On July 6, 2020, a Michigan state court delivered one of the first opinions deciding a key issue impacting all these cases – whether policyholders have sustained physical losses or damages during the pandemic. In Gavrilides Management Co. et al. vs. Michigan Insurance Co, Judge Joyce Draganchuk of Michigan’s 30th Circuit Court held that a plaintiff restaurant-owner’s claim did not trigger coverage because the restaurant, despite a loss of use of its physical property, did not suffer a physical loss during the pandemic. This ruling relied heavily on the Court’s interpretation of state law on the physical loss issue. In the Court’s view, the insured could not establish a physical loss in the absence of a physical alteration of its property. While admittedly presenting a hurdle to insurance recovery for businesses that have suffered staggering losses of late, the ruling is unlikely to deter other insureds from continuing to pursue coverage for losses incurred during the pandemic. In fact, the number of litigations appears to be growing exponentially, and cases increasingly include high profile plaintiffs with substantial claims.
On June 23, 2020, fifteen minor league baseball teams filed suit against their insurers in the Eastern District of Pennsylvania. The matter is captioned Chattanooga Professional Baseball LLC d/b/ Chattanooga Lookouts et al. v. Philadelphia Indemnity Insurance Co. et al., Docket No. 2:20-cv-03032-TJS. In their complaint, the minor league clubs attempt to confront the physical loss issue head on, arguing that they have entirely lost the ability to utilize their ballparks. Strengthening the clubs’ position is the fact that the entire 2020 minor league baseball season was canceled for the first time in the history of the sport. Unlike Gavrilides, in which the Court noted that the restaurant could be used for take-out business, the minor league clubs have lost all ability to utilize their properties and they will experience a total revenue loss for the entire season.
Baseball is not the only sport getting involved in the business interruption insurance debate. On July 1, 2020, major sports leagues including the NFL and NASCAR signed a letter to Senate majority leader Mitch McConnell and House Speaker Nancy Pelosi in which these organizations ask Congress to take action to address business interruption insurance. “Whether it be professional and collegiate sporting events, the next must-see film, a bingeworthy TV series, or a marquee Broadway production, we cannot envision any long-term recovery of these American experiences without some form of business interruption insurance that mitigates the risks associated with producing these popular events and programs in the COVID era now facing the country,” the letter stated.
With initial litigation results creating additional obstacles to recovery for policyholders, attentions have again turned to the possibility of legislative intervention. Congress is currently considering several proposals. These are summarized below:
The Business Interruption Relief Act (H.R. 7412)
H.R. 7412 would allow insurers to voluntarily offer coverage for COVID-19 business interruption losses. Eligible policies must contain civil authority coverage but expressly exclude coverage for “a virus.” Participating insurers could then seek reimbursement from the federal government through the U.S. Treasury. The bill would not extend reimbursement for claims made on policies without virus exclusions. The proposal has received strong opposition from insurers.
The proposal broadly defines COVID-19 losses as, “losses resulting from business interruption due to a civil authority shutdown as a result of the COVID-19 pandemic.” The bill seeks to create a mechanism to, “avoid costly litigation with policyholders, and policyholders may receive policy benefits to compensate for government shutdown and business interruption.”
The Pandemic Risk Insurance Act (H.R. 7011)
The Pandemic Risk Insurance Act (H.R. 7011) contemplates a federal backstop for pandemic-related insurance claims. It is based around the model of the Terrorism Risk Insurance Act passed after 9/11. The Act, however, is not retroactive and would therefore only apply to future pandemics. The bill involves a federally funded insurance program in the event of industry-wide losses stemming from public health emergencies that exceed $250 million. If triggered, the act would cover 95% of insurance claims up to a $750 billion cap.
The Business Interruption Insurance Coverage Act (H.R. 6494)
H.R. 6494 would require insurers provide business interruption coverage for any future viral pandemic or forced closure of a business by government officials. H.R. 6494 would invalidate existing business interruption exclusions for viral pandemics and forced closures. The plan would also preempt States from approving such exclusions. Existing exclusions could only be reinstated if an insurer receives affirmative, written authorization from the insured, or if the insured fails to pay an increased premium associated with providing the mandatory business interruption insurance.
Importantly, the bill does not contain a mechanism for insurers to seek reimbursement. The bill would not apply to COVID-19, instead only providing coverage for future pandemics after its effective date.
The Never Again Small Business Act (H.R. 6497)
Under H.R. 6497, insurers would be required to provide business interruption coverage after a disaster or emergency declaration by the president, or public health emergency declaration by the secretary of health and human services. Eligible businesses would need to be impacted by the emergency for at least thirty days. Notably, eligible businesses would need to avoid terminating employees or their health coverage.
H.R. 6497 includes a federal backstop for insurers. Insurers could exclude coverage for national emergencies only by obtaining written authorization for policyholders, or if policyholders fail to pay premiums.
The Workplace Recovery Act (WRA)
The WRA would create a federal fund to directly reimburse businesses for operational losses. The proposal does not contemplate coverage for lost profits. The WRA would apply to both future events and COVID-19; however, it would not cover lost profits. Businesses would be required to pay a small premium to cover transaction and processing fees. Under the plan, the government will backstop all national crisis operating losses not otherwise covered.
The fund created by the WRA would seek to reimburse businesses for operating losses of 90% of lost revenues. Lost revenues are defined as the difference between current monthly revenues and average revenues for the six months preceding March. The payments would cover payroll, operating expenses, rent and debt servicing costs through the end of 2020.
The plan considers implementation in two phases. In part one, the WRA would provide direct reimbursement to every business for operating losses, limited to 90% of past revenues through a Federal Automated Security Trust (FAST) program. In part two, the WRA would establish a new government-funded business interruption insurance add-on for privately administered commercial insurance plans to protect against future national pandemics.
Business interruption litigation is in the first inning of a nine-inning game. With courts only beginning to address the substantive legal issues, it remains premature for insurers to declare victory. Courts will have to weigh a multitude of different facts, policies, and state laws. As a result, the resolution of business interruption claims will take many more rulings.
Competing congressional proposals vary in several important respects. Two of the most important variables are whether mandatory coverage will apply retroactively to losses from COVID-19, and whether insurers can seek reimbursement from the federal government. As proposals continue to accumulate with the House Committee on Financial Services, predicting a legislative outcome at this early stage is untimely.
In the absence of definitive guidance on the fate of any of these proposals, it is important policyholders obtain tailored legal advice based on specific policy language and particular facts. Any legal analysis should be guided by controlling legal precedent specific to the jurisdiction where the policyholder operates. Klehr Harrison’s Insurance Recovery Focus Group stands ready to provide precisely this type of client-specific advice and to determine the appropriate legal strategy for each client.
The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.