Issue: Insurance & Global Pandemics

Natural disasters such as hurricanes and wildfires can upend thousands of lives and cause incredible amounts of physical damage. This summer has made the awful power of these disasters even more clear, as Hurricane Laura battered the Gulf Coast and wildfires continue to devastate communities across the western United States.

In these moments of crisis, Americans count on their insurers for assistance, perhaps as much as they rely on first responders and government agencies. The industry’s response is its way of helping hundreds of thousands of people in need in the fairest way it can – by providing financial support for damages covered by insurance.
 With its landfall August 27, Hurricane Laura ravaged southwestern Louisiana and parts of Texas, causing at least three dozen deaths and extensive property damage. As many as 17,000 residents were evacuated and as of mid-September thousands seem likely to be without power for several weeks more.

Insurers are always ready and able to step up to help homeowners and communities rebuild. Following Hurricane Laura, this will mean covering an estimated $8 billion to $12 billion in insured claims. The industry could end up paying even more than that this year to supply funds that will help fire victims in the west get their lives back on track.

Insurers have a long record of helping customers and economies rebuild in natural disasters. Fifteen years ago customers received more than $50 billion to help them recover from Hurricane Katrina, the costliest hurricane in U.S. history. Hurricane Laura’s timing and direction mirrored that of two other hurricanes, Harvey (2017) and Rita (2005), during which the industry paid nearly $20 billion and $6 billion in insured damages respectively. (All dollar amounts have been adjusted for inflation.)

As the hurricane and wildfire seasons continue, with some analysts expecting more severe catastrophes than ever before, insurers are prepared to serve communities around the country. Whether that’s setting up early warning centers in Colorado, monitoring hurricanes in real time from Florida, or sending adjusters into neighborhoods most affected by the LNU Lightening Complex Fire in California, resilience and recovery are core values deeply ingrained in insuring the risks of natural disasters. 

Following a natural disaster, policyholders with relevant coverage often file claims based on their business interruption policy. This is precisely what that coverage was intended for—the times that businesses have sustained physical damage from disasters like hurricanes, wildfires, or earthquakes.

Keeping these commitments to Main Street – helping small businesses and communities across the country manage risks both known and unknown – is an incredible responsibility that insurers take seriously and work every day to uphold as financial first responders. 

To learn more about business interruption insurance, visit the Future of American Insurance and Reinsurance (FAIR). For more on the role of insurance in natural disasters, visit the Insurance Information Institute (Triple-I).

As policymakers return to Washington and debate how to best help the economy recover from the COVID-19 pandemic, one thing is certain: American businesses need a government-backed solution to get our economy back on its feet.

Recent polling conducted by CivicScience and initiated by FAIR illuminates how the American public is thinking about this crisis and the road ahead:

• The majority of Americans believe the government should bear the financial responsibility for helping businesses stay afloat during the pandemic.* A government-backed policy solution can provide immediate relief to struggling business owners and protect insurers’ ability to keep promises to policyholders for covered catastrophe losses, like damage from wildfires and hurricanes.
  

• Only 16% of Americans believe insurance companies should bear the responsibility for helping businesses during this unprecedented time.* Business interruption insurance contracts were not priced to cover global pandemic risks, so forcing insurers to pay for claims their policies weren’t priced to cover would harm all policyholders. 
  

• Only 8% of Americans say trial lawyers’ lawsuits against insurers is the best path for businesses to secure financial relief.* Trial attorneys’ attempts to retroactively force uninsurable pandemic coverage in business interruption insurance contracts is detrimental to policyholders, communities, insurers, and economic growth.
  

One thing is clear—Americans across the country widely recognize that only the federal government can provide the true relief business owners need. Business interruption insurance was never intended to cover global pandemic risk. The sheer scope and magnitude of loss associated with a pandemic of this nature is unprecedented and extends far beyond the ability of the insurance business model to address, and that’s what makes it uninsurable.

This fall, it is imperative that policymakers put in place the policies needed to help us recover from the massive economic damage COVID has caused to businesses of all sizes across the country. While there are no shortage of political distractions, the urgency for a government-backed solution for struggling businesses in need of relief has never been greater.

*Polling conducted by CivicScience and all commentary is attributed to FAIR.

For more information, please visit fairinsure.org.

Late last week, the U.S. District Court for the Eastern District of Michigan ruled in favor of insurers in a business interruption lawsuit filed by a Michigan chiropractic practice. 

“‘Accidental direct physical loss to Covered Property’ is an unambiguous term that plainly requires Plaintiff to demonstrate some tangible damage to Covered Property,” wrote Judge Thomas Ludington in his decision. “Because Plaintiff has failed to state such damage, the complaint does not allege a Covered Cause of Loss.”

The plaintiff sought coverage on COVID-related business losses as well as damages from the insurers’ alleged breach of contract based on its “all risks” business interruption insurance policy, which had an virus exclusion. Even if business interruption losses were caused by accidental direct physical loss, the Judge further explained, the virus exclusion still applies.

The number of federal and state courts that have noted the absence of physical damage, required in business interruption claims, is approaching double-digits. The growing list includes federal courts in Florida, California, Texas, and New York, as well as the Eleventh Circuit and courts in the District of Columbia and Michigan.

You can read more on the latest Michigan federal court ruling here and here.

For more information, please visit fairinsure.org.

Yet another court ruled in favor of insurers recently in the ongoing dispute over business income (interruption) insurance (BI) today. From Business Insurance:

“The virus exclusion in a dentist’s commercial insurance policy with a unit of Nationwide Mutual Insurance Co. bars coverage for coronavirus-related losses, a federal court ruled Wednesday.” 

Today’s decision from the U.S. District Court for the Middle District of Florida in Fort Myers adds to the growing list of rulings decided in favor of insurers, and delivers a clear win for the integrity of contracts. Efforts to reinterpret or retroactively change provisions in insurance contracts have met fierce resistance in courts across the country. From the ruling:

“‘Because [the plaintiff’s] damages resulted from COVID-19, which is clearly a virus, neither the Governor’s executive order narrowing dental services to only emergency procedures nor the disinfection of the dental office of the virus is a “Covered Cause of Loss” under the plain language of the policy’s exclusion,’ the ruling states.”

Read more here, via Business Insurance.

Insurers have won more rulings than policyholders in recent weeks, as courts begin to work through more than 1,000 business interruption (BI) disputes filed since the beginning of the pandemic.

Judges in Michigan and the District of Columbia, as well as federal courts in Texas and California were among those who ruled against plaintiff attorneys’ attempt to force insurers to pay out COVID-19 claims.

“The initial decisions indicate, on the whole, these cases can ultimately be resolved consistent with insurers’ underwriting intent as reflected in the language of the policies,” observed Bryce Friedman, an insurance lawyer with Simpson Thacher & Bartlett.

In fact, the array of clear cut rulings may have discouraged further attempts at litigation. According to University of Pennsylvania Carey Law School’s litigation tracker, the number of COVID-19 coverage-related lawsuits have drastically decreased since the beginning of August.

You can read the full analysis on The Wall Street Journal here and below.

For more information, please visit fairinsure.org.

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Insurance Firms Gain Early Lead in Coronavirus Legal Fight With Businesses
By Leslie Scism, Sep. 1, 2020

U.S. property insurers have won a flurry of judicial rulings backing up their rejections of claims for businesses’ lost income during government-ordered shutdowns, dimming policyholders’ hopes of payments to help them rebound.

In recent weeks, insurers have won more rulings than policyholders as the courts begin to work through more than 1,000 Covid-19 business-interruption coverage disputes.

Still, policyholders scored success in a federal court in Missouri, boosting efforts to interpret property insurance as covering claims from the coronavirus.

Across the U.S., restaurants, hair salons, retailers and other businesses are seeking policy proceeds to deal with the huge economic cost of the shutdowns, in one of the biggest fights the insurance industry has ever waged with its policyholders.

In the rulings, the judges sympathize with businesses’ plight, but most so far support insurers’ legal arguments.

Insurers say the policies are intended to help policyholders as they recover from events, such as fires, that lead to repairs and rebuilding, and were never intended to cover virus-related claims.

So far insurers have prevailed in state courts in California, Michigan and the District of Columbia, and in federal courts in Texas and California, according to a Covid-19 litigation-tracking effort at the University of Pennsylvania Carey Law School. On Thursday, a federal magistrate judge recommended the dismissal of a lawsuit brought by a Miami restaurant.

Those actions follow a May hearing where a Southern District of New York federal judge said she would rule against a magazine publisher seeking to force an insurer to pay a Covid-19 claim. The policyholder’s lawyer withdrew the case before the judge issued a written opinion.

“We are at an important inflection point,” said Randy Maniloff, an attorney at White & Williams LLP, who represents insurers. “If the score continues to be lopsided, the decisions will become a strong headwind for policyholders trying to convince judges to see the issues differently.”

However, policyholders’ lawyers say that many states have yet to rule, and appeals could undo some of insurers’ early wins.

“There are a few states that have favorable law on certain key issues, and many do not,” said Alexandra Roje, a partner with Lathrop GPM LLP, who represents policyholders. Until the states more favorable to policyholders deliver rulings, “we won’t know which way the wind is blowing,” she said.

Business-interruption coverage is a subset of property insurance, and with limited exception insurers say they didn’t collect premiums for virus-related claims. Pandemics, they say, violate a cardinal principle of insurance: Large numbers of policyholders pool their risk to finance a few losses in a given year, while policyholders suffer losses simultaneously during a pandemic.

Many policies specifically exclude claims stemming from viruses. Among challenges for policyholders in policies without the specific exclusions, business-income coverage typically requires “direct physical loss or damage” to have caused the interruption. Over the years, many courts have interpreted this to mean tangible or structural damage to property.

To clear this hurdle, hotel company The Inns by the Sea asserts in its lawsuit in Monterey County, Calif., that the coronavirus is a “hazardous physical substance that permeates the air and sticks to surfaces, and causes both physical loss of and damage to property,” Michael Reiser, one of the hotelier’s lawyers, said in an interview.

The business is appealing the Aug. 6 ruling against it, he said.

In their lawsuits, plaintiffs are drawing on past rulings in which judges concluded that things like wildfire smoke, gasoline vapors and carbon monoxide created property damage.

Still, in a typical example so far, U.S. District Judge David Ezra dismissed a case brought by San Antonio-area barbershops after concluding that a direct physical loss requires a “distinct, demonstrable, physical alteration of the property.”

The plaintiffs will appeal. “We believe that our clients have suffered physical loss,” said their lawyer, Shannon Loyd.

Insurers generally contend that any danger posed by the coronavirus can be wiped away with household cleaners.

In two cases in federal court in Missouri, a judge rejected insurer Cincinnati Financial Corp.’s motion to dismiss the litigation.

Judge Stephen Bough said the plaintiffs—hair salons, bars and restaurants—”have plausibly alleged that Covid-19 particles attached to and damaged their property, which made their premises unsafe and unusable.”

Now, as the case proceeds, the plaintiffs must document the nature and extent of Covid-19 on the relevant property to get their claims paid, the judge said.

“The initial decisions indicate, on the whole, these cases can ultimately be resolved consistent with insurers’ underwriting intent as reflected in the language of the policies,” said Bryce Friedman, a lawyer with Simpson Thacher & Bartlett, who represents insurers.

Plaintiffs beg to differ.

Mr. Reiser, the lawyer in the California case, is hoping for a quick response from the appellate court.

“Thousands of entrepreneurs and small-business owners are facing permanent closure or bankruptcy based on dubious coverage denials,” he said.

U.S. District Judge Stephen V. Wilson ruled on Friday, August 28, that a downtown Los Angeles restaurant was not entitled to business interruption (BI) coverage for income lost during the Los Angeles shutdown order that closed nonessential businesses on March 15. 

Judge Wilson sided with the insurer in his ruling because the Los Angeles restaurant did not experience “direct physical loss of or damage to property” under California law. 

“‘An insured cannot recover by attempting to artfully plead impairment to economically valuable use of property as physical loss or damage to property,’ Wilson said, adding that [the plaintiff] has only plausibly alleged that in-person dining restrictions interfered with the use or value of its property — ‘not that the restrictions caused direct physical loss or damage.'”

This ruling adds California to the list of states siding with insurers on the grounds of similar findings, including Texas, Florida, Michigan, and the District of Columbia. 

You can read the full article on Law360 here.

For more information, please visit fairinsure.org.

Earlier this month, a Texas federal court sided with an insurance company’s motion to dismiss a lawsuit by a policyholder, finding that there was no coverage for plaintiffs’ claims for business interruption (BI) COVID-19 losses.

As outlined in a National Law Review article yesterday, in his decision, Senior U.S. District Judge David Ezra agreed with what insurance companies have been showing for months: COVID-19 does not cause direct physical damage to property.

The court held that plaintiffs failed to prove they had incurred a direct physical loss, that the virus exclusion included in the policy barred policyholders’ claims, and that the Civil Authority provision in the policy was not triggered. 

The judge made a couple of very important points in his decision: 

• While there is “no doubt that the COVID-19 crisis severely affected plaintiffs’ businesses, [the insurer] cannot be held liable to pay BI insurance on these claims as there was no direct physical loss.” He added that even if there were direct physical loss, the virus exclusion would apply to bar plaintiffs’ claims.
  

• The judge also stated that “given the plain language of the insurance contract between the parties, the Court cannot deviate from this finding without in effect re-writing the policies in question.”

The Texas Court joined a chorus of states recently siding with insurers on the grounds of similar findings, including Florida, Michigan, and the District of Columbia. 

For more information, please visit fairinsure.org. 

Earlier this month, a Texas federal court sided with an insurance company’s motion to dismiss a lawsuit by a policyholder, finding that there was no coverage for plaintiffs’ claims for business interruption (BI) COVID-19 losses.

As outlined in a National Law Review article yesterday, in his decision, Senior U.S. District Judge David Ezra agreed with what insurance companies have been showing for months: COVID-19 does not cause direct physical damage to property.

The court held that plaintiffs failed to prove they had incurred a direct physical loss, that the virus exclusion included in the policy barred policyholders’ claims, and that the Civil Authority provision in the policy was not triggered. 

The judge made a couple of very important points in his decision: 

• While there is “no doubt that the COVID-19 crisis severely affected plaintiffs’ businesses, [the insurer] cannot be held liable to pay BI insurance on these claims as there was no direct physical loss.” He added that even if there were direct physical loss, the virus exclusion would apply to bar plaintiffs’ claims.
  

• The judge also stated that “given the plain language of the insurance contract between the parties, the Court cannot deviate from this finding without in effect re-writing the policies in question.”
  

The Texas Court joined a chorus of states recently siding with insurers on the grounds of similar findings, including Florida, Michigan, and the District of Columbia. 

For more information, please visit fairinsure.org. 

“The demand for protection from future pandemic losses is massive, but coverage is small and unaffordable to most without government backing,” concluded various scholars and insurance industry leaders in a recent analysis published by S&P Global Market Intelligence.

A few compelling reasons for a federal government backed pandemic coverage solution outlined include:

• The private insurance market does not have the capacity to write coverage for business interruption losses for pandemics, according to Lloyd Dixon, director of the RAND Center for Catastrophic Risk Management and Compensation. “If we want to use the insurance mechanism to cover business interruption losses and wage losses, it’s going to be a necessity to have government involvement in the program,” Dixon further explained.
  

• The absence of an affordable insurance market could harm post-pandemic economic recovery. Tarique Nageer, a terrorism insurance adviser for Marsh, recalled how reinsurance companies excluded terrorism risks from contracts following the 9/11 attacks, which caused primary insurers to withdraw coverage. When banks began requiring businesses to insure against terrorism to qualify for loans, the contracting insurance capacity caused a slowdown in the construction industry. Lenders will likely enforce similar requirements post COVID-19, projected Nageer.
  

• A government-backed pandemic insurance solution could help make pandemic coverage more accessible in the future. Nageer further noted that prices for terrorism coverage have come down and terms have grown more generous because of the adoption of the Terrorism Risk Insurance Act in the aftermath of 9/11. Representative Carolyn Maloney (D-NY) introduced a similar bill to create a government-backstopped pandemic insurance program in May.

You can read the full analysis here.

For more information and resources, visit fairinsure.org.