As fall approaches, schools across the country are preparing for a year unlike any other. While much of the current conversation centers around whether, and how, to reopen schools, the downstream effects of school closures on businesses has been the topic of much less discussion. For example, companies that provide school lunches may find their contracts cancelled, or at least reduced, if schools do not reopen. High school sports teams may not be purchasing team gear or apparel this fall. Maintenance companies that contract with schools to repair buses may find that their services are no longer needed. And school districts that may have otherwise purchased new desks, blackboards, or other classroom supplies may opt not to do so this year.
Insurance coverage may provide some relief to these businesses affected by school closures. While the primary focus of business interruption coverage has been on those directly impacted by the coronavirus – stores and restaurants forced to close their doors – some property policies may provide coverage for businesses whose customers have closed.
Under these policies, an insured may be entitled to coverage when its business is interrupted because property owned and operated by others has been affected (for example, due to physical loss or damage at the property, or closure by order of civil authority), if those properties accept or receive the insured’s products or services. A company whose contracts to provide certain classroom materials to schools were cancelled because the schools closed for the year may be able to recover its losses under such an insurance policy.
All businesses whose business has been interrupted due to the impact of coronavirus on their customers – whether or not those customers are schools – should review their policies to determine whether such business interruption coverage may be available to them.
As we have discussed elsewhere, many businesses feeling the impact of coronavirus have turned to their insurers for “business interruption” coverage. If a business has purchased such coverage, it generally can expect its insurer to provide the income it would have received in the absence of the event which caused the “interruption” to its business. Courts across the country are grappling with the question of whether business interruption policies will cover losses due to the coronavirus. Assuming a business is covered, however – how long must the insurer pay for its losses?
Generally, business interruption coverage will cover lost income due to the impairment or suspension of operations during the “period of restoration.” Although different policies may define the “period of restoration” differently, it is typically a period of time starting at the date of damage to the property and ending on the date when the property is repaired, rebuilt, or replaced with reasonable speed and similar quality. It is easy to see the limits of these time periods in other contexts. In Lightfoot v. Hartford Fire Insurance Company, No. 07-4833, 2010 WL 4909437 (E.D. La. Nov. 24, 2010), for example, the “period of restoration” for a business harmed by Hurricane Katrina ended when its office had been fully repaired and all operations at its temporary office had been shut down. When a tornado caused heavy damage to a furniture store, the period of restoration ended when the store reopened after repair. Gates v. State Automobile Mutual Insurance Company, 196 S.W.3d 761 (Tenn. App. 2005).
But determining when the “period of restoration” ends for a business affected by coronavirus may prove more difficult. As states begin to gradually reopen, businesses may be able to operate at 25% or 50% of their pre-COVID capacities. At what point is the “period of restoration” over, such that their insurer will no longer be required to cover any of their losses?
Insurers will likely argue that any sort of reopening means that the property has been “repaired.” But, as we’ve noted elsewhere, physical damage to a property can occur without complete destruction of a facility, and even businesses that are able to partially reopen may still be damaged or contaminated by the coronavirus. These businesses’ properties cannot be said to have been repaired or replaced. Additionally, businesses may have separate “civil authority” coverage, which covers lost income due to a government order, and may provide a different end date for coverage. Policyholders should examine their policies closely to determine how their insurers define the length of their coverages.
On June 15, 2020, Society Insurance (“Society”) filed a motion in the United States District Court for the Eastern District of Wisconsin seeking dismissal of a proposed class action lawsuit that seeks insurance coverage for COVID-19-related losses incurred by certain bars and restaurants in Wisconsin, Minnesota, and Tennessee. Rising Dough, Inc., et al. v. Society Insurance, Case No. 2:20-cv-00623-JPS (E.D. Wis.). While Society’s motion seeks to avoid coverage based on typical arguments that many insurers have pressed regarding COVID-19 property insurance claims, such as a purported lack of physical damage to or contamination of property, Society supports its contentions, in part, by pointing to the fact that the relevant state executive orders allowed restaurants to “continue or even expand their business for take-out and delivery service.” Although customers were prevented from dining on the premises, Society argues that because the establishments were open for take-out and delivery orders, the property could not be physically damaged or contaminated and access was not prohibited by civil authority. Society’s reliance on the permissibility of these limited operations to support its coverage defenses misses the mark.
Most property insurance policies, and business interruption claims in particular, require a policyholder to mitigate losses. While the extent of actions a policyholder must take to satisfy this obligation is beyond the scope of this discussion, the concept of mitigation is one of common sense and, in theory, benefits both the policyholder and its insurer. Unfortunately, in this instance, Society is using what should be a shield intended for its protection as a sword to bar coverage to its policyholders.
As COVID-19 spread and state and local jurisdictions issued shutdown orders to flatten the curve and reduce loss of life, the restaurant industry faced unprecedented challenges. Many restaurants and bars were unable to withstand the closures and were forced to shut their doors permanently. Others were able to pivot to different business models that focused on take-out or delivery to reduce losses and ride out the storm. That resourceful business owners were able to pivot, or attempted to pivot, in order to mitigate losses and attempt to save their businesses should not support a denial of their insurance rights. Society argues that:
[t]he Orders expressly allowed access, with certain restrictions regarding dine-in services. Employees were allowed to access the premises to prepare food for delivery and carry out orders. Customers were allowed to access the premises to pick up the food. Delivery services were allowed to access the premises to collect the orders that they would then deliver. At no time was access prohibited.
Society’s generalized statement that “at no time was access prohibited” ignores the fundamental fact that significant restrictions on access were imposed and access was prohibited to the general public for any meaningful period of time. Society’s argument also ignores the fact that physical damage to a property can occur without complete destruction of a facility. In fact, had these restaurants not sought to mitigate their losses by altering their business model, there is little doubt that insurers such as Society would have sought to bar or limit insurance coverage on the basis that their policyholder did not mitigate damages.
Society’s position reminds policyholders to expect insurers to advance all potential arguments to bar coverage. Policyholders should review their policy terms in detail and anticipate creative insurer arguments. The plaintiffs in Rising Dough have not yet filed their opposition to Society’s motion to dismiss. We will continue to monitor these developments, and other developments in the COVID-19 insurance area.
As the COVID-19 pandemic has grown, insurers have been repeatedly attempting to send the message that the policies they have issued, such as property policies providing business interruption losses, are not intended to cover losses resulting from the pandemic. In stark contrast to that message, however, several insurers have recently reported significant losses during Q1 2020 as a result of the COVID-19 pandemic. Some of these losses are described below:
- American International Group Inc. (“AIG”) reported last week a 93% drop in quarterly adjusted profit, due to the fact that it was setting aside money to cover COVID-19 related claims. Brian Duppereault, AIG’s CEO, said AIG believes COVID-19 will be the “single largest [catastrophe] loss the industry has ever seen, and it will continue to have significant global economic ramifications for the foreseeable future.”
- Axis Capital Holdings Ltd. Recently estimated it will pay first-quarter catastrophe-related claims of $300 million, including $235 million in COVID-19 claims.
- Reinsurer Munich Re has reported Q1 2020 losses of nearly $700 million largely due to COVID-19
Many policyholders who have submitted COVID-19 related claims have likely received, or will receive, denial letters from their insurers. However, the public statements by insurers described above and their acknowledgment of losses caused by COVID-19, amplify the message we have been expressing in prior posts and articles—these policies are not “one size fits all” and variations between the coverage provisions (and exclusions) found in policies might provide a policyholder with arguments that coverage does indeed exist. Policyholders facing COVID-19 related claims or losses should consult with counsel to determine if relevant coverage exists.