COVID-19 Business Interruption Claims: A Discussion with Insurance Coverage Practitioners

However, the typical property insurance policy references some type of “physical” loss or damage as a trigger to coverage, and many also have “virus exclusions.” While it may seem doubtful at first blush as to whether a policy predicated on “physical” loss or damage can be deemed to nonetheless provide coverage for business income losses resulting from state and local government orders restricting access to certain properties, or the manner in which the properties may be used, the losses involved have been staggering. As a result, numerous business income loss claims have been made.

With the denial of these claims almost universally across the board, we have not surprisingly seen a huge influx of coverage litigation stemming therefrom. The cases are still in the early stages, there is limited decisional law that has developed to this point, and the issues are still evolving. Nonetheless, there have been developments that can provide some guidance as to what critical fact and legal issues are coming to the fore, which insurance coverages and exclusions are in play, and what can be viewed as emerging trends and perhaps signposts to where this is all heading.

Peter Biging, a partner at the law firm Goldberg Segalla, and Agnes Wilewicz, a partner at Hurwitz & Fine, P.C., both members of the editorial board of The Brief, brought together a group of insurance coverage lawyers representing both policyholders and insurers to take part in a broad-based discussion of the issues presented by the ongoing battle over what, if any, coverage there may be for business income loss arising from the unique circumstances presented by the pandemic. In this joint interview, they shed some light on the types of claims and cases that have been brought and break down the arguments being made and some of the early judicial rulings on the issues. They also discuss the different types and potential applicability of virus exclusions specific to COVID-19. Finally, taking out their respective crystal balls, they offer their forecasts of how these claims will play out.

Before we dive into the issues, can you first each briefly discuss your background in insurance coverage and litigation of business interruption claims?

John Vishneski (Reed Smith LLP): I have litigated first-party property insurance claims for over 30 years, including claims involving explosions, fires, natural disasters, and environmental damage for both corporations and homeowners.

Larry D. Mason (Goldberg Segalla): I have protected the interests of domestic and international insurers and reinsurers in complex insurance coverage disputes for over three decades. My practice has been significantly concentrated in first-party property insurance issues, including cross-discipline challenges arising from environmental, structural, or other catastrophic damages, including business interruption and lost revenue.

Laura Gregory (Sloane and Walsh, LLP): I have specialized in insurance coverage and bad faith litigation, primarily on behalf of insurers, for nearly 30 years. My experience is primarily in the property and casualty area, handling matters involving personal and commercial policies and first-party and third-party coverages.

Bill Meyer (Fuksa Khorshid, LLC): I have almost 30 years of commercial litigation experience, including representing carriers in complex coverage and class action matters. After an MBA and stint as GC of a sharing economy e-commerce platform marketplace (suffering the effects of COVID firsthand), I joined my new firm, representing many of our hospitality industry clients (bars, restaurants, and others) in seeking coverage for business interruption losses they have sustained from the current public health emergency. In my general litigation role during this crisis, I have also, unfortunately, seen clients endure the impact of these challenges up and down the “chain.” Currently defending actions in commercial eviction and commercial loan foreclosure that are the consequence of business income loss, I appreciate perhaps more than many that while no one is at fault for this crisis, courts have profoundly difficult decisions ahead of them in deciding who will bear these losses.

Lee S. Siegel (Hurwitz & Fine, P.C.): I am an insurance coverage and bad faith litigator, representing carriers in all property and casualty lines of business for more than 25 years. Since March 2020, I’ve seemingly become an almost full-time COVID-19 lawyer, serving as national counsel for a number of carriers.

Ryan Maxwell (Hurwitz & Fine, P.C.): In March 2020, Hurwitz & Fine was among the first law firms to develop a nationwide survey of COVID-19 business interruption lawsuits. After reviewing hundreds of pleadings, I coauthored with Lee Siegel an article highlighting the policyholder COVID-19 pleading trends that was among the top 10 most read insurance articles of 2020 for a well-known legal publication.¹ Along with Lee, we presented on the topic to numerous groups, including carriers, attorneys, and insurance industry investors.

There has been a significant amount of litigation with regard to coverage under property insurance policies for losses incurred by businesses as a result of COVID-19 concerns and shutdowns ordered by state and local authorities. Can you tell us what the basic issues are?

John: The two key issues that have been the focus of litigation to date are first, whether the policyholder has suffered physical loss or damage to covered property; and second, whether one of many variant virus exclusions applies. Some other issues have arisen, including whether sublimited coverages are triggered for loss due to the actions of civil authorities or due to physical loss or damage to dependent properties (i.e., properties of others that affect the policyholder’s business when they suffer physical loss or damage). Insurers have also raised exclusions for “acts or decisions” and “delay, loss of use, or loss of market.”

Laura: Agreed. Many of these businesses have filed claims seeking coverage for their lost income pursuant to these insurance policies. The primary issue regarding coverage for this loss of income is that the vast majority of business interruption coverages require “direct physical loss” or similar language, either at the insured’s premises or within a certain distance of the premises, depending on the type of coverage at issue. It should be noted that these policies generally do not include a definition of “direct physical loss,” and each state will look to its policy interpretation rules as well as case law relating to direct physical loss to determine its application.

Additionally, many, but not all, of these policies include virus exclusions. At the time of this writing, the decisions regarding policies that include virus exclusions have very heavily favored insurers. Insureds have argued that direct physical loss includes situations where business owners are unable to fully function in their businesses as they could before the government shutdowns, and they have also argued that the existence of the coronavirus/COVID-19 within the premises causes direct physical loss to people and/or property. Alternatively, insurers have argued that there is no coverage for pure economic harm without direct physical loss to property, which requires physical alteration to property.

We can anticipate appellate court decisions on the motions to dismiss and motions for summary judgment to begin being issued in 2021.

What types of claims are being made?

John: The vast majority of claims are for loss of business income by businesses that heavily depend on having full use of their physical facilities to conduct business with customers in close proximity to each other, but which have been impaired by the dangers associated with community spread of the coronavirus during the pandemic (e.g., restaurants, bars, nightclubs, theaters, concert venues, hotels, and sports teams). Claims range from full shutdown of facilities (e.g., theaters) to impaired use or redirected use (e.g., hospitals have had to cease using facilities for elective surgeries and redirect use of facilities to caring for COVID-19 patients and urgent care needs).

Larry: The vast majority of claims have been brought by businesses seeking reimbursement for loss of business income and extra expense sustained due to the impact of COVID-19 government orders that have impacted their operations. Examples include restaurants, which had to close their doors to in-person dining; hotels; sports and wellness facilities; theaters and concert venues; addiction treatment centers; and elective medical treatment facilities.

Bill: Many of our insured clients are in the hospitality industry, with some in other areas such as fitness clubs and specialty retail. We’ve alleged all of our coverage claims individually, for loss of business income and civil authority coverage. We’ve also added premium rebate class action claims to most of our lawsuits. We don’t have any clients currently being sued on class action matters for which they are seeking coverage, but we did see an interesting (and somewhat bizarre) twist on business income interruption in a commercial eviction case.

Defending a commercial eviction, we argued that a casualty provision of the lease abated rent payment obligations because the current public health crisis is a “casualty” under that provision. The landlord argued that the casualty/rent abatement provision only came into effect if there was insurance coverage under the landlord’s policy. The landlord’s property manager (in an action she may later regret) swore out an affidavit that the landlord had no such coverage, but attached no policy and made no further argument. We responded “not so quick” and raised all the issues of business income coverage under the typical commercial property coverage. The trial court sided with us and abated rent, albeit under common-law theories of impossibility and frustration of purpose, choosing not to wade into the insurance coverage issues. An appeal is almost certain in this matter. Now that the landlord lost the case and bears the loss, I can only wonder if they are examining their policies and will be soon asserting a coverage claim.

Lee: Bill brings up the hospitality industry, which, combined with the travel segment, makes up the plurality if not the outright majority of the plaintiffs. Of course, this makes perfect sense as no other businesses in our daily lives have been impacted more significantly than bars, restaurants, sports and concert venues, hotels, airlines, and cruise lines. These are all the places we want to go to as soon as the pandemic is over. Apart from business income claims, there have been nearly a thousand class actions brought—which range from refunds for prepaid tickets to college tuition discounts for the alleged devalued educational experience of distance learning to breach of fiduciary duty claims against public entities. Of course, each of these suits in turn triggers a coverage evaluation under the insureds’ various coverages.

What coverages are implicated?

John: Implicated coverages include business income loss, civil authority loss, and dependent property loss.

Ryan: In addition to those John mentioned, quite a few insureds assert coverage under ingress/egress and sue and labor coverages. Further, specialized contamination and communicable disease coverage extensions have been raised in some specialized cases, such as one filed by Major League Baseball and Wimbledon.

Bill: Yes, importantly it seems all litigation involves the same basic business income and civil authority coverage claims. While there are obviously broad similarities across the industry, each coverage case in which we are involved gets attention to whether some specialized coverages like Ryan mentioned may be implicated too.

What positions are being taken by insureds?

Ryan: Arguments on the two issues John pinpointed before have largely been dictated by whether a virus exclusion was included within the insurance policy. By and large, the pleading trend nationwide in the absence of the virus exclusion has been for a policyholder to allege that the coronavirus was physically present at the relevant location and resulted in “direct physical damage to property,” as required to trigger coverage under standard Insurance Services Office (ISO) language. Where the virus exclusion is present, which is the majority of policies, policyholders have artfully pleaded, attempting to avoid its application, alleging instead that a policyholder has suffered “direct physical loss” of use of the property as a result of governmental stay-at-home orders—rather than the virus. These two pleading approaches have been about as certain as death and taxes.

John: And no matter how it’s pleaded, the primary issue in litigation to date is whether the policyholder’s property has suffered “physical loss or damage.” Facts vary widely as to the actual presence of the coronavirus on insured property, but a common source of physical loss of an insured’s property is community spread of the coronavirus. Policyholders argue that community spread causes a physical loss to their facilities, as they can no longer be used as intended, or used at all in some cases. Policyholders argue that “physical loss” must mean something other than “physical damage” as policies cover both. “Property” is a legal concept applied to physical objects, including buildings, and includes a bundle of rights. Hence, any physical cause that results in a loss of property rights is a “physical loss”—which includes the physical loss of use of facilities for their intended functions.

Policyholders are also confronting virus exclusions. These vary widely in terms of the exclusion wording, ranging from no exclusion at all to modifications of pollution exclusions to use of some version of the ISO standard exclusion from 2006. Consequently, policyholder positions vary depending on the specific exclusion language. One important argument applies where the virus exclusion is triggered by the presence of a virus in or on the covered property. Insureds argue that the physical loss does not require the coronavirus to be in or on the property and therefore the exclusion does not apply.

Bill: In addition to all of the usual arguments related above, insureds are also taking the position that justice demands these cases proceed to discovery (factual and expert) and jury trial on the important issues herein. From our point of view, while the talented attorneys on both sides, not to mention the courts, bring to the table vast legal experience and wisdom, that legal experience and wisdom is not enough to determine these controversies where factual determinations make a difference—and scientific evidence comes into play. We are arguing that at the core of these disputes are questions a trier of fact must hear—and on some of them necessarily assisted by scientific evidence presented under Rule 702. A motion to dismiss cannot do justice here.

Larry: Policyholders are also outright challenging the interpretation of the term “direct physical loss or damage,” arguing that the presence of COVID-19 in a building is sufficiently akin to other cases where courts have found the presence of certain conditions renders the insured premises uninhabitable. Policyholders argue that their inability to use the insured premises due to the COVID-19 pandemic constitutes “physical loss.” We are also seeing arguments that the grant of coverage—“physical loss of or damage to”—is ambiguous. Insureds, as some of us have discussed, are challenging the virus exclusion as well. Insureds sometimes argue that the virus exclusion only applies if the virus is actually present in or on the insured property.

Lee: Adding to the uninhabitability Larry mentioned, a significant number of insureds emphasize case law where business interruption coverage was triggered by the “physical” presence of, among other things, asbestos, ammonia gas, gasoline vapors, or mold spores, absent a traditional, tangible alteration to the structure. Functionally, insureds argue that “direct physical loss of or damage to property” does not require tangible alteration, so long as the property is rendered uninhabitable by the physical presence of some dangerous element—like COVID-19. Insureds have also argued, albeit unsuccessfully, that the virus exclusion is barred under a theory of regulatory estoppel, i.e., that carriers (via ISO) made statements to regulators that are contrary to their current coverage position.

What arguments have insurers been relying upon to deny coverage?

Larry: The fundamental requirement for business interruption coverage is that there be direct physical loss or damage to covered property. With respect to civil authority coverage, insurers similarly argue that direct physical loss or damage to property must happen to the other property within the specified distance from the insured’s property as identified in the policy language. While the “physical damage” requirement is the primary basis for most insurers’ declinations, the virus exclusion is an additional basis to deny coverage.

Lee: Teasing out the civil authority coverage, insureds argue that local and statewide stay-at-home orders trigger coverage. Putting aside the facial appeal, after you deconstruct the argument in terms of the coverage, it becomes obvious how circular this reasoning is. To trigger civil authority coverage, the order of civil authority restricting use of the insured’s property must be issued as a result of an off-premises covered cause of loss. Basically, policyholders are saying that the closure orders were issued as a result of the closure orders. This is syllogistic reasoning, and the courts are not buying into it.

John: And going back to Larry, insurers assert that “physical loss or damage” requires physical alteration of a physical object, equating “covered property” with “covered objects.” They point to other provisions of the policy to support this restrictive reading. For example, a common definition of the “period of restoration” (the period during which an insured suffers lost business income) identifies the end point of the period as the point where property has been “repaired, replaced, or rebuilt.” Insurers assert that the policy must be read as a whole, and only physically altered objects can be “repaired, replaced, or rebuilt.”

How many litigations have been brought to this point in the U.S., and where do things stand?

John: The latest survey I have seen was as of December 2020 and tracked 1,500 business interruption complaints. Far fewer have reached any sort of substantive decision. Our own tracking suggests approximately 100 decisions, splitting 75 to 25 in favor of insurers in the U.S.

Laura: I would note too that the 1,500 complaints is likely a low number as the federal court actions are easier to track than state court actions. Most of the decisions on motions to dismiss have been in favor of insurers either based on the application of a virus exclusion or a determination that the complaint did not plead direct physical loss, with only two decisions affirmatively finding coverage.

Lee: By the latest count, which is sure to be outdated by the time anyone reads this, carriers lead with 106 wins to 27 losses. The wins have come almost exclusively on motions to dismiss and judgment on the pleadings. The policyholder wins are, basically, having survived the initial motion practice. In one of the cases mentioned by Laura, the one that found business income coverage for COVID-19, the North Carolina state court judge certified the decision for immediate appeal. Notably, where the insureds have been able to move into the discovery phase, generally, the virus exclusion was absent and it was pleaded that the virus was physically present at the insured premises.

Bill: Our anecdotal information is consistent with carriers anticipating a 75–80 percent “win” rate on their motions to dismiss, and even banking on it in setting their reserves. However, justice cannot and should not be measured by which party presents any court with the longest string citation or the greater count of motion to dismiss “wins” versus “losses” in what one side or the other will advocate are similar cases around the country. Rather, every party deserves individual attention to its case and the facts it presents so that they—like all—can have their day in court. The obvious bears mentioning: insurance is an issue of state law, so any particular issue may have 50 differing answers—thus calling into question the utility of string citations from across the country both sides inevitably proffer. For example, so far in our briefing we’ve seen carriers artfully avoid taking on the Illinois burden to prove an exclusion is “clear and free from doubt.”

Larry: We should mention, at this point, less than two dozen appeals have been filed. It is reasonable to expect further appellate court activity throughout 2021.

You indicate that the majority of the decisions to date have been in favor of insurers, but there have been some victories by insureds. Can you discuss the rationales offered by the courts that have found in favor of insureds or at least refused to dismiss claims at the pleading stage?

John: Courts finding for policyholders on the issue of physical loss or damage have agreed with the policyholder arguments we’ve talked about. This is significant because the argument that community spread of the coronavirus causes “physical loss” of property due to loss of intended use is broadly applicable to a large variety of factual circumstances. This approach also dovetails with strong arguments that a virus exclusion requiring the presence of a virus in or on the covered property is inapplicable. A Nevada federal court declined to apply a pollution exclusion that was modified to include “virus” as a pollutant or contaminant. The court noted prior decisions that have limited pollution exclusions to “traditional environmental pollution” due to the overbreadth of absolute pollution exclusions. This case could have broad significance because a number of states have supreme court decisions limiting absolute pollution exclusions to traditional environmental pollution (e.g., Illinois and California). A number of courts have rejected insurer motions to dismiss as brought too early and allowed their cases to proceed to discovery so that substantive motions could be decided on a full record. These cases are of lesser immediate significance, but they will provide guidance down the road as to what facts matter for key issues.

Larry: It would be naïve to simply reject the few decisions in favor of policyholders’ arguments as flawed aberrations soon to be reversed on appeal. An example of a court’s rationale denying an insurer’s motion to dismiss worthy of a closer look comes from a Washington state court.² In that case, the insured argued that the policy did not define “direct physical loss,” “loss of,” or “damage to” but used “or” to separate “the direct physical loss of” and “damage to,” providing for an alternative means of coverage. The Washington trial court considered the terms as alternative means for coverage because they were undefined and found that the insured’s position that its dental practice had a “direct physical deprivation” of its property when it was unable to see patients was a reasonable interpretation by the average layperson. The court noted that while there was no factual allegation of physical alteration of the insured’s property, the insurer’s narrow reading of the policy to apply an identical meaning to the terms “loss of” and “damage to” was silent as to the policy’s language providing “physical loss” as an alternative basis for coverage. To the court, the policy clearly provided an alternative means for coverage because if “physical loss of” was interpreted to mean “damage to,” then one or the other would be surplusage. Since the court was required to give meaning to the whole language in the policy, it could not ignore the alternative means of coverage and “clear intent” of the policy.

Laura: As we’ve talked about, the courts that have refused to dismiss cases upon insurers’ motions to dismiss have primarily done so on the basis that discovery is necessary to determine the existence of the coronavirus/COVID-19 at or near the premises and/or whether the coronavirus/COVID-19 results in “direct physical loss” to property. As Lee mentioned, in October 2020, a superior court in North Carolina found coverage for multiple restaurants that sued their insurer.³ The court held that “direct physical loss” describes the scenario where business owners and their employees or customers lose the full range of rights to use or access their property, whether by government order or otherwise. The court found the term “direct physical loss” to be ambiguous, permitting the inclusion of a loss of use or access to covered property absent structural alteration. The court did not mention whether the policy at issue included a virus exclusion. Only one other case to date has found coverage for these claims, another Washington state case against Enumclaw.⁴ The Washington court determined, as a matter of law, that Perry Street Brewing suffered a loss of its property when it “lost the ability to use its property at premises for its intended purpose.”

Bill: Insureds have had two parallel and complementary paths to “victory” over motions to dismiss (and the same can be said of later motions for summary judgment and ultimately trial). The first is that discovery is required to do justice, and (for later) that discovery shows that there are issues of fact that must be determined at trial to resolve these issues. Hand in hand go the arguments that where the court decides issues, the policy language is ambiguous at the very best for the carriers, whether we are talking about coverage or, where the carrier bears the burden, the virus exclusions. With ambiguity, the courts must construe the policies to effectuate the reasonable policyholder expectations of coverage.

Ryan: Not to be lost, we recently saw the Northern District of Ohio issue a decision in stark contrast to the tide of those decisions that came before.⁵ Granting partial summary judgment to the insureds, the district court was unwilling to limit “physical loss of property” to “physical injury.” The court drew distinctions from Ohio decisions construing the phrase “direct physical loss to property” exactly that way, finding instead that the use of “to” and “of” rendered the language in the Zurich policy sufficiently different to change its meaning. The policy, importantly, lacked an ISO virus exclusion, and other exclusions were deemed inapplicable. It’s difficult to determine where to place this decision as so many other courts have found the opposite.

What do you see as the significance of the victories achieved to this point by insureds? Are the cases specific to their facts, or are there arguments to be made that they can be more broadly applied?

Larry: For now, the limited number of pro-policyholder decisions remain the “minority” approach and do not appear to be trending toward a broader precedential application across the U.S.

Laura: Other than the Ohio, North Carolina, and Washington state court decisions, the “victories” for the insureds to date have been limited to allowing cases to proceed to discovery. Thus, there has been no determination of coverage, and we can anticipate motions for summary judgment in those cases after discovery is completed.

Ryan: Reading the tea leaves, the biggest takeaway has been predictability—especially the decisions coming from the federal courts. The cases show that the inclusion of a virus exclusion is a carrier’s ace in the hole. However, its absence permits an insured to allege that coronavirus was physically on location and caused direct physical damage to property. Since we are at the threshold pleading stage, some, but not all, courts have permitted further pursuit of these claims asserting actual contamination into discovery and beyond.

Lee: Laura and Ryan raised the Henderson Road decision from Ohio that found coverage for the insureds. This is certainly an outlier outcome from the dozens of courts that have come down 180 degrees on the other side; but it will definitely be cited by policyholders in all the appeals. The Ohio court gave credence to the concept that a governmental order could be a covered cause of loss, causing the direct physical loss of property. On that basis, the court stands remarkably alone in that conclusion. The court certified its decision for immediate appeal. So, we’ll eventually see what the Sixth Circuit’s view is.

Bill: Having litigated on both sides of the coverage divide during my career, the best thing I can say is take nothing for granted. The first quarter of a game doesn’t necessarily predict the final score. We are our best as advocates when we see the weaknesses in our own cases, instead of being blind to them. As much as there are similarities in these cases, there are important differences in policy language, underlying facts, and governing state law. We’ve seen a resistance to grant multidistrict litigations (MDLs), which also implies that our courts view these cases as individual and divergent matters on the coverage issues. Judges for the most part try to do the right and fair thing, and usually are reticent to take away somebody’s “day in court.” One appellate decision can change a tide, if there even is a tide given that 50 states could give us 50 ultimately differing answers, and layer on top of that 13 federal courts of appeal. All in all, neither side in this controversy should be “counting their chickens” quite yet.

Can you speak to the history of virus exclusions and why some property policy forms have them and others don’t?

Larry: In 2006, ISO filed its Exclusion for Loss Due to Virus or Bacteria endorsement (form CP 01 40 07 06) providing that insureds will not pay for loss or damage caused by or resulting from any virus or bacteria that is capable of inducing physical distress, illness, or disease. The ISO virus exclusion was presented to state insurance regulators, making specific reference to such viral and bacterial contaminants as SARS, rotavirus, influenza (such as avian flu), legionella, and anthrax. At its most basic level, admitted insurers that issue property policies on a state-approved admitted basis are more likely to have included the ISO virus exclusion as a matter of routine. For the excess and surplus lines market carriers and those insurers issuing manuscript policies, decisions may have been made to either issue policies without virus exclusions or to develop different exclusionary language of their own. Consequently, since 2006, there is no uniformity in the types or existence of virus exclusions in the property insurance market.

John: I would add that the ISO exclusion was developed in the wake of the SARS coronavirus outbreak of 2003. That outbreak was far more limited and barely reached the U.S. As a result, it’s been argued that the drafting did not take into account the kind of untraceable community spread issues in the 2020 pandemic. As drafted by ISO, it was not subject to anti-concurrent causation language. This means that the exclusion will not apply where other causes combine with the spread of a virus to cause particular losses in jurisdictions applying the concurrent causation doctrine. In the present circumstances, government negligence allowing release of the virus from China and community spread in the U.S. is a significant concurrent cause of loss in many cases. ISO forms are not mandatory; they are advisory. The commercial property market has significant diversity of policy forms, and many insurers opted not to include any virus exclusion, many opted to develop their own or adapted ISO’s exclusion to fit their non-ISO policy form language, and many modified pollution exclusions to include virus as a pollutant or contaminant. The result is a significant diversity of virus exclusion language in the market.

Ryan: Notably, the circular from the 2006 ISO virus exclusion filing indicated that the specter of a pandemic raised concerns that insurers employing these policies may face efforts by policyholders to expand coverage and create sources of recovery contrary to policy intent.⁶ Thus, although the exclusion sought to alleviate concerns involving enterprising policyholder attorneys, it was clear that as far as the industry was concerned, the intent of these policies prior to the exclusion was never to provide coverage for a viral pandemic.

Lee: In addition to what has already been said, it’s worth noting that certain business sectors such as the food and beverage industry may benefit from coverage for E. coli, salmonella, and other foodborne contaminants, resulting in the virus exclusion’s conscious absence from policies. So, we’ve seen carriers that cater to these industries seemingly make the business decision not to include the virus exclusion on their policies. It’s probably a decision they are questioning going forward.

Bill: I agree with Lee that viewing this from an “after the fact” perspective, it’s hard not to be influenced by a hindsight bias. Many of our hospitality clients have policies without virus exclusions, and we can only speculate whether this was a business decision, an administrative oversight, or some of both. Perhaps discovery will tell. Business organizations are imperfect, so the answers may surprise us all.

Do you see the presence or absence of virus exclusions as being a significant factor in how these claims can be expected to play out?

John: Yes, although the effect is unclear. Policyholders without virus exclusions are arguing that the absence of a virus exclusion when many other insurers have them is an indication that coverage was intended and that courts should reject the insurers’ interpretation of physical loss or damage and other non-virus exclusions. Policyholders do not need to make such arguments to prevail, but to the extent courts pick up on them as a basis for ruling in a policyholder’s favor, insurers with virus exclusions will point to those decisions to argue that the presence of a virus exclusion is dispositive as to intent. It’s anyone’s guess how significant an effect this back-and-forth will have on court decisions.

Larry: As we’ve noted, an insurer’s primary response to COVID-19 business interruption claims has been and will continue to be the “physical damage” requirement. However, if applicable, the availability of a virus exclusion as an additional basis to deny coverage will most certainly enhance an insurer’s ability to prevail against any challenge to its declination decision.

Ryan: We’ve said it, but it bears repeating: the virus exclusion has been a universal ace in the hole for carriers. As John mentioned, policyholders have argued (although we thought we’d see it more often) that the lack of a virus exclusion equals an intent to provide virus coverage. Of course, a policy should not be interpreted by what’s not in it. But where there’s no virus exclusion, coverage hinges on whether COVID-19 causes direct physical damage.

Bill: What we haven’t seen though is an exclusion that aligns with what at least some carriers assert today is the real problem—that (according to the carriers) no one underwrote and collected premiums for the risk of pandemic. Perhaps there is a lesson to be learned here—that on an unpredictable cycle, exogenous shocks will occur that profoundly affect economies in ways no one can predict. In the last century, we have at least two data points for world-altering pandemics—in 1918, and today. If insurers are not collecting premiums for certain risks (while writing broad, arguably “all-risk” policies), they best catalog those risks proactively (instead of reactively) and craft coverage language, exclusions, or both to align their premium collections with the exogenous shocks that we cannot deny will come our way.

If you had a crystal ball, where do you see this all heading over the next 12–18 months?

John: I do not have a crystal ball, and 2020 taught me to be cautious about predicting the future. That said, I do not expect state or federal government to interfere with the courts, although some legislation has been proposed in both spheres. More likely, decided cases will continue to accumulate, and they will start to reach the appellate courts in 2021. Much as happened with coverage for environmental pollution under general liability policies, I expect that courts will reach divergent and inconsistent rulings both within states, across states, and between state and federal courts. Only state supreme courts will be able to provide clarity for a particular state’s law. It will take several years for this to play out.

Larry: We have already seen a reduction in the number of COVID-19 claims presented to insurers. Consequently, I believe it is reasonable to predict there will be a corresponding reduction of new COVID-19-related coverage suits. I additionally anticipate the passage of legislation, which may further reduce the number of COVID-19-related claims.

Laura: I expect over the next 12–18 months that we will see the first of the appellate decisions, primarily out of the federal courts, to address the trial courts’ dismissals of the insureds’ suits against the carriers. I anticipate the appellate case law will be primarily from the federal courts because most of the early decisions on motions to dismiss came from the federal courts. Additionally, in many states, the state courts have been slower to adapt to the new reality of virtual hearings, which has resulted in a slower process. I anticipate that we will begin to see clarity across the country on the application of this language in the context of COVID-19-related shutdown orders. I anticipate the law will be clear that direct physical loss is not implicated by the mere presence of the coronavirus/COVID-19 in a premises and that the virus exclusions apply and prevent coverage, and many of the suits remaining in litigation will be dismissed or settled.

Bill: My crystal ball is out for repairs today. Appellate courts will get to speak, but I am not so confident we will have firm answers in 2021 on a general basis, as the pandemic is constraining the courts’ throughput of cases, and criminal cases have to get priority. The divergence in state law, and in instances policy language, may not result in any “across the board” clarity on these issues as much as anyone desires. Carriers or policyholders may see themselves victors and vanquished on different sides of our state borders, and forum selection may follow the insured-favorable appellate decisions, perhaps as we see in asbestos. The general rejection of MDLs here calls into question any one prognostication.

Instead of a crystal ball, perhaps the collective wisdom of the financial markets can give us some insight. Because insurers make real money on “float” and not necessarily on underwriting (combined ratio does not take account of investment profits), the liquidity question must certainly be influenced by carrier investment results as we see (as of this drafting) equity markets at all-time highs. If we take Berkshire Hathaway as a proxy or bellwether (a diversified company with both heavy exposure to insurance but also diversification into the U.S. economy generally), BRK-A in 2020 recovered about 2.5 percent above its pre-COVID value, whereas the S&P 500 returned about 16 percent up for 2020. That delta, especially in a darling stock of the last half-century, may tell us that insurance-dependent equities have some rough waters to navigate in 2021 and beyond. The first page of Warren Buffet’s letter to shareholders always compares his performance to the S&P 500 (why take a risk in him if you can go to the market generally?). He will have some explaining to do that will be interesting. The letter usually comes out in late February, and persons interested in this litigation should be watching.

Lee: Right now, the carrier side is riding high—and rightfully so, I believe. But, in the next six months or so, we’re going to see what the appellate courts think. Just like how we jumped on the early trial court decisions, the industry will be watching the oral arguments and outcomes closely. A series of affirmances will lead to a collective exhale. But we’ll also be watching the state appellate courts to see how much variance there winds up being from the federal cases. As has been discussed in other contexts, a broad finding that COVID-19 business interruption claims are covered may very well lead to an industry-wide liquidity crisis. We all know that insurance works by large numbers of insureds paying into a risk pool that relatively few draw from. A 95 percent combined loss ratio is generally favorable—meaning that for every premium dollar a carrier takes in, it pays out 95 cents in claims and costs. With COVID-19 business interruption, virtually every insured, not just the ones that have sued, has a loss. If the policyholders prevail, carriers will be paying out exponentially more in claims than they took in premiums. It’s not hyperbolic to say that paying out these claims would have a catastrophic impact on the property and casualty and reinsurance markets.

Thank you all for your insights. The circumstances we find ourselves in, and the magnitude of the losses, are all fairly breathtaking. There is obviously a lot still to come. It is certainly going to be interesting to see how this all plays out.

Notes

1. Lee Siegel & Ryan Maxwell, Major Trends in COVID-19 Business Interruption Lawsuits, Law360 (May 14, 2020), https://www.law360.com/articles/1273308/major-trends-in-covid-19-business-interruption-lawsuits.

2. Hill & Stout PLLC v. Mut. of Enumclaw Ins. Co., No. 20-2-07925-1 SEA (Wash. Super. Ct. Nov. 13, 2020).

3. N. State Deli, LLC v. Cincinnati Ins. Co., No. 20-CVS-02569 (N.C. Super. Ct. Oct. 9, 2020).

4. Perry St. Brewing Co., LLC v. Mut. of Enumclaw Ins. Co., No. 20-2-02212-32 (Wash. Super. Ct. Nov. 23, 2020).

5. Henderson Rd. Rest. Sys. Inc. v. Zurich Am. Ins. Co., No. 1:20-cv-1239 (N.D. Ohio Jan. 19, 2021).

6. ISO Circular LI-CF-2006-175, New Endorsements Filed to Address Exclusion of Loss Due to Virus or Bacteria (July 6, 2006), https://www.propertyinsurancecoveragelaw.com/wp-includes/ms-files.php?file=2020/03/ISO-Circular-LI-CF-2006-175-Virus.pdf.