As we frustratingly approach the second anniversary of the COVID-19 pandemic, businesses continue to struggle with challenges caused by an unpredictable virus and related economic upheavals. Fortunately, companies are more prepared to adapt to such disruptions than they were when the pandemic first hit in March 2020. But the ensuing lockdowns and screeching halt to commerce that followed dealt a devastating blow to countless businesses that year. Sadly, these events continue, including with new variants.
In turn, those businesses that had the foresight to maintain insurance with “business interruption coverage” felt confident that such coverage would help them weather the storm. They soon learned that their confidence was misplaced. While business was unquestionably “disrupted” during and after the Great Lockdown of 2020 for companies across the country, many insurers took the position that pandemic-related closures are not the right kind of disruption or closures that would trigger business interruption coverage.
Now, after hundreds of covered businesses filed lawsuits relating to such denials, the verdict of the courts has come into focus. And the overwhelming verdict is that perhaps the most significant mass “interruption” in American business history was not covered under the language of most business interruption insurance policies.
Why Insurers Denied Coverage
As any owner can tell you, there are countless occurrences beyond their control that can cause a business’s operations to grind to a halt or go haywire. Many of these events – fires, floods, power outages, and similar events, to riots and civil unrest (as we saw in 2020) – are typically covered under business interruption policies. That is because the language of these policies usually limits coverage to interruptions that involve “direct physical damage or loss” to the business or its facilities, equipment, and/or inventory.
While the pandemic and subsequent lockdown orders shut the doors of countless businesses, the doors themselves were left untouched. As such, insurers claim that the lack of “direct physical damage or loss” from the lockdowns precludes coverage.
Trial Courts Agreed With Insurers, and Now, Appellate Courts Are Too
With disappointing consistency, state and federal trial courts across the country have almost invariably ruled in favor of insurance companies and against insureds on COVID-related business interruption claims. Many defeated insurers appealed those decisions and, as 2021 rolled on, appellate courts started weighing in on the issue. Unfortunately, they too have largely come down on the side of insurers.
To date, at least five federal Circuit Courts of Appeal (the 6th, 7th, 8th, 9th, and 11th) have sided with insurers on business interruption claims. A December 2021 ruling by the Seventh Circuit affirming a trial court’s dismissal of claims by three separate insureds is illustrative of how appellate justices are approaching these cases and supporting insurers’ denial of coverage.
In Sandy Point Dental, P.C. v. Cincinnati Ins. Co., a hotel, dentistry practice, and restaurant filed business interruption claims based on losses they incurred due to Illinois Governor JB Pritzker’s COVID-related executive orders that essentially shut all their doors or dramatically curtailed their operations. The businesses held materially identical commercial-property insurance policies that provided coverage for income losses sustained because of a suspension of operations caused by “direct physical loss” to covered property. The policies also covered income losses suffered due to an action of civil authority prohibiting access to covered property when such action was taken in response to “direct physical loss” suffered by other property.
The Seventh Circuit affirmed the trial court’s dismissal of all three claims. Based on the policy language, the court held that to avoid dismissal, the insureds had “to allege that either the virus or the resulting closure orders caused direct physical loss or direct physical damage to covered property.”
The court rejected the insureds’ argument that the presence of the deadly virus in their facilities made the premises unsafe and unfit for their intended use, and thereby caused physical loss or damage:
“While the impact of the virus on the world over the last year and a half can hardly be overstated, its impact on physical property is inconsequential: deadly or not, it may be wiped off surfaces using ordinarily cleaning materials, and it disintegrates on its own in a matter of days.”
If the pandemic has proven anything, it is that we don’t know what the future holds. But if the current wave of court decisions continues, we know that the future is unlikely to uphold judgments in favor of business interruption coverage for businesses upended by COVID-19.
Fred Mendelsohn is a partner at Burke, Warren, MacKay & Serritella in Chicago. If you have questions or concerns about business interruption insurance claims, contact Mendelsohn at 312-840-7004 or firstname.lastname@example.org.