Legal Implications of COVID-19 Business Interruption Claims Remain to Be Seen

Business interruption insurance, or business continuity insurance, is intended to protect business owners from income lost due to a disaster, such as a fire or natural disaster, and typically is an add-on to a larger policy.  

Many insurers have denied these claims related to coronavirus, often claiming the policies require physical loss or physical damage to property that causes a business to close. The businesses filing these claims, however, argue that the pandemic is, in fact, the cause of physical loss and damage, even if the directive to close came via governmental mandate. At issue in many of these cases is whether the presence of severe acute respiratory syndrome–associated coronavirus 2, the virus that causes COVID-19, at a given property constitutes physical damage.

Regardless, without business interruption coverage, some businesses are facing the reality that they may not be able to open their doors again when the pandemic ends.

A Goldman Sachs survey published on March 19, 2020, revealed that about 51 percent of U.S. small business owners foresaw that they would be able to keep operating for only up to three months if conditions under the pandemic continued as they were, and 96 percent indicated they were already feeling the pandemic’s effects.

Of course, conditions arguably have worsened since March—as of this writing, almost 6 million people in the United States have been infected, while more than 175,000 have died.  

Local, state, and federal jurisdictions have taken steps to attempt to curb the spread of the deadly virus, some more drastic than others. Widespread stay-at-home orders began in mid-March after President Donald Trump and many state governors declared states of emergency due to the pandemic.  

Along with these stay-at-home orders came mandates that nonessential business close to encourage people to avoid unnecessary contact with others to help “flatten the curve.”

Physical Loss or Damage

Many businesses have filed class action lawsuits based on the claim that COVID-19 indeed causes direct physical loss or damage to the property.

One such case is Lucha Libre Gourmet Taco Shops’ class action lawsuit against Century-National Insurance Co. Lucha Libre alleges that Century denied the restaurant chain’s business interruption claim after agreeing to pay for risks of direct physical loss to the business. Any loss that would not be covered was specifically excluded or limited by the policy, Lucha Libre says, and the policy did not exclude or limit coverage for virus-related losses. The restaurants claim that the presence of COVID-19 on their property caused physical loss or damage because they were forced to prohibit patrons from eating on site after California Governor Gavin Newsom issued an executive order declaring a state of emergency.

Circus Circus LV, the holding company for Circus Circus Hotel and Casino on the Las Vegas Strip, similarly has accused AIG Specialty Insurance Co. of breaching their contract, alleging the insurance company sold the casino a policy that it has failed to stand by since Circus Circus closed its doors in March. Circus Circus alerted AIG of the loss it was experiencing shortly after shutting down. AIG reportedly denied the claim in June. The casino says its employees took more than 1,600 sick days between January 1 and March 18, and claims it welcomed more than 337,000 registered guests during that same period. Circus Circus claims its loss is an ongoing “direct physical loss” and the property is suffering “physical damage” because COVID-19 contaminates objects and surfaces. The plaintiff is aware that people infected with COVID-19 were on the property before the casino shut down.  

Another Las Vegas hotel and casino, Treasure Island, has filed a similar lawsuit. Treasure Island says it has lost about $1 billion since the shutdown began in mid-March, but alleges its business interruption claim was unfairly rejected by its insurance company, Affiliated FM. The casino says its policy with AFM covers Treasure Island against “all risks of physical loss or damage, except as . . . excluded,” up to $327 million in losses due to interruption of business under certain circumstances and up to $850 million for property damage.

Treasure Island’s lawsuit cites the World Health Organization’s guidance that COVID-19 is able to be spread by human-to-human contact and can exist on surfaces such as copper, plastic, and stainless steel—materials the casino says it has throughout its facilities. The casino maintains that its policy with AFM expressly covers costs for the “cleanup, removal and disposal of . . . communicable disease from insured property.”

In one case in the Midwest, a bakery and tavern group have joined forces to file a business interruption claim class action lawsuit. The companies allege their policy with Society Insurance includes not only special property but “contamination” coverage, which pays for actual business and income loss caused by various forms of contamination. According to the lawsuit, the businesses claim the coverage includes an instance in which a “public health or other governmental authority . . . prohibits access to the described premises and adverse ‘publicity’ resulting from the discovery or suspicion of ‘contamination.’” Nonetheless, Society Insurance has denied the businesses’ claim.

Exclusions

In some cases, businesses claim their respective policies should protect them because the policies do not explicitly exclude losses suffered because of a virus from its coverage.

That was the tack taken in Pennsylvania by La Campagna Ristorante, which says its business interruption insurance claim was denied after the restaurant closed its doors due to the pandemic. In denying the restaurant’s claim, Erie Insurance Group said it did not have to pay out because of a virus exclusion in the policy. But in its complaint, the restaurant says the policy in dispute is an “all-risk” policy that covered all causes of loss, “including but not limited to direct physical loss and/or direct physical damage” unless the loss is specifically excluded and “provides coverage for damages resulting from ‘interruption of business’ when there is property loss or damage.”

Prime Time Sports Grill in Tampa, Florida, also claims it was unfairly denied a business interruption claim after Lloyd’s of London informed the company it would not be covering monetary losses incurred as a result of the COVID-19 pandemic. Like La Campagna, Prime Time says its claim against its “all risks” policy was denied via a letter from its insurer. Prime Time is seeking to recover up to $200,000 in coverage for being forced to close its doors due to a government mandate shutting down all nonessential businesses.

Other businesses have filed similar lawsuits against Lloyd’s, including Oceana Grill in New Orleans, GIO Pizzeria & Bar Hospitality and GIO Pizzeria Boca in Florida.

Vanguard, a Tulsa, Oklahoma, concert venue, also alleges its all-risk policy should have covered it for business interruption, but its claim was denied. Unlike in other cases, Vanguard says its policy with Covington Insurance does not state any exclusions for losses incurred due to the spread of viruses or communicable diseases. Vanguard hopes to establish eight national classes to address losses Covington has declined to cover.

Violation of Rights

Some business owners are approaching their lawsuits from the perspective that their rights were violated by a government-mandated shutdown and should be covered under their insurance policies because the decision to close was not theirs.

In one such case, several Texas bar owners claim Governor Gregg Abbott’s closures violate the state constitution. While the governor’s order allows most businesses to be open, it singles out bars, stating, “People shall not visit bars or similar establishments that hold a permit from the Texas Alcoholic Beverage commission (TABC) and are not restaurants . . . ,” according to the lawsuit.

Bar owners allowing patrons to visit their businesses could have their licenses suspended and face possible fines, the complaint says. However, the plaintiffs say, Texas’s “Disaster Act” does not allow the defendants to force businesses to shut down.

Denial Without Investigation

Once an insurance claim is filed, it is typical for an insurance company to send a representative to a property to investigate the loss. But many businesses throughout the country say their claims were denied without the benefit of such visits.

Monarch Ballroom in California alleges its insurance company never sent someone to visit its property after the dance studio’s business interruption claim was filed. The business’s owner says he expected to be covered because a virus exclusion in Monarch Ballroom’s policy does not exclude income and extra expense losses and because the covered cause was the prevention of the spread of COVID-19, not simply the coronavirus. Monarch Ballroom’s owner claims he submitted his claim on May 4, 2020, and Farmers denied it just one day later, meaning the denial was made “without any inspection or review of Plaintiff’s physical location.”

Anytime Fitness filed a class action lawsuit after it had a similar experience with Markel Insurance Co. The gym was forced to close due to COVID-19 and filed a claim against the policy it purchased in April 2019. The plaintiff says its policy includes Health Clubs Commercial Property Elite Enhancement coverage, the intention of which is to protect against actual loss of business income due to suspended operation. But the gym’s claim was denied just four days after Anytime Fitness reported it was experiencing a qualifying loss, demonstrating Markel didn’t perform a “meaningful investigation,” the class action lawsuit says.

An Ohio bridal shop experienced perhaps the fastest turnaround on its business interruption claim, receiving a denial from its insurance company the very same day the claim was filed. In its class action lawsuit, the shop says it purchased Special Property Coverage through Owners Insurance with the understanding the shop would be specifically covered for losses in the event it had to close its doors. The shop claims the insurance company did not exclude or limit coverage for losses due to viruses on the Special Property Coverage Form. The bridal company alleges Owners Insurance Co. has uniformly denied claims for business losses incurred due to the pandemic.

Conclusion

The effects of the coronavirus pandemic have been felt across all sectors of the U.S. economy. As stay-at-home orders are tentatively rescinded, some businesses will be able to reopen and emerge nearly unscathed from mandated COVID-19 closures. Others will struggle to provide the same level of service and customer care they may have been known for before the pandemic.

Even those entrepreneurs whose business interruption claims are paid by their insurers will have to work to find their place in the post-COVID “new normal.” But those who have their claims denied are looking at an even steeper climb as they try to salvage what they can of their livelihoods. Without the insurance they believed they had to protect their business, many will be forced to take on massive amounts of debt or make the decision to close their doors permanently. What remains to be seen is the fallout that will result from the class action lawsuits centering on losses, in terms of both financial recovery and legal precedent.

Katherine Webster is a writer and editor at Top Class Actions in Las Vegas, Nevada.

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