Analyzing business interruption claims amid the COVID-19 landscape
New York foodies have long known Thomas Keller for his Michelin-starred restaurants including Per Se, at which, until recently, for a small fortune, one could be treated to culinary mastery. Amid the COVID-19 crisis, when Per Se and his other establishments remain closed, Mr. Keller is attempting to be known in Insurance Law circles in California. He recently sued his insurance carrier demanding business interruption coverage under his insurance policy. His carrier is resistant denying coverage claiming events triggering such coverage have not occurred.
“Business Interruption Insurance” is defined as, “An agreement to protect against one or more kinds of loss from the interruption of an ongoing business, such as a loss of profits while the business is shut down to repair fire damage.” Black's Law Dictionary (11th ed. 2019). It is optional insurance coverage some business owners obtain to protect themselves during work stoppages. In some instances, landlords require such insurance to ensure a tenants’ ability to pay rent despite being unable to operate their businesses.
It makes logical sense that this coverage would apply during forced closures resulting from COVID-19. Business owners are not permitted to operate, businesses are interrupted, so it is reasonable to think that business owners would be insured for lost profits under policies with such coverage. The reality, however, is more nuanced. Carriers have avoided paying out claims by invoking creatively crafted policy language even in connection with closures arising out of significant disasters.
Businesses have fought back, demanding coverage in several instances and seeking court intervention upon carrier refusal. For this reason, we recommend that business owners consult trusted legal counsel to identify their legal and coverage rights under the business’ applicable policies.
Insurance companies’ typical policy language provides for business interruption coverage only if the business is closed due to physical damage to the place of business; the physical place of business is closed due to “Civil Authority,” i.e. by governmental order; or physical damage to a “dependent property” (discussed below) causes the closure of the place of business. Moreover, physical damage to the place of business or the “dependent property” must not have been caused by a condition contained in a specific exclusion from the policy.
New York’s treatment of the above concepts is covered in BORAH V. TRUMBULL INS. CO., under Index No. 652633/2013 where the Court affirmed a large carrier’s denial of a claim made by a prominent law firm for business interruption due to Superstorm Sandy. The firm’s offices lost power due to the failure of a transformer caused by the storm surge and was forced to close.
There, the Court upheld the carrier’s denial of coverage. First, no coverage was required because there was no actual damage to the firm’s offices. The office was forced to close due to external forces. Today, while the widespread forced closures of businesses is due to a global pandemic, the physical plants have been shuttered, in large part, to reduce the spread of the virus, not because of the actual presence of COVID-19 in those places. Even if the presence of a virus definitively constitutes physical damage to a place of business, it is uncertain how many businesses could show actual damage in the form of the presence of the virus in their space.
The same is true with respect to “dependent property” physical damage. Governmental orders have excepted essential services from closure, meaning that utilities and basic services remain open and operable. In order for such coverage to apply, not only would the services at the “dependent property” have to fail—preventing the subject business from operating—but that failure would have to be traceable to physical damage to the “dependent property.”
In Borah, such a nexus could be made between the damage to the transformer (the “dependent property”) and the inability of the law firm to operate. However, the Court also upheld denial of coverage because the damage to the “dependent property,” the transformer, was caused by flood and flood coverage was specifically excluded from the firm’s policy.
In connection with the COVID-19 disaster, though it’s unlikely any pandemic exclusions exist, the exclusion to be aware of is to viruses and bacteria which started getting written into policies in the wake of the 2003 SARS outbreak. Therefore, we recommend Business owners carefully scrutinize their policies and assess the legality and enforceability of exclusions written into a policy. Failure to understand these can lead to unexpected denial in coverage.
Finally, in Borah, the Court denied “Civil Authority” coverage because the firm’s offices were not squarely within an evacuation zone, and therefore, access to said offices had not been “specifically prohibited” as required by the policy. The language of the firm’s policy (which is also the typical language), which supported this determination, reads in relevant part: “This insurance is extended to apply to the actual loss of business income you sustain when access to your [place of business] is specifically prohibited by order of a civil authority.” (emphasis added).
Despite widespread social distancing, most buildings in New York technically remain open. Governor Cuomo’s BUSINESS CLOSURE ORDERS have not specifically stated that people are not allowed to enter their places of business. It is the operations themselves which have been ordered closed. Does this, therefore, mean that carriers can, per se, deny coverage because access has not been “specifically prohibited?” As discussed above, carriers have long invoked this distinction and been successful in getting a court to uphold their denial of coverage.
Despite a policy of interpreting policies “consistent with the reasonable expectation of the average insured,” Dean v. Tower Ins. Co. of New York, 19 N.Y.3d 704, 708 (2012), the Borah Court took an extremely narrow view on what would trigger coverage. Though a business was unable to operate by external forces, because those circumstances did not fall squarely within the language of the policy, coverage was denied.
Thomas Keller’s LAWSUIT, though in California, challenges the definition of “specifically prohibited.” He argues that the COVID-19 executive orders, which require people to stay at home and for non-essential businesses to cease onsite operations except minimum basic operations, are tantamount to such a prohibition. He contends that though can physically walk into his restaurant, since he cannot operate, he cannot “access” it for the purposes of the policy. Since the case is pending it is unknown whether his argument will prevail. It is all but a certainty that New York courts will be called upon to make a similar determination.
Arguably, the reasonable expectation of the average insured would necessitate coverage. See Dean, 19 N.Y.3d at 708. Consistently with such an expectation, and to prevent any doubt, the New York legislature has introduced a BILL to requiring insurers to cover business owners for revenue lost during the COVID-19 state of emergency declared by Governor Cuomo. Parenthetically, this bill will doubtlessly be contested by the insurance industry and the subject of significant litigation.
During this grave period, especially if this new legislation is enacted, New York Court’s may be more receptive to Mr. Keller’s arguments/position. Therefore, while success is not assured, business owners in New York must consider making such a claim and, if denied, asking a Court to decide entitlement to coverage. Farber Schneider Ferrari LLP remains available to assist you in making this decision. Insurance policies are drafted to maximize the carriers’ profits and skew heavily against the policy holder. As a result, in navigating this unprecedented period, all businesses would do well to engage a review of their policies to assess the viability of making similar claims. Please feel free to contact us if you would like assistance in that regard.