How bars, restaurants, and other hospitality businesses are arguing that their business interruption insurance does cover COVID-19 related shut-downs and their insurance companies were wrong to deny claims.

In the past few weeks we’ve seen plenty of bars, restaurants and other hospitality based businesses file putative coverage actions against their insurers claiming that the business interruption insurance they purchased from insurance companies that have issues blanket denials of coverage under those policies. Businesses impacted by COVID-19 should be aware of these lawsuits and arguments as it is not a certainty that the blanket denials of coverage are proper and that no coverage is owed under property-damage based business interruption insurance.

These lawsuits (links to complaints for your review and edification) have included:

• The Billy Goat Tavern (No Pepsi … Coke) suing Society Insurance;
• UCGM (Texas movie theatre chain) suing Lloyd’s of London (this one involves a pandemic policy endorsement);
• Proper Twenty-One suing Seneca Insurance;
• Big Onion Tavern Group suing Society Insurance;
• 10e suing Travelers;
• Maillard Tavern suing Society Insurance;

The general problem these businesses appear to have run into with their insurance claims is that insurance companies do not believe that the COVID-19 shutdown amounts to the type of physical loss that typical property damage based business interruption insurance covers. You see, business interruption insurance policies are not normally drafted to cover every type of interruption. There are two basic types of business interruption insurance, the general kind that most people have which is triggered when the business is interrupted due to property damage or destruction that prevents the business from continuing (a fire or hurricane or tornado destroys your premises or important equipment and you cannot operate) and the non-property damage business interruption (non-damage business interruption) that could ostensibly cover issues like profit loss or maintenance costs due to business interruption regardless of property damage (think cyber attacks, strikes, government stop work orders or regulatory issues forcing you to not operate) which is where the COVID-19 and other pandemic related non-operation issues would be covered if properly bargained for in the policy (see the UCGM case above for an example of a pandemic related endorsement). 

Many insurance providers have issued blanket denials under the property damage related business interruption policies claiming that COVID-19 does not amount to “direct physical loss” of the kind covered under the policy. (See Exhibit B in the Big Onion suit above.) Since many of the businesses that were shut down appear to have obtained the first type of business interruption insurance but not the latter, they are filing these suits asserting various theories as to how the COVID-19 epidemic or resulting state action does amount to the type of physical loss covered by the policies.

For example, the arguments include:

• The presence of a dangerous substance in the property is physical loss;
• COVID-19 renders the premises unsafe and inaccessible for dine-in customers as does the presence of people infected with the virus which results in direct physical loss to the premises and property damage;
• The fact that there are pandemic related exclusions in CGL policies which are meant to cover physical damage losses belies the argument that a COVID-19 argument does not cause physical damage – if it did not, there would be no need for an exclusion;
• To be covered under a pandemic endorsement the specific disease or a mutation or variation need only be the pathogen responsible and COVID-19 is a variation/mutation of SARS which is covered;
• Business interruption policies cover “necessary suspensions” including those brought about by government orders and this is one of them; and
• The government shut-down orders in states like Colorado, New York, Florida, Illinois, North Carolina, New Mexico, and cities like LA have all issued orders related to COVID-19 stating that the virus causes properly loss and damage and utilizing that declaration as the justification for taking the restrictive measures of closing non-essential businesses. 

These lawsuits are testing policy language and circumstance in a fairly novel circumstance and given the amount of premiums insurers collected – potentially on the misimpression that this type of business interruption would be covered – it is nowhere near a set or determined question of law that physical damage related business interruption policies do not cover losses to business income generated by closures forced by government action or simply on account of the circus. So it is far from a set circumstance that the blanket denials insurers have been issuing to hospitality businesses around the country are proper and restaurants, theaters, hotels, bars, and other hospitality businesses would do well to consider the circumstances before just letting a denial go unchallenged.