Will Business Owners Be Able to Seek COVID-19-Related Insurance Claims?

As the economy continues to reel from COVID-19, companies impacted by pandemic-related shutdown orders have been looking for ways to get insurers to pay business interruption claims. 

There are millions of claims by small businesses that want their insurers to cover their losses from COVID-19 lockdowns. The problem for many businesses is that they’re required to show physical loss or damages to make a claim for business interruption. Plus, even if policyholders could invoke business interruption or civil authority coverage to address mandatory shutdowns, many policies contain an exclusion for closures attributable to viruses or bacteria. Some also exclude civil actions, such as the government-mandated shutdown. 

Now, there are many state legislatures considering laws to force the industry to provide retroactive coverage to policyholders, regardless of the language of their insurance contract. In fact, at least 1,000 cases are pending in courts, according to one estimate.

In August, Judge Stephen Bough of the Western District of Missouri gave the go-ahead to a handful of small businesses in Cincinnati to proceed with their case against property and casualty insurer Cincinnati Insurance Company over its refusal to pay business interruption insurance claims.

The insurer had sought dismissal on grounds that its coverage is only for physical damage to a property, not an unseen virus outbreak. But the judge said the case should proceed to discovery because it's not clear the virus hasn't affected the businesses in a physical way. 

"Discovery will shed light on the merits of Plaintiffs' allegations, including the nature and extent of COVID-19 on their premises," he wrote. "COVID-19 allegedly attached to and deprived Plaintiffs of their property, making it 'unsafe and unusable, resulting in direct physical loss to the premises and property.'"

The Cincinnati case was the first in which the judge refused to accept at face value insurers' assertion the virus doesn't qualify as physical damage to a property; in three previous cases since the pandemic hit, judges dismissed the suits. 

It is hard to say if other judges will follow Bough’s lead. American Property Casualty Insurance Association (APCIA) says business interruption insurance was never intended to cover the impact of a pandemic because a pandemic is not something that can be underwritten against. Many commercial insurers worry that if they’re forced under proposed state laws to liquidate those reserves to pay policyholders for virus-related losses, insurers won’t be able to pay other legitimate claims and it could bankrupt the insurance industry.

John Houghtaling, an attorney representing several businesses in COVID-related lawsuits and the head of Business Interruption Group, a coalition of businesses seeking relief, says insurers should pay claims if the policies don’t have these explicit exclusions. 

"We are banding together to launch big legal action in every state against insurers who deny ... coverage," Houghtaling told CFODive. 

Houghtaling’s coalition is also advocating for a legislative solution for insurers as well. His group wants the federal government to create a fund with which it would reimburse insurers who pay the claims even if they have an exclusion. 

The group sees that as a more appropriate solution than some others that have been floated, including one approach that would require insurers to pay regardless of whether the policy has an exclusion or not.