More than 1,500 business interruption (BI) coverage lawsuits have been filed in the United States since the onset of the COVID-19 pandemic. So far, rulings have been all over the map due to widespread ambiguity around whether the presence of COVID-19 in a building (in the air and on surfaces) constitutes direct loss or physical damage to the property.
The insurance industry has taken a united stance that global pandemics are “fundamentally uninsurable events” by private insurers alone. They have consistently argued that the sheer size and unpredictability of pandemic events makes them nigh on impossible for the industry to apply a standard underwriting practice. As such, many insurers have rejected BI claims related to the pandemic, stating that they cannot pay for losses for which they collected no premiums.
However, according to insurance recovery lawyers at Pasich LLP, Anamay Carmel and Mikaela Whitman, the insurance industry has known from court decisions over the last 60 years that they could be called on to pay for losses and clams associated with viruses.
“The overarching argument revolves around whether or not a virus can constitute direct physical loss or damage to a property,” said Carmel. “We cite a litany of case law in our complaints that refer to all sorts of substances [like] smoke, ammonia, asbestos fibers, and other microscopic physical substances that have been held to cause physical loss or damage to property, even if there was no obvious structural change. That’s really the crux of the issue that’s being decided in these BI cases.”
The insurance industry has dealt with pandemics before, although none quite like the COVID-19 pandemic. Following the SARS outbreak in 2003, the industry crafted a common exclusion for loss due to virus or bacteria. ISO form CP 01 40 07 06 states: “We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” The exclusion adds that it specifically applies to, among other things, “business income” connected to business interruption.
However, one issue in active BI cases, according to Whitman, is that not all policies contained the 2006 ISO form exclusion. In fact, she said that most policies they’re looking at include “nothing of the sort”. And for those policies that do contain a virus exclusion, questions remain around the clarity of the contractual language, she stressed.
“We have all this evidence that insurers absolutely knew about the risk of pandemic, whether it’s in their public financial statements to their investors, or in the various whitepapers that have been written on the subject,” Carmel told Insurance Business. “We’ve seen things like this before with the Spanish Flu, SARS and MERS, which is why the insurance industry drafted a virus exclusion in 2006. And so, if insurers: A) knew pandemic was a risk; B) knew there was language available to limit their liability on that risk; and C) were telling their investors, shareholders, and the public that a pandemic could happen again, it seems rather convenient to now issue a blanket statement saying that policies will not respond to COVID-19.”
There has been some discussion in the industry around whether insurers are admitting fault retrospectively if they now start to introduce virus exclusions or clear up any silent policy language around communicable diseases. Whitman commented: “That’s definitely an argument that recovery lawyers are going to make. When insurers start putting virus exclusions into their policies, which we’re already seeing happen in some renewals, it points to them admitting that the previous policies should cover COVID-19.”
But there is a concept in US jurisdiction that states that if a party changes something retrospectively, that can’t necessarily be used as evidence of pointing to wrongdoing or liability prior to the change. Carmel stressed: “Introducing a virus exclusion now doesn’t help them on their earlier policies, but that’s something they have to deal with. We really want to encourage insurers to make their policy language clearer, and to get rid of all the ambiguity - and if putting a virus exclusion in now can achieve that, then so be it.”
Over time, the complaints against insurance companies have grown stronger, and insurance recovery law firms like Pasich LLP are starting to dominate the BI litigation. BI lawsuits are still being filed across the US, and there is some pressure on the Appellate Courts to provide guidance and uniformity around how the cases should be handled and how to differentiate between the concepts of physical damage and physical loss.
“There’s a lot more litigation to come,” said Whitman.