Insurance Law Update on Coronavirus: Business Interruption Coverage

March 2020

By Erica Baumgras

Whether insurance companies will have to pay business interruption coverage claims due to the coronavirus pandemic will be significantly impacted by what is happening on two different fronts: legislative and judicial. We are continuing to monitor both. 

We previously reported on a bill in the New Jersey General Assembly that would retroactively expand business interruption insurance to include losses attributed to the coronavirus pandemic. The bill would effectively rewrite such policies to explicitly include coverage for "business interruption due to global virus transmission or pandemic." Like New Jersey, the Ohio Legislature has now introduced House Bill 589, and as drafted, the bill purports to require insurers offering business interruption insurance to cover losses attributable to viruses and pandemics. If enacted in its current form, H.B. 589 would require that every property insurance policy providing business interruption coverage be construed to provide "coverage for business interruption due to global virus transmission or pandemic during the state of emergency." Also, in Massachusetts, S.D. 2888 has been introduced and would retroactively mandate that certain business interruption policies include the coronavirus pandemic as a covered cause of loss. The Massachusetts bill states that insurers cannot deny business interruption claims on the grounds that COVID-19 is "a virus, even if the relevant insurance policy excludes losses resulting from viruses" or "there being no physical damage to the property of the insured or to any other relevant property."  

These recent legislative proposals show a divide in what business interruption policies cover and the expectations policyholders have developed as to what they should cover. It appears policyholders and some state legislators believe these policies are an "ideal tool" to address coronavirus-related losses, despite explicit terms and exclusions indicating otherwise. If one or more of these bills gain final approval, insurance companies could file suit collectively, alleging they violate the contracts clause of the U.S. Constitution, which curtails the ability of the states to interfere with private contracts.

On the judicial front, at least two new significant declaratory judgment actions have been filed in state courts. On March 24, 2020, the Chickasaw and Choctaw nations filed lawsuits in the District Court of Pontotoc County and the District Court of Bryan County, Oklahoma against defendants Lexington Insurance Co., various underwriters at Lloyd's of London, Arch Specialty Insurance, Allied World National Assurance, Liberty Mutual, XL Insurance America, Homeland Insurance Co. of New York, Hallmark Specialty Insurance Co., Endurance Worldwide Insurance Ltd. and Evanston Insurance Co., asking the courts to determine that any losses to their casinos and other businesses as a result of the coronavirus pandemic will be covered by their insurance policies. Both the Chickasaw and Choctaw nations have temporarily closed their casinos and other businesses, including restaurants, in an effort to stem the spread of the coronavirus.

Similarly, a pair of Napa Valley-based French restaurants owned by prominent chef Thomas Keller, The French Laundry and Bouchon Bistro, have sued Hartford Fire Insurance Company in Napa County Superior Court in California, seeking a ruling that the insurer must cover their losses due to government-mandated closures tied to the outbreak of COVID-19. The lawsuit filed on March 25 alleges that they are entitled to payment under the "civil authority" prong of their "all-risk" property policy with Hartford, which extends coverage for losses attributable to closures decreed by government authorities, relying on a March 18 order from the Napa County health officer directing all nonessential businesses to cease activities amid the coronavirus outbreak, which cited evidence that the virus causes physical damage to property. The lawsuit notes that the policy does not contain an exclusion for losses caused by viruses.

Flaherty will continue to monitor any legislative action at the state or federal level, and any new declaratory judgment actions filed that will impact whether insurers have a duty to pay business interruption coverage or other coronavirus-related claims.

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