US businesses seek to use damage trigger for business interruption claim pay outs

The coronavirus pandemic has shone a glaring spotlight on business interruption (BI) insurance policies, picking holes in the nuances of policy wordings to debate whether organisations can recoup any of their losses from government-advised closure through the claims process.

Here in the UK, business owners are unlikely to feel reassured by their BI cover as many policies will not be triggered by Covid-19. Some exclude notifiable diseases or pandemics in policy wordings, while others will only pay out for specifically listed diseases – this obviously will not include the newly discovered coronavirus.

In the US, however, companies are attempting to take a different stance by using the damage trigger within BI policies to activate a claim. This is where organisations state that coronavirus is on the hard surfaces within the business property and that this, therefore, constitutes damage to the property.

This tactic has gained more visibility since March thanks to the Cajun Conti LLC v. Certain Underwriter’s at Lloyd’s, London lawsuit, which is being dealt with by the Civil District Court for the Parish of Orleans, Louisiana.

This involves restaurant Oceana Grill suing its insurer, Lloyd’s, Louisiana’s governor and the State of Louisiana itself. According to The Network for Public Health Law, Oceana Grill seeks a declaratory judgment affirming that the restaurant is entitled to insurance coverage for business interruption due to operating restrictions affecting restaurants due to Covid-19. It also wants a judgment that the insurance policy would cover physical losses from any Covid-19 contamination and clarification on Louisiana rules around seating capacities and gatherings.

This is just one of many cases that Simon Brooks, co-head of global insurance at law firm Eversheds Sutherland, predicts will emerge as a result of the Covid-19 outbreak combined with the US’s litigious culture.

“There will definitely be other cases because it’s a common issue with business interruption policies across the board, so other insureds are going to try it on,” he said.

Gavin Coull, member of London FOIL’s executive committee and partner at EC3 Legal, added: “For business interruption claims, the focus will undoubtedly be on ‘wide area’ damage claims.

“There has long been debate about the correct approach to these claims and one can easily see that the combination of disputed coverage and quantification of related losses could lead to a re-examination of this area of law, potentially up to the Supreme Court; this would impact not only Covid-19 claims but also ‘traditional’ business interruption policies.”

Forced claims pay outs

A “potential game-changer”, however, is the legal action many US states are taking to force insurers to pay out on business interruption claims.

In New Jersey, for example, the Legislature began discussions in March of a draft New Jersey Bill A-3844. According to law firm White and Williams, “if enacted in its current form, that law will force business interruption insurers — despite a ‘virus’ exclusion in their policies — to provide coverage for this crisis, and then spread that financial burden via a new special purpose apportionment on other, non-business interruption carriers insuring New Jersey risks.”

Coull continued: “The potential game-changer is the very real possibility of retroactive governmental interference as numerous legislatures throughout the United States and elsewhere seek to re-write policies with traditional ‘physical damage’ triggers to include Covid-19 exposures, even where ‘contagious and infectious’ diseases are expressly excluded.

“If any such wholesale re-writing is forced through, then any market exposed will face significant, unexpected, unreserved and potentially un-reinsured exposures.”

Investment bank Morgan Stanley believes that coercing the insurance sector in this way could be vastly detrimental. In its analysis, the firm said: “Several state legislatures have introduced measures to pass Covid-19 business interruption losses onto P&C insurers. We believe these measures will fail, noting clear contract exclusions and the potential threat to insurers’ financial health.

“However, in the unlikely event that these measures pass, the impact would be highly detrimental, with the American Property Casualty Insurance Association estimating up to $383bn in losses per month. Losses of this magnitude would call the industry’s solvency into question, creating headline risk in the near term.”

UK impacts

But, what does this US legal action have to do with insurance here in the UK?

Referencing the Oceana Grill example, Brooks reiterated the potential impact on Lloyd’s of London. He said: “The only way those proceedings in the US affect us most definitely here is because of the risks being written here in London – the defendants to that case are syndicates of Lloyd’s.

“How much of [US business interruption] business is written in the London market, we don’t know, but obviously a significant proportion of what the London market does is US domestic property so we’re going to see more of those [types of cases].”

Steve Whitfield, senior consultant at Altus, added that the common trajectory is for US trends to filter through to the UK. “These things tend to follow,” he said.

In the UK, Brooks said there will be more coverage arguments surrounding contingent business interruption extensions, such as around denial of access for property.

Here, a business owner could be denied access to their property as a result of the government shutting down business sectors to contain the spread of Covid-19, however some denial of access extensions will exclude disease.

Others will list specific reasons for denial of access that policyholders have to select, such as a bomb scare, police closing down roads or a gas leak.

The only exception with this extension would be if policyholders have a civil authority trigger.

Brooks explained: “If the civil authority – being the government – issuing the statutory instrument they issued, closing pubs, clubs, cinemas, the 17 things on the list; if you’re the owner of one of those businesses and your extension says denial of access due to the actions of a civil authority and it doesn’t say diseases excluded, then you’re likely to be covered.”

There is also the BI extension for infectious disease – some policy wordings will say the trigger has to be a notifiable disease, however others will refuse cover if the outbreak is declared a pandemic.

Some clauses will specify that the disease outbreak has to be present at the property, or that the disease in question has to feature on a pre-identified list within the policy small print.

Brooks said: “It’s all ’devil’s in the detail’ really. You have to look at the clauses and see what’s covered. But there will be some cover out there.”

However, he added that it will be small to medium-sized enterprises (SMEs) that will bear the brunt of detrimental Covid-19 impacts. “Most businesses in the country are SMEs and they’re not the ones who would be likely to buy the most comprehensive insurance out there,” he noted.