A Pandemic Walks into a Bar:The Covid-19 Pandemic andBusiness Interruption InsuranceBy Daniel A. Cotter

Unlike most catastrophes and majorevents, which are geographicallycontained, the Covid-19 crisis

has affected everyone across the UnitedStates, with the vast majority of Americanssubject to shelter in place orders to “flattenthe curve.” With such orders came majorbusiness disruptions and closures. Whenpeople face the potential for major finan-cial disruption to their households andbusinesses, they seek sources of money tohelp assuage the losses, as “desperate timescall for desperate measures.” One source ofpotential funds that many businesses haveturned to is insurance and, more specifi-cally, business interruption coverages. Thisarticle addresses those coverages and thecoverage disputes storm that is brewing.

A PandemicWhile some continue to argue that Covid-19 is simply a strain of the flu, the sciencesuggests otherwise. A pandemic is generallydefined as an “outbreak of a disease thatoccurs over a wide geographic area andaffects an exceptionally high proportion ofthe population.” Covid-19 is worldwide, inevery U.S. state and territory. While therewill always be deniers, the data stronglysuggests that Illinois and the United Statesare facing a pandemic, unlike anything seenbefore, with widespread death and illness.

Actions by Governor Pritzker andMayor LightfootOn March 19, 2020, California became thefirst state subject to a stay at home orderwhen its governor issued an executive orderto that effect. Many questioned him at first,seeing the action as extreme and unlikelyto happen in other states. However, onthat same day, Chicago Mayor Lightfootannounced that City Hall would not beopen to the general public and that manylibrary branches would close two dayslater. The following day, Illinois Governor

Pritzker issued an executiveorder, effective March 21,that addressed essentialservices and the shelter inplace stated.

Mayor Lightfoot joinedin the announcement. The executive orderwas effective until April 30, 2020, but hassince been extended.

Broad Swath of Businesses ImpactedPritzker’s executive order defined certainactivities, functions, and businesses as“essential,” meaning that they couldcontinue to operate with some restric-tions. Unlike some orders by other statesand localities, the Illinois order includedlawyers in services deemed essential. Law-yers here have been busy advising clientson impacts from court and governmentagency closures, and on a variety of othertopics.

Even for essential functions and busi-nesses, Covid-19’s economic impact hasbeen significant. From gyms and fitnessstudios to restaurants and bars, from Uberto conventions, and every other indus-try imaginable, business revenues – andindeed, the very ways they do business– have been impacted. More and more,businesses are looking to various resourcesto mitigate their losses and provide somemeasure of relief from the substantialerosion of their business operations. Onepotential avenue of recovery is businessinterruption insurance.

Business Interruption InsuranceBusiness interruption insurance, or busi-ness income insurance (BI), is a form ofinsurance that covers the loss of incomea business suffers as a result of a disasterthat is covered by the particular insurancepolicy. Covered losses might include lossof revenue, business closures, supply chaininterruptions, and loss of customers, as

well as costs to rebuild or decontaminate.Typically, BI is part of a business’s propertyinsurance policy or is included in a com-prehensive package policy, often known asa business owner’s policy (BOP).

Property insurance, including BI, is firstparty insurance. First party means thatthe insurance applies to the insured’s ownproperty or person and the insured’s ownbusiness. BI has several common features,often with waiting periods before the BIpays, documentation requirements forlost income, requirements of full closurein some instances, and exclusions. BIalso often has a civil authority provisionand a requirement that the insured sufferdirect physical loss or damage to coveredproperty.

Direct Physical LossPolicy language for BI, like most coverage,varies by insurer and by policy type, suchas BOP, that the insured has obtained.Many insurers subscribe to the two larg-est property and casualty form providers,Insurance Services Office (ISO) or theAmerican Association of Insurance Services(AAIS), each of which provides insuranceforms, rules governing the forms, and losscosts. Insurers who subscribe to ISO orAAIS often adopt the approved forms andrules that the services have submitted tothe various states.

A common business income provision,whether in a standalone policy, part of aproperty policy, or a BOP, states:

“We will pay for the actual loss ofBusiness Income you sustain due tothe necessary ‘suspension’ of your‘operations’ during the ‘period ofrestoration’. The ‘suspension’ must

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be caused by direct physical loss of ordamage to property at premises whichare described in the Declarations andfor which a Business Income Limitof Insurance is shown in the Declara-tion.”

Many BI policies also require that the lossresult from a covered cause of loss. Manypolicies contain language such as:

“Covered Causes of Loss means DirectPhysical Loss Or Damage to CoveredProperty except those causes of losslisted in the Exclusions.”

Civil AuthorityFinally, many BI policies include coveragelanguage for closures of businesses andinterruption caused by order of a civilauthority. A civil authority policy typicallyhas language such as:

“We will pay for the actual loss of‘Business Income’ you sustain andnecessary ‘Extra Expense’ caused byaction of civil authority that prohibitsaccess to the described premises dueto direct physical loss of or damage toproperty, other than at the describedpremises, caused by or resulting fromany Covered Cause of Loss.”

The purpose of the civil authority provi-sion is to expand the business interruptioncoverage to apply when there is damageto the property of another business thatcauses civil authorities to prohibit accessto the area where the insured’s propertyis located. For example, following a hur-ricane, authorities might cordon off theentire area that was hardest hit to limitexposure and subsequent damage. This areamight include businesses that sustainedlittle or no damage, but whose revenuewould nevertheless be affected by the civilauthority order. The civil authority provi-sion is often invoked as well where a fireor explosion or extensive release of toxicpollutants has occurred in a business area,and other businesses are closed temporarilyas a safety precaution.

Insureds have begun to file claims for BIcoverage, primarily under the civil author-ity provisions, asserting that executiveorders such as Governor Pritzker’s are civilauthority orders triggering BI recovery.

Oceana Grill CaseIn the first of what likely will be thousandsof lawsuits, Oceana Grill, a New Orleansrestaurant, sued its insurer, Lloyd’s ofLondon, in Cajun Conti, LLC v. CertainUnderwriters at Lloyd’s London, CivilDistrict Court for the Parish of Orleans,Louisiana. The case argues the civil author-ity provision of its insurance policy wasinvoked because of restrictions and bansby local authorities.

The Grill alleged that the Covid-19virus meets the definition of physical lossbecause “the global pandemic is exacer-bated by the fact that the deadly virusphysically infects and stays on the surfaceof objects or materials, ‘fomites,’ for up totwenty-eight days, particularly in humidareas below eighty-four degrees.” Thecomplaint also alleges that it is “clear thatcontamination of the insured premises bythe Coronavirus would be a direct physi-cal loss needing remediation to clean thesurfaces of the establishment.”

For its argument that the virus meets the“physical loss” requirement of a standardbusiness interruption coverage such asyou have as a franchisee, the Grill reliedupon Gregory Packaging, Inc. v. TravelersProperty and Casualty Company of America,No. 12-cv-04418, 2014 U.S. Dist. LEXIS165232 (D.N.J. Nov. 25, 2014). In Greg-ory, an issue of release of excess ammoniafrom a refrigeration unit was present. Thecourt determined that, while structuralalteration provides the most obvious signof physical damage, a property can sustainphysical loss or damage without experi-encing structural alteration. The courtconcluded that ammonia, a dangerous gas,which rendered Gregory Packaging’s build-ings uninhabitable, constituted a “directphysical loss,” sufficient to trigger coverageunder the Travelers’ policy.

Chicago Cases FiledAs of mid-April, several lawsuits similarto the one filed in Louisiana by OceanaGrill have been filed in the United StatesDistrict Court for the Northern Districtof Illinois. The first two known cases filedin Illinois were:• Big Onion Tavern Group LLC et al.

v. Society Insurance Inc., 20 cv 2005-Northern District of Illinois

• Billy Goat Tavern v. Society Insurance,20 cv 2068- Northern District of Illinois

Each invokes the civil authority provi-sion, and the Billy Goat lawsuit seeks classaction status. Both cases assert that theMarch 20 executive order triggered BIcoverage under the plaintiffs’ insurancepolicies with the common defendant,Society Insurance.

While most lawsuits filed to date havebeen by restaurants and bars and movietheaters, other business types have alsofiled lawsuits, including a dental practicein Lake Zurich, IL.

Sandy Point CaseOn April 6, 2020, Sandy Point DentalPC (Sandy Point) filed a lawsuit againstthe Cincinnati Insurance Company andits affiliates in the Northern District ofIllinois. Sandy Point provides dental ser-vices. The complaint alleges that SandyPoint has been forced “to cease most of itsoperations” as a result of the orders issuedby Pritzker. According to the complaint,elective dental work being deemed nones-sential “affects over 95% of Plaintiff’s busi-ness.” Sandy Point cites to the AmericanDental Association (ADA), which “issuedan advisory opinion telling dentists thatelective and routine matters should bepostponed during the quarantine periodfor the sake of patient and staff health.”The defendants denied Sandy Point’s claim“based on the assertion that the presenceof the coronavirus… does not constitute‘direct physical damage.’” Sandy Pointalleges that this does not comport withIllinois law, alleging at paragraph 21:

“Illinois courts have consistentlyheld that the presence of a dangeroussubstance in a property constitutes‘physical loss or damage.’ See, e.g., Bd.of Educ. Of Twp. High Sch. Dist. No.211 v. Int’l Ins. Co., 720 N.E.2d 622,625-26 (Ill. Ct. App. 1999), as modi-fied on denial of reh’g (Dec. 3, 1999).”The plaintiff also cites to the policy in

question issued by the Cincinnati Compa-nies, noting that unlike other policies, theone at issue does not “include an exclusion

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for loss caused by a virus” and that “a virusis not a bacterium.”

Science and InterpretationIn a Law360 article, Coronavirus ‘CivilAuthority’ Coverage May Hinge On Science,author Jeff Sistrunk discusses the OceanaGrill case and notes that the battle over thecivil authority provision and BI coveragein general might hinge on science, withexperts likely to battle over whether thecoronavirus can cause physical damage, andover the question of whether the virus cancause direct physical damage to property.The arguments will center on cases such asGregory Packaging and Bd. of Educ. of Twp.Experts will also have to analyze whetherCovid-19 was contemplated by the lan-guage that insurers have used in their BIpolicies to address pandemic situations.

Insurance Industry andGovernmental ResponsesAbout 15 years ago, to respond to SARSand its potential, the insurance industryresponded to potential pandemics byadding exclusions to confirm that lossessuch as those now presented by Covid-19were not covered. ISO filed form CP 01 4007 06, entitled “Exclusion for Loss Due ToVirus Or Bacteria,“ which provides:

“We will not pay for loss or damagecaused by or resulting from any virus,bacterium or other microorganismthat induces or is capable of inducingphysical distress, illness or disease.”When ISO files policy language or

forms such as the exclusion, it also filesa memorandum explaining the policy

language. For this exclusion, ISO filedLI-CF-2006-175, which discusses in greatdetail the reasoning for the exclusion andinsurers’ intentions with various pandemicssuch as Covid-19. Many policies includethe specific ISO exclusion or similar lan-guage that purports to exclude situationssuch as the present.

Various trade associations, such as theInternational Council of Shopping Cen-ters, have urged Congress to guarantee orpay for business interruption coverage. Inaddition, some state legislatures, beginningwith New Jersey, have introduced legisla-tion that would mandate coverage for thepandemic regardless of policy languageor exclusions. The insurance industry haspushed back and is closely monitoring suchactivity, arguing that such actions wouldraise constitutional and contractual issues.At his April 10th press briefing, whenasked about what businesses should do,even President Donald Trump said thatgenerally, insurers should cover insureds’BI claims.

In addition to state legislatures, someinsurance regulators have issued data calls,which require insurers to reply to informa-tion requests the regulators issue. To date,the New York Department of FinancialServices and the California Department ofInsurance have issued such requests, askingproperty and casualty insurers to provideinformation on their BI policy languageand positions they are taking.

There are no easy answers to the cover-age storm brewing over BI and whetherinsurers must respond to claims. Theproperty and casualty industry is strong,

with surplus of more than $800 billionat December 31, 2019, not includingreinsurance. At the same time, the linesof insurance most likely to respond to BIclaims accounted for approximately $90billion in 2019. The estimated BI if allclaims (submitted or potential) were fullycovered is $200 to $300 billion per month,which would wipe out the surplus of theindustry in a single quarter.

No Easy AnswersThe unique circumstances of the Covid-19 crisis will lead to many disputes inthe coming years. The BI dispute arenais one area where lawyers will have a cot-tage industry. When facing catastrophicdestruction of a business, potentiallynever to reopen, affected individuals andbusinesses look to every potential source,including potential insurance recoveries.Insurers will argue credibly – and with basisin express language as well as interpreta-tion – that pandemic situations were neverthe type of risk contemplated or priced bythe industry. Thousands of coverage suitsare possible in the Chicago area alone.Policyholders and insurers will be fight-ing over facts, policy interpretation, andscience, for decades to come. A pandemicwas not allowed to walk into a bar – butthe punchline awaits us.

Daniel A. Cotter is an attorney and counselorwith Howard & Howard Attorneys PLLCfocused on the needs of insurance companiesand other financial institutions, IT and con-sulting companies, and nonprofits.

New CBA Podcast!The Criminal Courts Adapt to COVID-19 Edition:

How the Pandemic is Impacting the Rights of the Accused

In the second of our series of COVID-19 related podcasts, our hosts Jonathan Amarilioand Chastidy Burns speak with Cook County Public Defender Amy Campanelli aboutthe constitutional issues being raised and the impact on the rights of the accused ascriminal courts adapt to the logistical challenges brought about by the COVID-19 pan-demic. Listen now at LegalTalk Network, Apple Podcasts, Google Play, Stitcher, and more.Amy Campanelli

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