A court ruling on pandemic-related business interruption (BI) claims in the US has been described as “undeniably positive for the property & casualty (P&C) industry”, by a US-based expert.

As business shutdowns were ordered across many countries in an attempt to stop the COVID-19 pandemic in its tracks, turnover nose-dived. Hospitality has been hit particularly hard. A UK test case pushing for BI claims to be paid is awaiting the final ruling, and steps have been taken in Australia to launch a test case.

Back in March 2020 it was claimants in the US who first started taking their cases to court to claim for pandemic-related losses. At the time, many in the insurance industry warned that forcing insurers to pay out on BI claims en masse, even those where the policy did not offer explicit pandemic cover, could destabilise the entire insurance sector.

Now, a case heard in the District of Columbia Superior Court on August 6 offers P&C insurers further hope that more judges could rule in their favour.

This case centred on claims brought by plaintiff Rose’s 1, a multi-site restaurant owner in Washington DC, against its insurer Erie Insurance Exchange. The restaurant owner was claiming for loss of use of the premises as a direct result of DC Mayor Muriel Bowser’s shutdown order related to SARS-CoV-2.

Judge Kelly Higashi ruled that mayoral orders do not constitute the direct physical loss needed to trigger BI policies. She stated that government orders didn’t cause any direct changes to the properties, they only mandated that individuals and businesses take certain actions.

Further arguments from the plaintiff that the losses were “physical” because SARS-CoV-2 is a material and tangible virus that prompted the mayor’s orders were also rejected. In response, the judge said the plaintiff had failed to prove that the virus was actually at the insured locations when they were forced to close.

In addition, she said the mayor’s orders didn’t have any effect on the material or tangible structure of insured properties.

Claims that loss in context of the policy can mean loss of use and not just damage were also dismissed.

Higashi said that when policies require “direct physical loss”, the words “direct” and “physical” modify the word “loss”. This means that loss of use must be caused by a direct physical intrusion on the insured property, which the mayor’s orders did not do.

The judge didn’t find any precedents within the court’s jurisdiction specific to virus contamination. But she highlighted similar loss of use claims following curfews in the 1960s, which were also denied because there was no physical damage. The judge noted that some BI cases cited by the plaintiff, including ammonia and gasoline fume contamination, either required actual repairs or caused damage compromising the physical integrity of the insured property.

Meyer Shields, managing director at Keefe, Bruyette & Woods, a boutique investment bank and broker-dealer, says: “We think Judge Higashi’s ruling is undeniably positive for the P&C industry, but we expect BI litigation to continue for several years, and we think some losses are eventually likely, since we don’t expect courts to rule uniformly.”

A guide for other jurisdictions

Shields tells Intelligent Insurer that this ruling, which favours insurers, could guide jurisdictions where no opposing precedent exists. But he adds: “Other states or jurisdictions do have precedents that define damage differently, which could produce some adverse rulings.”

Judges have denied BI coverage claims in other US cases.

Judge Joyce Draganchuk ruled in favour of the insurers in the Ingham County, Michigan State Court on July 1 in the case of Gavrilides Management Co et al v Michigan Insurance Co.

Judge Valerie Caproni ruled in favour of the insurers in the case on May 14 in the hearing of Social Life Magazine v Sentinel Insurance at a Manhattan court. Shields adds that cases like these represent “an important—but not absolute—precedent”.

On August 12, as if to prove the point, a federal judge in Kansas City, Missouri, ruled against the interests of the defending insurer saying the plaintiffs were entitled to claim BI losses caused by the coronavirus pandemic. Judge Stephen Bough’s ruling was made in the case of Studio 417 salon (representing a group of hair salons and restaurants) v Cincinnati Insurance.

Shields says there are particular businesses that are more likely to get a ruling in their favour for a COVID-19 BI claim. He says: “I come to it from an alternative direction, that there are different policies that are more likely to get different rulings.

“I make that distinction because some businesses are always focused on risks such as viruses or germs—the easiest example would be restaurants.

“They would have some vulnerability if people became sick at the restaurant because of some microbe. That’s nothing to do with global pandemics necessarily, but it’s something they would have been aware of.”

There is a reasonable expectation that companies like that would have different policy language and are therefore more likely to get a favourable court decision, he says.

“I would point to the recent case in Missouri where the judge refused to throw out a claim because of how that particular judge was reading the policy language, and there was no virus exclusion on the relevant policies. That probably makes a difference.

“There have been differences of opinion so far in terms of whether the virus constitutes the physical damage or loss that’s necessary to trigger a BI claim.”

Favourable state rulings

There are US states where a business claiming COVID-19 BI has a better chance of winning because the terms in that state are more pro-business.

“It’s easy to generalise and say ‘these are blue states’ and ‘these are red states’, which are the current indicators for supporting democrats or republicans,” says Shields.

“These court rulings are a business-to-business decision, so even if we posit that a particular state is more pro-business it’s not necessarily to the benefit or detriment of the insurance industry.”

But, Shields says, it’s “hard” to draw up a definitive state list where insurers are more likely to win because “red states have patches of blue and blue states have patches of red”.

“You’re going to get some fascinating or troubling precedents, and different decisions from different courts, probably even in the same state. I suspect that one of the inputs into that will be the political makeup of the state.”

Images (from top): shutterstock.com / Chansom Pantip, Orlowski Designs LLC