Business interruption claims mean bankruptcy, insurers say

With businesses shut down and courts operating at reduced capacity, insurance providers for companies have been facing logistical challenges when it comes to moving litigation forward. But as businesses and policymakers continue to dispute what, exactly, their coverage includes during the pandemic, attorneys representing insurance providers say the industry could face bankruptcy and other legal issues, too.

Insurance adjusters working from home with limited technology and attorneys not being able to secure hearing dates has made it nearly impossible to move cases along at pre-pandemic rates, said Samuel Mann, who works in insurance defense at Orland Law Group. But proposed legislation in other states -- including New York and New Jersey -- that would require insurers to cover COVID-19 losses under their business interruption policies is also cause for concern.

"I don't know if California has one on the books," Mann said. "I know that's looming."

Business interruption coverage helps businesses replace lost income and pay for expenses when they are impacted by a covered peril. In general, the range of covered perils is narrow, said Marc Feldman, a partner at Sheppard Mullin who represents insurance companies. "The typical policy provision that provides business interruption coverage will say something like, 'We'll provide for the actual loss of business income you sustain while your business is suspended,' but 'the suspension of your business must be caused by direct physical loss of or damage to property.'"

Across the California courts, interpretations of these policies have been fairly narrow and require policyholders to show their business was interrupted because their property was physically altered -- something that isn't the case for businesses trying to make these claims due to stay-at-home orders, Feldman said.

Daniel H. Handman, who represents employers as a partner at Hirschfeld Kraemer LLP, said the consensus among employers is that filing these types of claims is a "very uphill battle." Businesses have been trying to file claims for this type of coverage because insurance against pandemics is not common, Feldman said. He pointed to civil authority insurance, which covers instances when government orders have impacted the operation of a business, or communicable disease coverage. But in most cases, these types of coverage still only cover a narrow range of circumstances.

Enter the proposed legislation, which proponents have argued could help businesses stay afloat through the pandemic. But Feldman is not sold on legislation as a solution. "You're not talking about millions of dollars, you're talking about hundreds of billions of dollars," he said of what insurance providers would potentially have to pay out in claims. "It could essentially bankrupt a whole industry."

"The idea of legislation that tells an insurance company how to interpret a policy contrary to its actual meaning ... creates all sorts of issues, in particular constitutional issues," he added. "The Constitution prevents the impairment of contracts."

Handman agreed legislation is not the answer. "If the courts were to say, 'This isn't covered,' I don't know if the Legislature could retroactively rewrite an insurance policy," he said. "I don't know if this is a matter for the Legislature to decide."

Matthew Kenefick, a partner at Jeffer Mangels Butler & Mitchell LLP who litigates insurance policies, said businesses should not back down.

"Following catastrophes, carriers often campaign that potentially covered categories of loss are excluded," Kenefick said. "Insurers do this to discourage claims. Do not be persuaded."