrews: I want to put this into the discussion as well. All insurance coverage forms are very situation specific. So it depends utterly upon the facts of the claim scenario and the insurance coverages in place. I must say, having said that, the overwhelming majority of American businesses are insured and what we call the Standard Property Casualty Insurance Marketplace under standard Insurance Services Office, or ISO coverage forms.

Now, it’s been my experience that those standard market insurance companies using those standard ISO coverage forms are currently denying coverage for these loss of business income claims caused by government orders to suspend operations to prevent the spread of COVID. They’re denying these claims because of the specific circumstances that the claims have not met the insuring agreement requirements with the coverage forms. And because of multiple exclusions, they believe are applicable. And I don’t think the virus exclusion is the only culprit here.

On the other hand, there may be relatively few specialty insurance companies working in what we call the excess and surplus lines marketplace, or ENS, that haven’t been denying COVID-19 loss of business income claims because one, these ENS insurers sometimes use non-standard coverage forms, which may or may not cover such losses. And secondly, ENS insurers often create and draft specialized individual non-standard coverage forms for their extremely large policyholders. However, I personally have not yet heard of a single honored claim in this or any other sector of the business.

Mr. Barreto: On the subject of insurance companies honoring these claims, I want to jump into the idea of insurers being bound by a duty of good faith. I’ve been reading a lot about how these claims are being brought to insurers, and they’re denying them right away without any type of investigation. So Craig, I’m interested to hear from you—to what extent is an insurer bound by a duty of good faith to cover these COVID-19 business insurance claims in all these different scenarios?

Mr. Andrews: I will say that the insurance company owes each of its policyholders a prompt and thorough investigation of the situation and to deliver a prompt response to the claim. Whether or not it’s bad faith, I sometimes struggle with that. And honestly, I really worry about things like unjust enrichment of a policyholder who receives coverage that was not actuarially built into the premium. I think of other catastrophic causes of loss, like war. God forbid we have an actual war that fits the definition of insurance policies. Would the precedent of paying for COVID-19 business income losses….what does that say to the next excluded cause of loss that occurs?

Mr. Barreto: It’s an interesting question you bring up, Craig—about the implications that COVID-19 will have on insurance precedents to come. We’ll dive back to this question a little later in our discussion. But for the time being, I want to circle back to James—you briefly touched on how business interruption kicks in for insured events that affect premises. So how could COVID-19 be considered an insured event? And could you maybe walk us through some scenarios?

Mr. Fazio: There’s ways to look at this from both angles. If you look at business interruption, we have something, a coverage that’s called contingent business interruption. So just say I’m a manufacturer. And now I have a supply chain and I get my components from a couple of manufacturers, and right now they’re shut down. They’re not able to supply me with the components that I need to build my product and to be able to sell what I sell to my customers. So therefore, I’m not making any money. So somebody could look at that and say, well, you know what, if you look at this virus, it’s sort of triggering this contingent business interruption for me because I can get what I need from my suppliers. But then if you look at, going back to Craig said about the ENS market and the specific custom design manuscript policies that a lot of the larger ENS carriers put out there for their commercial insured—15 years ago, there was always a pollution exclusion on the policy, and they always had in the definition of pollution virus or bacterial infections. So they could come back and say, ‘Well, we don’t cover virus.’ But this is something again, it’s going to go back to the way the policy is worded. If there’s any ambiguity, then they can argue this possibly in court. And if it’s ambiguous, it typically goes in favor of the client.

Mr. Golomb: I just wanted to follow up on something both Craig and James said. When Craig was talking about the ISO policies. First of all, the virus exclusions did not even exist until the early 2000s, and that was after the SARS epidemic. These cases are so unique in so many ways. But one of, one of the uniquenesses of it is you’ve got 160 or more carriers out there that are all going to be defendants in this case. And they don’t all have the same language.

And as, I think it was James who said, and he’s right, is that the policies do vary from carrier to carrier, from region to region, sector, to sector. There’s a lot of differences in the policies. And so, you know, one of the things that James said when he was talking about the definition under the virus exclusion, some of them don’t refer to it as the virus exclusion. Some talk about microbes, talk about bacterias, but don’t talk about the virus at all.

And so looking from 30,000 feet, it’s the carrier that is drafting these policies. It’s not like— except in very minimal circumstances—the insured doesn’t have the, the right that doesn’t have the ability to negotiate the terms of the insurance contract, and the law recognizes that. So if there’s an ambiguity in the policy, then that ambiguity is going to be construed against the carrier and in favor of the insured. And so what we’re going to see in these particular cases is it’s going to be the burden of the plaintiff to show that there’s this interruption coverage. But that’s not the problem. The question is, is there an exclusion that the carrier can reasonably rely on?

You know, from my perspective, representing the small businesses, there are relevant inconsistencies and all of these policies that we believe, you know, that ultimately these policies are going to be construed in favor of the businesses, and these claims are going to have to be honored.

Mr. Barreto: So Richard, let me ask you this. It seems like some of these virus exclusions started to happen more often after the SARS issue that was taking place back in, I think, 2006—how many of these 200 clients or so that are coming in, how many of them have older insurance policies that are still in place versus newer ones?

Mr. Golomb: That’s a good question. And most of them do. In probably 80% of the policies that I see at this point, they have the virus exclusion. But as James and Craig can tell you, annually, they have addendums or endorsements. You know, they certainly didn’t have the virus exclusion before 2004, but they have it now. And there’s about 20% of the policies, to my surprise, that don’t have virus exclusions at all.

Mr. Barreto: Do you think that the majority of these will be handled class action torts, or if they’re going to be handled kind of on an individual basis?

Mr. Golomb: It’s a good question. You know, I’m a class action lawyer by profession, and I’m filing this as individual claims. I think there’s too many differences, factually, too many differences from carrier to carrier. Too many differences in the policies to get these cases certified as a class. Now, that said, there are very specific instances that I’ve seen where we have filed a class in a particular sector of the economy, where there was one or two carriers that had a very large market share, and so we’re not seeing those differences. But for the most part, I view these as individual cases.

Mr. Andrews: Just piling on to what both Richard and James said regarding these virus exclusions, which began appearing in ISO-based policies in 2006. I think it was those two pandemics—SARS and Ebola—that demonstrated to ISO and insurance companies that the character of the virus exposure was catastrophic in nature in the same way war is, in the same way nuclear radiation is, in the thousands, if not millions of properties and persons, could be affected in a single event.

Now, before we go any further, you know, a lot of attention has been paid to the virus exclusion, or lack thereof, and rightly so. I don’t hear a lot of conversation about the other two exclusions that exist in most standard policies that I think we’re going to see companies begin to rely on besides the virus exclusion. And that is first of all, the loss of use exclusion in other words, there’s been no damage to the property, but the insured has lost the use of it. That exclusion is lying out there. And the other one is the acts decisions of a government body. You know, and all of these things bring me around to really, what’s kind of a liability concept, and that’s the issue of proximate cause. What was the cause but for which this loss would not have happened? And in so many of these cases, it at least appears to me, admittedly, the 43-year insurance guy, son of an insurance guy, sees the proximate cause to be the shutdown caused by the acts or decisions of a government authority.

Mr. Barreto: Perfect timing, Craig. I want to hop into some of these other exclusions, particularly acts of authority. James, I’d like to hear from you on this topic. Obviously, many of the businesses filing these claims have been forced to shut down because of government orders. So can you elaborate on whether there could be coverage in a situation where an authority steps in and limits, or denies, access to a business’s premise?

Mr. Fazio: Right, so, typical coverage that you would see, especially in commercial property policies, you’d see a limit for civil or military authority. So basically as you mentioned, Zach, if the government forces you to be out of your premises, or not be able to use it, usually they give a limit. And there’s like 72 hours before they’ll pay the limit. But now they’re saying civil or military authority doesn’t cover this because this is not a covered cause of loss. This is not a covered peril. So therefore we can’t pay you your limit for civil and military authority, and you might have a $10 million limit and we’re not going to pay it because it’s not a particular covered peril. But again, that doesn’t mean they won’t cover it, because if you do have a policy that provides civil or military authority, that has a specified limit, and you don’t have virus that’s specifically excluded, then they have to pay it.

The other thing I wanted to just say was that as far as these claims, the biggest fear that the insurance market has now is that if they pay all these claims, it would basically bankrupt the industry. Basically it’s a trauma on both ends. It’s a trauma for the insured and the insurance company.

Mr. Barreto: Certainly an interesting perspective, James. Richard—I’m interested to hear your thoughts as well on both sides of this “trauma,” as James puts it. But just briefly, to go back to acts of authority coverage, are clients coming to you with business interruption cases that hinge more on acts of authority coverage as opposed to virus coverage?

Mr. Golomb: Well, they’re coming to me because they’re desperate. Some have, and many haven’t, gotten the PPP money. They know they have the coverage, and either the carrier or their agent has told them ‘No.’ So, you know, they’re not necessarily coming in as experts on the coverages that they have. They’re just trying to find ways to make a claim under a policy of insurance that they’ve been paying premiums on for, in some instances, 25 or 30 years.

So the way I view it is, in terms of the civil authority provisions in the policy, it’s really kind of a good news and bad news. And that is, while I believe it’s easier to prove a case under the civil authority language, it comes with some limitations.

There are more dollar limitations or time limitations in the civil authority provision than there are in the general business interruption claims. As an example, we’ve seen civil authority limitations of 30- or 60- or 90-day shutdown. Some don’t have limitations at all. And then we could have a dollar limitation—$50,000, $250,000, a million dollars of coverage. And so that’s what I mean when I say good news and bad news. The good news is, I think we can prove the claim under civil authority. The bad news is, it’s not without their limitations.

Mr. Andrews: Right. Just for the record, the standard ISO policies, the Business Owner’s Policy, for example, that probably ensures the great majority of the very small businesses— civil authority coverage is limited to four weeks, and that’s after a 72 hour waiting period. So they’re right. It is severely limited, depending on, and limitations of course, depend on, back to square one, how the policy was written.

Mr. Barreto: Very interesting, Craig. Richard, one follow up on your last point—you mentioned some of your clients have not received any PPP loan money to date. So if a business is receiving PPP money, could you discuss how that affects the business interruption claim, if at all?

Mr. Golomb: it’s a really good question. And, and there’s, there’s really two answers. One is a legal answer and one is a practical answer. The legal answer is not at all because there’s no collateral source language in the policy. The practical answer is, as James alluded to earlier….and look, you know, I’ve been a plaintiff’s lawyer for 37 years, and it’s not my job to feel sympathy for insurance companies. But James is right. You know, they have somewhere in the area of $800 billion in surplus money that they’ve been accumulating since 2008. And frankly, that’s not enough money to get all these businesses back on their feet. And so at some point there needs to be, you know, a three legged stool, if you will, to come to a negotiation. The three legs of that stool being small business on one side insurance carriers on another and the government on another. But when I talk about the practical, I think that whether or not a business got PPP money is going to have to come into play practically in order for there to be a solution for everybody.

Mr. Barreto: This brings us to the end of Part 1 of our business interruption insurance coverage here on COVID-19: Diagnosing Liability. Tune into our next episode to hear more from Craig Andrews, James Fazio, and Richard Golomb about how insurance companies, state governments, and small businesses—the three legs of the stool, as Richard put it—may resolve these ethical questions about pursuing litigation against insurers and passing legislation mandating payouts without bankrupting industry sectors.