Issue: Insurance & Global Pandemics

New developments in a Florida suit filed by a restaurant against its insurer provide further clarity in the business interruption debate, with direct implications for other attempts to force insurers to pay uninsured business interruption claims related to COVID-19.  

In Mama Jo’s, Inc. v. Sparta Ins. Co., the Southern District Court of Florida held unequivocally that “cleaning is not considered direct physical loss,” meaning that in circumstances where property could be cleaned to repair, there was not a case for business interruption coverage that requires direct physical loss. When the plaintiff appealed, the Eleventh Circuit Court affirmed the district court’s judgment and held that a restaurant’s lost income and extra cleaning costs did not trigger a business interruption claim because there was no direct physical loss or damage. 

“This case has direct implications for Florida businesses seeking coverage for business interruption losses under their property insurance policies due to COVID-19. Based on the Eleventh Circuit’s analysis, coverage will not be triggered for similar claims because the presence of the COVID-19 virus, or cleaning related to the virus, does not constitute direct physical loss or damage to property. The Eleventh Circuit’s holding provides helpful guidance that will most certainly be used in the analysis of COVID-19 business interruption claims.”

The court’s decision that COVID-19’s presence on property that can be cleaned does not constitute direct, physical damage is in line with CDC guidance determined by leading scientific and public health experts. 

“Transmission of novel coronavirus to persons from surfaces contaminated with the virus 
has not been documented…Cleaning of visibly dirty surfaces followed by disinfection is a best practice measure for prevention of COVID-19 and other viral respiratory illnesses in households and community settings.” 

You can read the full piece on JD Supra here, and it is also pasted below. 

For more information and resources, visit fairinsure.org.

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JD Supra: Eleventh Circuit Confirms Cleaning is not Direct Physical Loss

The Eleventh Circuit has provided some clarity to Florida businesses and their insurers dealing with COVID-19 claims. In Mama Jo’s Inc., d.b.a. Berries v. Sparta Ins. Co., No. 18-12887 (11th Cir. March 18, 2020), the Court held that a restaurant’s lost income and extra cleaning costs due to nearby roadwork did not trigger coverage because it did not involve direct physical loss or damage.

In the underlying case pending in the Southern District of Florida, Mama Jo’s, Inc. v. Sparta Ins. Co., 17-CV-23362-KMM, 2018 WL 3412974, at *9 (S.D. Fla. June 11, 2018), the Court considered whether there was a direct physical loss when construction debris and dust from road work required the insured to clean its floors, walls, tables, chairs, and countertops. The Court held unequivocally that “cleaning is not considered direct physical loss.”  Id. The Court stated: “A direct physical loss ‘contemplates an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so.’”  Id. Because the insured’s claim did not involve any direct physical loss, the district court granted summary judgment to the insurer.

The insured appealed to the Eleventh Circuit, and on appeal, the insured argued that: (a) the policy’s “direct physical loss” requirement could be satisfied by showing that the property was rendered uninhabitable or unusable; and (b) the policy’s business income coverage provisions did not require the insured to show that a suspension of operations was the result of physical damage. Mama Jo’s Inc., d.b.a. Berries v. Sparta Ins. Co., No. 18-12887, Slip Op. at 14 (11th Cir. March 18, 2020).

Applying Florida law to the insured’s claims, the Eleventh Circuit held that neither the insured’s claim for cleaning the restaurant nor its claim for business income loss triggered coverage under the policy. As to the insured’s cleaning claim, the Eleventh Circuit concluded that, under Florida law, an item or structure that merely needs to be cleaned has not suffered a “loss” which is both “direct” and “physical.” Id. at 23. As to the insured’s business income loss claim, the Eleventh Circuit noted that the policy’s Business Income Coverage Form required that a “suspension” of operations “be caused by direct physical loss of or damage to property.”  Id. Because the insured failed to show that it suffered a direct physical loss of or damage to its property during the policy period, the Eleventh Circuit concluded that no coverage was triggered for the insured’s business income loss. Id. Finally, the Eleventh Circuit found that the district court correctly granted summary judgment on the insured’s business income claim because its “suspension” of operations that occurred when it had been required to close sections of the restaurant for cleaning was not caused by “direct physical loss of or damage to property.”  Id. at 24. Accordingly, the Eleventh Circuit affirmed the district court’s grant of summary judgment in favor of the insurer.

This case has direct implications for Florida businesses seeking coverage for business interruption losses under their property insurance policies due to COVID-19. Based on the Eleventh Circuit’s analysis, coverage will not be triggered for similar claims because the presence of the COVID-19 virus, or cleaning related to the virus, does not constitute direct physical loss or damage to property. The Eleventh Circuit’s holding provides helpful guidance that will most certainly be used in the analysis of COVID-19 business interruption claims.

Businesses across the country have suffered a devastating blow since the beginning of the COVID-19 pandemic. While Congress-enacted measures brought some relief, they have not done enough to support impacted American businesses.

Today’s Omaha World-Herald opinion piece by former U.S. Senator Ben Nelson (D-NE) highlights that blaming insurance companies is distracting people from rallying around the one solution we need: government-backed relief for struggling businesses. 

As federal policymakers debate the next round of COVID-19 aid, Sen. Nelson stresses three fundamental principles that must be included in any proposal designed to address the real issue that is pandemic risk: 
 

• Only the federal government has the financial means to provide relief. Since pandemics have the potential for unlimited impact, they are fundamentally different from insurable events, which are limited in terms of time and geography. “But if pandemics were to be included in insurance coverage, a market-based premium for a risk of this nature would be very expensive, and likely cost-prohibitive, for many small businesses.”
  

• Support for businesses must be provided in a fast and efficient manner. “Prioritizing transparency and accountability is key to ensuring all businesses that need immediate payments get them and are able to stay operational in case of a prolonged disruption period.”
  

• Businesses must be protected from losses and incentivized to retain employees. Policyholders must be shielded from financial harm without needing to turn to litigation for coverage or jeopardizing existing insurer commitments. “If insurers were forced to include pandemic coverage without having collected its costly risk-adjusted premiums, the industry — an important engine of our economy in Nebraska and across the country — could collapse.”
  

The full piece is pasted below. For more information, please visit fairinsure.org.

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OMAHA WORLD-HERALD: Midlands Voices: Be Wary Of Placing Undue Burdens On Insurance Sector In Virus Era

COVID-19 has upended the lives of millions of Americans over the past few months in ways no one could have predicted. Small businesses, in particular, have borne the brunt of the nationwide economic devastation.

For thousands of Nebraskans, this experience is deeply personal. During the April pandemic peak, unemployment claims in the state skyrocketed to more than 10 times pre-pandemic levels. And though Nebraska claimed the lowest unemployment rate in the U.S. amid the COVID-19 crisis in May, it saw its unemployment rate rise again in June, up 3.6% from the same month in 2019.

While Congress-enacted measures brought some initial relief, they simply have not done enough. Amid the blame game and finger pointing that have followed, insurance companies have been caught in a political crossfire that is distracting people from rallying around the one solution we need: government-backed relief for struggling businesses.

During my 12 years in Congress, my colleagues and I also dealt with our fair share of unforeseen crises. From the terror attacks of 9/11 to the 2008 financial crisis and other large-scale stimulus bills, I learned firsthand the kinds of policies that best support both consumers and businesses during economic downturns. That’s why I can say with confidence: forcing insurers to cover uninsured business interruption (BI) claims is not the answer.

Members of Congress and various industry groups have helped to move the needle by presenting several thoughtful proposals to address the real issue that is pandemic risk. And while they all differ, they all get at the same three fundamental principles: Only the federal government has the financial means to provide relief; support for businesses must be provided in a fast and efficient manner; and businesses must be protected from losses and incentivized to retain employees.

First, an event of this magnitude is impossible for the private sector to underwrite. The National Association of Insurance Commissioners (NAIC), where I served as chief executive until as recently as 2015, has made clear that BI policies were generally not designed or priced to provide coverage against communicable diseases, such as COVID-19. In fact, the NAIC has labeled swift action by Congress to directly address the needs of citizens and our economy as the “most effective and expedient means” to combat the devastating impact of the virus.

Pandemics are excluded from standard BI policies for good reason. Insurance works by pooling risk. Since pandemics have the potential for unlimited impact, they are fundamentally different from insurable events. When limited in terms of time and geography, costly events — such as hurricanes or wildfires — can be covered by BI insurance. But if pandemics were to be included in coverage, a market-based premium for a risk of this nature would be very expensive, and likely cost-prohibitive, for many small businesses. Therefore, only the federal government has the financial ability to provide relief needed during such unpredictable crises.

Additionally, when a pandemic hits, we must have a government program already in place to provide widely accessible relief payments to businesses in a quick and efficient manner and with minimal possibility of abuse. Prioritizing transparency and accountability is key to ensuring all businesses that need immediate payments get them and are able to stay operational in case of a prolonged disruption period. To this end, instead of an indemnity-based process, pandemic recovery payouts can be tied to business operating expenses.

Finally, proposed government policies must not only protect businesses from losses, but also incentivize them to keep their employees, without turning to litigation for coverage or jeopardizing existing insurer commitments, such as to auto and homeowners payouts. This is vital to economic stability. If insurers were forced to include pandemic coverage without having collected its costly risk-adjusted premiums, the industry — an important engine of our economy in Nebraska and across the country — could collapse.

With uncertainty growing by the day, and the increasing possibility of a virus resurgence in the fall that could once again force thousands of commercial establishments to close, we simply cannot afford to continue to allow our businesses — and our crucial American workforce — to suffer. Congress must recognize, and act on the fact that a government-backed solution is the only fix that can provide reliable relief to business owners today and help to protect them from similar situations in the future without risking insurers’ existing commitments to policyholders. Nebraskans, and Americans everywhere, need their government to do more.

Ben Nelson is a former U.S. senator and governor for Nebraska and the former director of the Nebraska Department of Insurance. He also served as the chief executive officer of the National Association of Insurance Commissioners from 2013 through 2015. He is currently the CEO of Insurance Care Direct, a health insurance agency in Florida.

The global COVID-19 pandemic has brought significant disruptions to our economy—and for many business-owners, this has come at a cost to their income and livelihoods.

In a CNN news segment earlier today, Insurance Information Institute (Triple-I) CEO Sean Kevelighan provided insight on why pandemics are uninsurable. While the insurance industry understands the challenges the business community is facing, only the federal government has the financial capacity to provide relief of this magnitude.

According to Kevelighan:

• Forcing insurers to cover pandemic losses would jeopardize the financial solvency of the insurance industry—a backbone for the American economy. “We would see systemic strain on the industry within a matter of months that could cost anywhere from $150 to $400 billion a month.”
  

• Standard BI policies are triggered by direct physical damage to property. “A virus does not trigger the direct physical damage that’s necessary to enact a business insurance or business interruption policy. We’ve actually seen that play out already in court.”

Insurers are doing what they can in response to the pandemic, including providing premium rebates, policy extensions, and making charitable donations, as they work to keep their promises to policyholders for covered catastrophe losses such as hurricane damage.

The CNN segment is available here. For more information and resources, visit fairinsure.org

In two separate, recent business interruption cases, judges sided with insurers and signified agreement on one key fundamental principle of the business interruption debate: Direct physical damage to property is required to trigger a business interruption claim. Thus, the Covid-19 pandemic and subsequent government-ordered shutdowns do not warrant claims for business interruption.

• In Washington, D.C., the case’s plaintiffs were restaurants that had shut down to comply with government-mandated orders. Washington, D.C. Superior Court Judge Kelly A. Higashi holds in her decision that Covid-19 does not cause direct physical damage to property, a prerequisite for coverage. She also held in her decision that shutdown orders only directed businesses to take certain actions, but “did not affect any direct change to the properties.” 
  

• In Texas, a group of barber shops filed suit against their insurer for business interruption claims due to business lost when the state shut down. Senior U.S. District Judge David Ezra of the U.S. District Court for the Western District of Texas, San Antonio Division, wrote in his decision, “State Farm cannot be held liable to pay business interruption insurance on these claims as there was no direct physical loss, and even if there were direct physical loss, the Virus Exclusion applies to bar Plaintiffs’ claims.”

You can read more about Judge Higashi’s decision in Insurance Business Mag here and Judge Ezra’s decision in Insurance Journal here.

For more information and resources, visit fairinsure.org.

A recent Law360 piece gathered expert opinions on trends in real estate insurance. Quoting leading legal and insurance experts, the article explores the potential for a government-backed pandemic recovery solution, and outlines the reasons why pandemics are not privately insurable:

• A pandemic impacts all lines of insurance at once. “‘Unlike terrorism, which is typically limited to specific assets or areas, a pandemic shuts down everybody at the same time,’ said Alexandra Glickman, senior managing director and global real estate and hospitality practice leader at global consulting firm Gallagher.”
  

• The magnitude of the loss of a pandemic makes it difficult to underwrite. “‘First, you have to understand the magnitude of what you’re underwriting. The risk assessment is so much greater in a pandemic than in a terrorism case,’ said Morris Missry, managing partner of Wachtel Missry LLP and the chair of the firm’s real estate department. ‘In a terrorism case, you’re talking about something that’s finite. … In a pandemic, it’s not just one site or a few sites. In a pandemic, you’re talking about cities, states. The magnitude of the loss is so much greater.'”
  

• Without government support, the risk-adjusted deductible for a pandemic insurance policy would be prohibitively expensive. Paraphrasing Mike Liever, partner at Orrick Herrington & Sutcliffe LLP, the piece notes: “Liever said if a policy were to, say, offer $2 million in coverage but come with a $1 million deductible, that might not be terribly attractive to an owner. Insurance companies may also put time deductibles into plans, which could, for example, spell out that a particular event is not covered for the first six months.”

Read the full article here. 

As businesses and consumers across the country brace for the devastating economic impact of COVID-19, insurers have taken proactive steps to support policyholders through their financial challenges. Payment relief, premium rebates, policy extensions, and donations are among the many ways in which insurers have stepped up in the absence of much needed federal pandemic relief.

USAA announced today its plan to return an additional $270 million in dividends to auto insurance policyholders. This third set of dividends follows USAA’s returns in April and May, which totaled $800 million, pushing USAA’s pandemic givebacks to over one billion dollars. “Giving money back to our members, especially now when budgets are stretched, is another way we are helping,” USAA President and CEO Wayne Peacock said.

Last week, Nationwide Retirement Plans announced a new fee waiver program that would provide temporary financial relief to plans that move to Nationwide in 2020. “We’re here to support plan sponsors and their participants to help ease their burden during these challenging times,” said Eric Stevenson, president of the Ohio-based Fortune 100 company. “We want to help businesses balance the costs of offering retirement plans with the vital need for their employees to prepare for a secure retirement – a challenge that has been exacerbated by recent market volatility and uncertainty.”

Erie Insurance, a publicly-held insurance company based in Pennsylvania, is also committed to giving back. Since the beginning of the pandemic, Erie has announced $200 million in rate cuts and provided $200 million in dividends to customers across 12 states and the District of Columbia, all while supporting local COVID-19 community efforts. According to Jacqueline Tirpak, vice president of corporate claims at Erie, the company has granted a “record-breaking volume” of requests for delaying payments, adjusting installment dates, changing pay plans, and waiving penalties.

To learn more about what insurers are doing for policyholders, communities, and our economy, watch FAIR’s new one-minute video highlighting how insurers have upheld their promises to customers throughout the COVID-19 pandemic.

For more information, visit fairinsure.org.