COVID Claims: Insurers Gaining Upper Hand in Business Interruption Legal Disputes

More than six months after COVID-19 restrictions shut the doors to many restaurants in Washington, D.C., St. Arnold’s Mussel Bar on Jefferson Place remains closed. Like scores of businesses across the nation, the owners have filed a lawsuit seeking payment from their insurance company for the consequences of a business interruption that they thought was covered in their commercial policy.

The courts have only begun to sort through thousands of COVID shutdown-related business interruption coverage disputes like the one brought by St. Arnold’s. Although a Missouri judge ruled in favor of a group dental practice a few weeks ago, the courts have sided, for the most part, with insurers, according to a Covid-19 litigation-tracking effort at the University of Pennsylvania.

Insurers say that the business interruption coverage that commercial policyholders are pinning their hopes on is intended to help them recover from losses from events that lead to repairs and rebuilding, and was never designed to provide relief based on virus-related claims.

Business-interruption is a coverage that can be included in a property insurance policy. However, most of those policies specifically exclude claims stemming from viruses. For policyholders without the exclusion in in their coverage, it is up to them to proof that direct physical loss or damage caused the interruption of operations. Courts have historically interpreted this clause to mean tangible or structural damage to property.

Bryan Schofield, senior vice president of Commercial Lines at Orchid Insurance, said he sympathizes with the plight of the business owner.

“It is our promise under terms of a commercial insurance contract to help put businesses back together,” said Schofield. “And my heart goes out to business owners who want to recoup their lost revenue, but standard business interruption policies are underwritten to specifically exclude pandemic-caused losses. To try to get coverage on losses outside the stipulated policy would not be fair to the carriers.”

Business interruption insurance dates to the 1880s, but only a modest percentage of small- and medium-sized commercial operations in the United States have the coverage. Since the SARS epidemic in 2003, more than half of those policies were written to specifically exclude viruses.

Even so, business interruption insurance can be vital to a company’s survival because it covers losses or continuing expenses from an event that forces an unexpected shutdown or suspension of operations. These “interruptions” are generally interpreted as weather-related incidents, such as a windstorm, fire, or natural disaster, and will cover lost revenue until the business is repaired or restored to normal operations.

At Odds

When lawmakers in many of the nation’s most populated states first began requesting businesses to shut down and residents to stay home, restaurants, retailers and scores of other employers hurt by COVID-19 started dusting off their property insurance policies to determine if they have coverage to help pay their bills until they were permitted to reopen.

Insurers largely rejected to pay their claims since then, citing various terms and conditions for physical damage that have moved hundreds of commercial policyholders to choose instead to battle the contractual language out in court.

“Commercial lines vary by policy,” said Nathan Coomes, a business development executive with Orchid Insurance, which offers a wide variety of commercial solutions, such as Business Owner Policies, more than 400 classes of Monoline Property Policies, and extensive brokerage options. “Some are fairly standard while others are filled with personal exclusions and endorsements.”

Although a virus would not normally be considered to have the ability to cause physical property damage, some business owners have argued that COVID-19 sticks to surfaces and renders a commercial operation unsafe.

“It’s truly unfortunate,” said Schofield. “But property and casualty carriers are obligated to pay on their pre-determined promises stated in the policy.”

The Long Haul

Some commercial policies will include clauses to cover losses when a government agency stops a business from operating, but even those require physical damage to property to trigger coverage. But despite the apparent exclusion, lawyers for plaintiffs continue to file lawsuits and attempt to twist the language to prove something that doesn’t exist in the hope they will find a judge or jury sympathetic to the plight of the business owner.

In the meantime, insurance companies are digging in to dispel the notion that they have pockets deep enough to resolve the woes of business. The American Property Casualty Insurance Association estimates that because of forced closures and social distancing recommendations, potential continuity losses for small businesses could total $220 billion to $383 billion per month, easily zapping the estimated $800 billion surplus that U.S. insurers have socked away for claims.

“While the U.S. insurance sector remains strong, if insurance carriers companies are required to cover such claims, such an action would create substantial solvency risks for the sector, significantly undermine the ability of insurers to pay other types of claims, and potentially exacerbate the negative financial and economic impacts the country is currently experiencing,” the National Association of Insurance Commissioners said in a statement.

Coverage in the New Norm

That potential consequence has not stopped legislators in several states from considering laws that would allow retroactive changes to insurance policies. If enacted, insurers would be required to make payouts for coronavirus business losses that could trickle down from carrier to consumer in the form of premium hikes the following year.

As legislators ponder laws, insurers have taken up their own cause. Brokers and agents are lobbying members of the House Committee on Financial Services on a proposal to provide a type of pandemic coverage for the future. The program would function something like the Federal Flood Insurance Program – with the government as the underwriter and insurers administering the policies.

“If there is a silver lining to be found in COVID-19, it would be a positive discussion to address threats posed by future pandemics and other potentially catastrophic risks,” said Schofield. “Having said that, we recognize the onus is on us to develop new products that protect our commercial clients from changing risks today and tomorrow.”

Orchid Underwriters Insurance, LLC, is the First Choice for commercial property insurance. If you need flexible products, fast processes, expert underwriting and competitive pricing, superior customer service is a phone call away at 1-866-370-6505 or visit