Precedents seen for some Covid-19 business interruption claims

Plaintiff attorneys believe there are a number of legal precedents that could mean insurers end up taking more business interruption claims from the Covid-19 coronavirus pandemic than initially thought, which analysts say suggests a rising risk of the impact being greater than anticipated.

As we explained last week, legal actions seeking to allow businesses and insurers to force through claims related to business interruption have expanded, with an increasing number of cases in a growing range of U.S. states.

There are potentially significant ramifications for some in the reinsurance and insurance-linked securities (ILS) market should this broad push for coverage succeed, especially as many of the claims (if allowed) would fall to property insurance towers and as a result into certain property reinsurance programs.

As we also explained, some efforts to force coronavirus pandemic related interruption claims into property catastrophe reinsurance programs has also been seen, which also presents a risk to the ILS market.

Analysts at KBW held a discussion with a number of plaintiff attorneys, seeking to gain more clarity on what these efforts really mean for insurers and reinsurers and came away feeling that the risk is heightened, but still believing the impact of pandemic business interruption claims will be more of an earnings impact, than a capital event for the sector.

The attorneys explained to KBW that one of the main issues, of whether a virus constitutes property damage, actually has what they see as significant case law behind it.

KBW’s analyst team explained, “There is significant case law on both sides of whether non-structural damage qualifies as “physical loss or damage” to trigger BI coverage, including decisions finding coverage for canceled performances due to smoke in a theater, that air-borne asbestos fibers could constitute “physical loss or damage”, and that toxic gases from defective drywall constituted “direct physical loss.”

The attorneys also believe that the burden of proof for contamination is achievable, saying to the analysts that, “a confirmed coronavirus diagnosis for an employee that had been at the building would “prove” (for purposes of coverage) that the virus was present, potentially qualifying for Communicable Disease Coverage.”

KBW’s analysts further explained that this communicable disease coverage typically needs the disease to be proven present and as a result access to the location to be limited, restricted or prohibited by either a government order, or a decision of an “officer of the insured”.

There are more potential triggers for business interruption coverage, the attorneys believe, including potentially “Civil of Military Authority” or “Ingress/Egress,” which are coverage extensions for when civil orders prohibit access to a location (normally due to physical damage), or when covered physical damage prevents access. In both these cases it can be that the damage is at an adjacent or nearby building, it seems.

KBW notes that after their discussions with the plaintiff attorneys they believe that contamination exclusions could actually be less widespread than previously thought.

This boils down to the fact that smaller accounts more frequently use ISO forms and so typically have an exclusion baked in, where as the larger accounts are more often customised and can in some cases not have explicit exclusions.

But, “We note that most of the insurers we’ve spoken with believe that the majority or vast majority of their policies include a virus exclusion,” KBW’s analysts said.

In addition, these contamination exclusions may not prove as effective as expected.

“In the attorneys’ view, while the burden of proving a loss falls primarily upon claimants, the burden of proving an exclusion’s relevance falls primarily on insurers,” the analysts explained.

An example here could be a typical pollution exclusion in New York, which have been found in the past to not be effective in all cases as they define pollution as being outside, not inside.

However, more positively for insurance and reinsurance market interests, the attorneys did say that state actions currently ongoing may not be successful, as they can “re-interpret approved policy language, but they cannot “renege” on it.”

In addition, “Even when BI coverage is found, material sub-limits could apply; that insurers could argue about both the duration of the remediation period (for which BI coverage applies) and that damages are limited to potential revenues assuming sustained social distancing without various shut-down orders; and that (most importantly) policy interpretation will likely vary significantly by jurisdiction,” the analysts explained.

Following their conflab with the plaintiff attorneys regarding coronavirus related business interruption, KBW’s analysts came away a little more pessimistic though.

“We still think that industry-wide exposure will constitute an earnings event rather than a capital event, but we see a little more risk than we’d originally assumed,” they said.

This remains an issue to watch.

It still remains the case, however, that should legislators decide they want the insurance industry to pick up the coronavirus business interruption bill, they will likely need to backstop or fund the reinsurance industry to support the resulting claims payments as it’s in no ones interests to drive the re/insurance market under at this critical time.

The most likely outcome of all of this remains that a few claims are honoured, while the industry fights back hard on any more blanket attempts to force BI claims into property policies. As a result, this issue is likely to run for some time.