In our last blog, we discussed some of the various insurance policies that landlords have turned to during the COVID-19 pandemic. Though many of these policies were meant to protect them and their tenants during uncontrollable and unprecedented events, most have found it difficult to actually receive financial assistance through this avenue. Since the pandemic began, landlords have submitted insurance claims for lost revenue, only to run into serious legal issues.
This blog will focus on the main arguments surrounding business interruption insurance and other relevant policies, along with looking at recent litigation on the matter. Hopefully, this can provide guidance for landlords and other real estate professionals on how to proceed as the pandemic continues.
The Arguments and Aspects of COVID-Insurance Litigation
One of the major sources of contention regarding business interruption insurance and other similar policies is the general ambiguity of the language used, particularly regarding the term “physical damage.” Many claims rest on whether or not a business interruption policyholder suffered “physical loss or damage” to their property, with insurers often contending that neither the presence of the coronavirus on a policyholder’s property nor the impact of government-ordered shutdowns meets the definition of damage.1 Some policies even specifically exclude viruses entirely, though ultimately it comes down to wording and interpretation of that wording.
The ambiguity of policy language can often make or break a case,2 though most recognize that when policy language is ambiguous, the language should be construed against the insurance company and interpreted in favor of coverage.3 That said, most of the dismissed cases have come down to the fact the policies specifically had virus exclusion clauses.4 When policies do not have the exclusion, insurers tend to argue that COVID-19 cannot cause the physical damage or loss required for a business interruption payout, an argument that’s pretty consistently won in court.5 The exact interpretation of “physical loss or damage” also tends to vary, which can have a serious impact on a case, with one federal judge shutting down a case due to a lack of evidence that a business suffered a “distinct, demonstrable physical alteration.”6
The Supreme Court’s Judgement
Recently, the Supreme Court passed judgment on a test case brought by the Financial Conduct Authority (FCA) in relation to certain non-damage business interruption insurance policies, with the intention of creating some clarity as to when insurers will have to pay out for COVID-19 related businesses losses, 7 hoping to clarify these key issues for as many policyholders and insurers as possible.8 To this end, the Court grouped all items into three main categories:9
- Disease Clauses: Provisions covering business losses in relation to business interruption following the occurrence of a notifiable disease within a specified radius of the insured premises (the “Relevant Area”).
- Denial of Access Clauses: Provisions covering losses in relation to an incident occurring that results in a denial or restriction of access to the insured premises.
- “Trends Clauses”: Allow insurers to adjust profit, turnover, and revenue figures (for the purposes of calculating losses) to take account of trends in the relevant business or other circumstances that would have impacted the relevant business even in the absence of the relevant event.
With regard to disease clauses, the Court held that policyholders will generally be able to establish cover for pandemic business interruption losses via disease clauses. It was determined that policyholders would not have to distinguish the effects of the nationwide COVID-19 pandemic from the local effects within the Relevant area to establish that they suffered a loss from the virus. That said, the Court agreed with the insurers that the cover was for specific and localized events, so policyholders could only recover where they could show that the disease in the Relevant Area had caused the business interruption losses.10
The Court’s interpretation was less generous for denial of access clauses.11For clauses that provide cover for a business interruption for “restrictions imposed” by a public authority on the premises, it was held that only those restrictions imposed by law would count, not from government guidance or cases where employees and customers chose not to visit the premises.12 It also held that whenpolicies cover business interruption where there is an “inability to use” premises, something more than hindrance was required.13
As for policies that contained “trends clauses,” the Court held that the effect of these clauses could not be that the losses would be limited by any part of the event that was being insured, including in this case of the COVID-19 outbreak.14 As such, when calculating the loss in respect of an insurance claim, the Court held that it is necessary to strip out the effects of COVID-19, including as a result of the authorities’ or the public’s response, so that all the losses caused by COVID-19 would potentially be covered.15
While the Supreme Court’s decision wasn’t ideal for all policyholders, it gave a sense of clarity to what has been a murky and confusing situation, as well as providing an opening for how to proceed with future insurance-related cases. In our last blog in this series, we’ll break down some general advice for landlords to help them determine if their insurance policy can help them shoulder the burden of the pandemic.
1. Egan, J. (2020, November 30). Is business interruption from covid-19 likely to lead to a spike in court cases? National Real Estate Investor. https://www.nreionline.com/property-management/business-interruption-covid-19-likely-lead-spike-court-cases.
2. Feeley, J., & Chiglinsky, K. (2020, December 9). Insurers Winning Most, But Not All, COVID-19 Business Interruption Lawsuits. Insurance Journal. https://www.insurancejournal.com/news/national/2020/11/30/592047.htm.
3. Gorenberg, K. M., &; Godes, S. N. (2020, October 29). Update on Business Interruption Insurance Claims for COVID-19 Losses. The National Law Review. https://www.natlawreview.com/article/update-business-interruption-insurance-claims-covid-19-losses.
4. Feeley, J., & Chiglinsky, K.
5. Feeley, J., & Chiglinsky, K.
6. Feeley, J., & Chiglinsky, K.
7. How does business interruption insurance work?: Real estate accounting firms. Smith & Howard. (2018, July 20). https://www.smith-howard.com/how-does-business-interruption-insurance-work/.
8. Mines, L., &; Shah, C. (2020, November 18). COVID 19 – Business Interruption Insurance Test Case – Coronavirus (COVID-19) – United States. Mondaq. https://www.mondaq.com/unitedstates/insurance-claims/1006868/covid-19-business-interruption-insurance-test-case.
9. Mines, L., &; Shah, C.
10. Mines, L., &; Shah, C.
11. Mines, L., &; Shah, C.
12. Mines, L., &; Shah, C.
13. Mines, L., &; Shah, C.
14. Mines, L., &; Shah, C.
15. Mines, L., &; Shah, C.