Insurers' COVID-19 Notepad: What You Need to Know Now (Week of April 13)

New Business Interruption Suits Against Insurers

In the Superior Court for the District of Columbia, the operator of a sports bar sued Seneca Insurance Company for breach of contract and a declaration of coverage under its “Business Income (And Extra Expense) Coverage Form” for loss of business income arising from its “forced” shutdown amid the coronavirus pandemic. According to the complaint, Seneca denied coverage, asserting: (1) that “no business income” coverage was available because “no direct physical loss” occurred; (2) coverage under a “Civil Authority” provision was unavailable because “access to the business was not prevented due to any nearby property damage”; and (3) the loss was excluded under the policy’s “Exclusion of Loss Due to Virus or Bacteria” because the claim “entirely arises out of such a virus.” Complaint, ¶34.

A restaurant sued Farmers Insurance Exchange in Alabama state court (Jefferson County) seeking coverage under a “commercial insurance policy” for loss of business income. It asserts that orders of the Alabama State Health Officer constitute a prohibition of access to its covered property, and that orders precluding “on-premises consumption of food or drink” have deprived it of “the value and function of its Premises” which constitutes a “direct and physical loss of Covered Property” under the applicable policy. According to the complaint, Farmers denied the claim because: (1) “there was no direct physical loss of or damage to property” at the insured’s premises; (2) although the government used “its civil authority to close businesses, access to the described premises was not prohibited due to direct physical loss or damage to property other than at the described premises”; and (3) the Policy excludes loss or damage caused by or resulting from any virus that is capable of inducing physical distress, illness or disease.” Complaint, ¶60. 

The owner/operator of a movie theaters and a restaurant sued Lloyd’s of London in the United States District Court for the Southern District of Texas asserting causes of action for declaratory judgment, breach of contract; common law bad faith, and “gross negligence and/or malice” which plaintiff contends entitle it to “exemplary damages.” Specifically, plaintiff alleges that the policy’s “Pandemic Event Endorsement” “purported to provide coverage for insureds who experience financial damages from business interruption during pandemics.” However, according to the plaintiff, Lloyd’s “anticipatorily repudiated” coverage by advising plaintiff’s broker that COVID-19 “is not covered under the Pandemic Event Endorsement as it is not a named disease on that endorsement.” Complaint at ¶21-22.

A theater company commenced a declaratory judgment action in Indiana state court (Marion County) against The Cincinnati Casualty Company for coverage for COVID-19 losses under a commercial property insurance policy. The complaint alleges that the applicable policy provides “broad,” “all risks” Building and Personal Property Coverage and Business Income and Extra Expense coverage” for “the losses suffered by [the theater company] when it was forced to close its doors, including the loss of ‘Business Income’ sustained due to the necessary ‘suspension’ of [its] ‘operations’.” Complaint ¶20. According to the complaint, the insurer issued a reservation of rights letter indicating “there must be direct physical loss or damage to Covered Property caused by a covered cause of loss in order for the claim to be covered,” and that “the pandemic, without more, is not direct physical loss or damage to property. Id. at 22. The policyholder, in turn, alleges that “[t]he complete loss of use the [theater] has sustained fits easily within a “direct physical loss,” and “also fits within other coverage provisions of the policy.” Id. at 23.

A Florida dive shop sued Tokio Marine Specialty Ins. Co. in Florida state court for declaratory judgment and statutory bad faith arising from claims submitted under a commercial lines insurance policy for business interruption losses. According to the complaint, “[p]laintiff suffered a loss of business income and extra expenses as a direct result of the pandemic, acts of civil authority and other causes beyond its control”; Tokio Marine “wrongfully” denied plaintiff’s claim under the policy; and Tokio Marine’s “failure to fairly adjust the claim, investigate the loss and cover undisputed damage constitutes bad faith.” Complaint, ¶¶34-40.

A dental office sued The Cinncinati Insurance Company in the United States District Court for the Northern District of Illinois for declaratory judgment, breach of contract, and statutory bad faith arising from the insurer’s alleged improper denial of claims arising from the State-ordered interruption of businesses. The complaint notes that “[t]he State has deemed elective dental work that is not an emergency as not essential, which includes cleaning and various other routine work that affects over 95% of Plaintiff's business.” Complaint, at ¶3. Plaintiff alleges that Cincinnati Insurance “issued a denial to Plaintiff for any losses related to the Closure Orders – within a very short period of receiving Plaintiff’s claims – and without first conducting any meaningful coverage investigation, let alone a “reasonable investigation based on all available information” as required under Illinois law.” Complaint, at ¶18. 

D&O COVID-19 Litigation

A securities class action was commenced in the United States District Court for the Northern District of California against Zoom Video Communications Inc. (“Zoom”) and its officers. Zoom “designs, develops, and sells a popular cloud-based communications platform that concentrates on video conferencing.” Complaint, ¶2. The complaint alleges that “Defendants made false and/or misleading statements and/or failed to disclose that: (i) Zoom had inadequate data privacy and security measures; (ii) …the Company’s video communications service was not end-to-end encrypted; (iii) …users of Zoom’s communications services were at an increased risk of having their personal information accessed by unauthorized parties…; (iv) usage of the Company’s video communications services was foreseeably likely to decline when the foregoing facts came to light; and (v) as a result, the Company’s public statements were materially false and misleading at all relevant times.” Id. at ¶6. According to the complaint, “the deficiencies in Zoom’s software encryption began to come to light as early as July 2019,” but “due in large part to the Company’s obfuscation, it was not until the impact of the COVID-19 pandemic in March and April of 2020 …, that the truth was more fully laid bare in a series of corrective disclosures.” Id. at 7. The complaint alleges violation of Sections 10(b) and 20(a) of the Exchange Act.

COVID-19 and Future CGL Exposures:

The estate of a former Walmart employee who died as a result of complications from COVID-19 sued Walmart in Illinois state court (Cook County) alleging two counts of wrongful death (one sounding in negligence and the other based on “willful and wanton misconduct”). According to the complaint, Walmart either negligently or with reckless or wanton disregard “for others,” among other things, failed to properly cleanse the store and/or implement adequate safety measures to protect employees such as implementing social distancing. The allegations of willful and wanton misconduct seek to avoid the exclusive remedy bar of workers’ compensation law.

COVID-19 and Event Cancellation Coverage:

In light of the cancellation of this year’s Wimbledon Grand Slam tennis tournament, public reports indicate that the All England Club “has been paying around £1.5m per year in pandemic insurance since it took notice of the SARS outbreak in 2003. It has paid out roughly £25.5m over the 17-year period, and it is set to recover around £114m, making it a very sensible investment.” “Wimbledon has shown it is one step ahead of most businesses by having insurance in place for current events,” Ben Carey-Evans, insurance analyst at GlobalData, said in a statement.

Newly Proposed or Anticipated State Legislative Action

South Carolina legislators have introduced a bill (S.B. 1188), which, as respects “policies that are issued to insureds with one hundred fifty or fewer full-time equivalent employees” in South Carolina, would mandate that “every policy of insurance in force in this State insuring against loss or damage to property, notwithstanding the terms of the policy and including any endorsement thereto or exclusions to coverage… shall be construed to include, among the covered perils under the policy, coverage for loss of use and occupancy, or business interruption, directly or indirectly resulting from the global pandemic known as COVID-19.” The proposed bill also provides that “no insurer in this State may deny a claim for a loss of use and occupancy, or business interruption, with respect to COVID-19.”

Press reports indicate that Rhode Island legislators are considering the introduction of a bill requiring commercial insurance companies to cover certain coronavirus-related losses. (As reported in prior COVID-19 Notepads here, here and here, similar legislation is cropping up in other states as well.) One particular draft bill which is anticipated to be brought to the floor for discussion when the Rhode Island legislative session resumes would provide “a mechanism by which certain businesses that suffer losses due to an interruption as a result of the coronavirus disease 2019 pandemic may recover those losses from their insurer if they had a policy of business interruption insurance in force on March 9, 2020, the date on which the Governor declared a Public Health Emergency and State of Emergency.”

New State Actions: COVID-19 and Workers’ Compensation:

The Minnesota state legislature passed legislation designed to allow first responders and health care workers battling the COVID-19 pandemic to qualify for workers compensation. Among other things, the legislation includes the presumption that covered first responders and health care workers contracted COVID -19 arising out of and in the course of their employment.

Missouri’s Governor issued an emergency executive order designed to allow first responders to receive workers’ compensation benefits if they are diagnosed with, or quarantined because of, COVID-19, removing the requirement that an employee prove she fell ill while on the job and creating the presumption that a first responder was exposed to the novel coronavirus while on duty. The order will take effect by mid-April, but will apply retroactively.

Kentucky’s Governor issued an emergency order stating that it shall be presumed that removal of workers from work by a physician is due to occupational exposure to COVID-19 if they are in a broad list of occupations including healthcare workers, first responders, corrections officers, military, activated National Guard, domestic violence and child advocacy workers, rape crisis, child care and other community-based services workers, and grocery and postal workers.

New State Action: Lapse/Termination of Insurance

The Governor of Delaware issued a sixth amendment to his earlier declaration of a State of Emergency. The amendment provides (in relevant part) that “no insurer may, without a court order, lapse, terminate or cause to be forfeited a covered insurance policy because a covered policyholder does not pay a premium… under the policy that is due during the pendency of the declared state of emergency.” A “covered policyholder” means “any individual or business entity who, as a result of the conditions imposed under the COVID-19 State of Emergency (or Modifications) or the public health emergency, was laid off or fired from their employment or was required to close or significantly reduce its business.”

COVID-19 and Sexual Abuse:

As reported in our Insurers’ Notepad on April 6, New York State Senator Brad Hoylman, citing the anticipated curtailment of court filings due to the COVID-19 pandemic, called for an extension of the look-back period contained in the Child Victims Act. Legislators elected not to extend the look-back period,, and the current deadline expires in August 2020.

U.S. Congress

The “Pandemic Risk Insurance Act of 2020” is under discussion on Capitol Hill. The legislation, as currently envisioned, would establish a federal backstop for pandemic insurance industry losses in excess of $250 million. Specifically, it would create “a Federal program that provides for a transparent system of shared public and private compensation for business interruption losses resulting from a pandemic or outbreak of communicable disease.” The proposed bill would have similar features to the Terrorism Risk Insurance Act and, as currently proposed, losses in excess of an individual insurer’s deductible would be shared between the federal government and the individual insurer, with the government paying 95%. 

On March 30, 2020, the CEO of Marsh wrote to Congress and the Administration to offer the company’s assistance in creating a public-private pandemic risk solution. According to Marsh, the program would accelerate the recovery of the United States economy in the summer and fall of this year; and establish a viable insurance market for future pandemic risks. 

The Governor of New Hampshire wrote to Congress on March 23, 2020 urging consideration of stimulus measures “urgently needed to help small businesses survive.” He noted that, while many small businesses secure commercial insurance for business interruption, coverage under business interruption policies is triggered by direct physical loss to property and “[a] ‘direct physical loss’ has been interpreted to exclude economic losses unaccompanied by a distinct and demonstrable loss of the physical use of the business property.”

U.S. President

President Donald Trump spoke about business interruption insurance on April 10, 2020, saying he “would like to see the insurance companies pay” if coverage is there. He noted that sometimes there is an exclusion, but also stated that, if coverage exists and the insurance companies say they are not going to give it, “we cannot let that happen.”

New State Insurance Commissioner Actions

The Colorado Division of Insurance published answers to several “Frequently Asked Questions” concerning “Insurance on Business Interruption Insurance and COVID-19.” The “FAQs” state, among other things: “whether business interruption coverage exists for the current COVID-19 circumstances will be determined by what the specific policy language provides”; and “Business interruption policies…may exclude coverage for an epidemic or pandemic, or may exclude viral or contagious diseases such as SARS and the new coronavirus COVID-19.”

The Washington D.C. Department of Insurance, Securities and Banking also published answers to Frequently Asked Questions. One statement indicates that “likely, business interruption insurance will not provide coverage.” Specifically, “communicable diseases are usually excluded” and “for a business interruption policy to respond, the following conditions will need to be met: 1. Actual loss of business income; 2. Suspension of business operation; 3. Direct physical loss or damage at the described premises that is from a covered cause. Business interruption insurance does not provide coverage for a slowdown or reduction in operations.” 

The Utah Insurance Department issued Bulletin 2020-2 to provide “guidance for business interruption claims related to COVID-19.” The Bulletin “urges insurers to promptly process and pay claims related to…COVID-19 - particularly claims for business interruption losses - to minimize the impact to insureds.” The Bulletin points to the Utah state Unfair Trade and Settlement Practices statute, as “offer[ing] additional guidance regarding settlement practices.”

A.M. Best Co. Inc. Revises Outlook on U.S. Commercial Lines

A.M. Best revised its outlook on the U.S. commercial lines insurance industry from stable to negative. The agency cited the impact of the COVID-19 pandemic and related economic slow-down. The agency noted that it did not expect commercial insurers to see “significant” claims arising directly from the pandemic, but that the change to negative reflected concerns about the economic fallout that may result from various responses to the pandemic. 

U.K. Insurers Suspend £1.3B Shareholder Payouts

Following the urging of the Bank of England for prudence with distributions, several of the U.K.’s largest insurers (Aviva, RSA, Direct Line, and Hiscox) indicated they would suspend shareholder payments due later this year.