Insurance Insights

COVID-19 Business Interruption Losses: Covered or Not?

Article reading time: 2 minutes 30 seconds

Hot Take:

Hot Take

Most business interruption losses related to the pandemic are not covered and insurers say forcing payouts have the potential to destroy the insurance industry. According to data collected by the National Association of Insurance Commissioners (NAIC), insurers paid $96.8 million in losses on 1,122 claims, for an average paid loss of almost $86,000 for business interruption coverage during the COVID-19 shutdown. 133,000 cases have been closed without payment, including all but 10 of almost 66,000 business owners policy claims. In the article below, Maria Vigul details the few rulings handed down on the over 1,000 business interruption lawsuits pending and gives some insight into legislation that might be the solution to this and future pandemic coverage.

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When businesses experienced financial losses related to local governments’ closures due to the COVID-19 threat, business owners counted on relief from their business interruption insurance coverage. However, as we take a closer look at what is covered in those policies, controversy emerges. Insurers and policyholders are on opposing sides with over 1,000 lawsuits filed–and only a handful of cases have a ruling.

Chart from SP Global, Business Interruption Litigation Case Count Tops 1,000


The issue: identify loss

Typically, a standard policy covers situations where a business sustained direct physical loss or damage and cannot operate until it is brought back into the original state before experiencing the loss. If the carrier accepts the claim, the most commonly covered items will be lost revenues, mortgage or rent payments, loan payments, taxes, payroll, and relocation costs.

Simultaneously, these types of policies usually exclude claims unrelated to property loss or damage, such as losses from viruses, bacteria, and other communicable diseases. However, carriers may allow the addition of endorsements to cover some of these exclusions.

Pro-carrier ruling

Due to complexities in contractual language and differences in the insurance contracts’ interpretations, business owners who were shutdown during the early days of the pandemic felt they had no other than taking the claims that were initially denied by the carriers into litigation. The first rulings that came out heavily relied on the concept of “direct physical loss or damage”; however, judges have interpreted rulings differently, resulting in opposite outcomes.

The first ruling where the court sided with the insurer was announced on July 1st, 2020, in Ingham County, Michigan, in Gavrilides Management Co. v. Michigan Insurance Co., No. 20-258-CB-C30 case. This was the first case where the carrier prevailed in the COVID-19 business interruption ruling.

The plaintiff was a restaurant business owner seeking to recover damages stemming from closures related to stay-at-home orders issued by Michigan’s governor. Some of the main arguments that aided in the claim being dismissed were the business did not experience direct physical loss or damage from COVID-19 closures and the policy in question had a specific exclusion for losses resulting from viruses.

Pro-policyholder ruling

In a different case, Studio 417, Inc., et al. v. The Cincinnati Ins. Comp., No. 20-cv-03127-SRB, filed in Western District of Missouri on August 12th, 2020, the court denied the carrier’s motion to dismiss based on the argument that the virus causing COVID-19 cannot satisfy the requirement that “direct physical loss or damage” caused the loss.

After it was established that the policies did not have specific virus exclusions, the court looked at the dictionary definitions of the words “direct”, “physical”, and “loss” to determine the meaning of the phrase “direct physical loss.” Relying on these definitions, the court ruled that the allegations against the carrier were sufficient since coronavirus particles attached to the property and damaged it by making it unsafe and unusable.

What’s next?

The impact of this ruling on the insurance industry is yet to be determined. Exclusionary language may vary from policy to policy, and each case needs to be carefully evaluated. However, the rulings in these cases for similar policies may set a precedent for other courts to follow. Additionally, what adds complexity to this issue is governmental involvement both on state and federal levels as an attempt to regulate the coverage disputes. Several states have already introduced legislation, aiming to make pandemic coverage required by the carriers prospectively and, in some cases, retroactively. Stay tuned for additional articles as we follow the legislation on state and national levels and further developments with these cases.