Louisiana lawyer says business interruption litigation will be biggest in US history

As the head of a coalition of restaurateurs and other businesses suing the insurance industry over unpaid business interruption policies, Louisiana plaintiffs' attorney John Houghtaling II has placed himself at the center of what could be the biggest legal battle in U.S. history.

"The tobacco litigation will pale in comparison to the importance of what we're about to do," Houghtaling, of Gauthier Murphy & Houghtaling LLC, said in a recent Zoom interview. "We're about to file the most significant piece of civil litigation in financial history."

One of the first lawsuits Houghtaling filed was on behalf of celebrity chef Thomas Keller of San Francisco's French Laundry restaurant. The suit filed in Napa County against Hartford Fire Co., seeks declaratory relief to determine whether government orders trigger coverage under the civil authority provisions of business owners' policies. French Laundry Partners LP et al. v. Hartford Fire Insurance Co. et al., (Ca. Sup. Ct., Napa Cty., March 25, 2020).

When local and state governments forced restaurants and retailers to close or severely reduce operations in March, owners took a huge economic hit. In response, they turned to insurance providers, relying on their business interruption policies and claiming a civil authority shutdown due to a virus was covered.

Insurers denied the claims on several grounds, including that business interruption policies only cover physical loss or damage, not consequences of government orders.

As the chief financial officer of a multi-billion-dollar oil and gas company and the majority owner of a successful Louisiana plaintiffs' firm, few would view Houghtaling as a David. However, he surely faces a Goliath in the insurance industry, which has an $822 billion war chest at its disposal to fight him and his group, he said.

"I've been fighting for 20 years and they have been winning," Houghtaling said. "Only 1% of people challenge what they say is their own liability. That is a constant statistic and it has gotten completely out of hand. If I'm the guy that finally turns that around, fine, but I don't think it's me."

According to his law firm biography, Houghtaling began his career moving file boxes for $8 an hour in 1996 for his mentor and law firm founder Wendell Gauthier. Gauthier is best known for leading a coalition of 100 law firms against U.S. tobacco companies in one of the biggest legal battles in history that resulted in $246 billion in settlements.

In 1997 Gauthier promoted Houghtaling to law clerk, and then attorney before his death in 2001.

Four years later, Houghtaling served as special counsel to the attorney general of Louisiana in a multi-billion-dollar litigation of policyholder rights after Hurricane Katrina.

In 2014, Houghtaling was appointed plaintiffs' liaison counsel by the U. S. Federal Court for the Eastern District of Louisiana in the aftermath of Hurricane Sandy. There, he uncovered fraud within the Federal Emergency Management Agency flood Insurance program, resulting in the arrest of an insurance contractor and a multi-million-dollar federal fine against the largest insurer and defense counsel involved in the insurance program.

Taking what he learned from his mentor and the experience gained in litigation during natural disasters, Houghtaling will once again take on insurance companies.

What exactly constitutes a physical loss will be a central point of contention in many of those lawsuits.

In a recent interview, San Diego partner Peter Klee of Sheppard Mullin Richter & Hampton LLP, who defends insurance companies, said there has to be physical damage to a property for the loss to be covered by the policies.

"Meaning there has to be something that actually altered the physical integrity of the property for it to constitute a potentially covered loss," Klee said. "So just because the government shuts down because of a threat of a potential contamination, that does not constitute the type of loss or physical damage that is necessary."

Attorneys for business owners argue the virus is a physical disrupter and not expressly excluded under many policies.

It could be difficult to make claims under policies with virus exclusions.

In a Zoom hearing posted to Youtube in early July, Michigan Circuit Court Judge Joyce Draganchuk granted an insurance company's motion for summary judgment, throwing out the $650,000 claim a restaurant filed after the governor closed businesses. The policy in that case did have a virus exclusion.

While traditionally only a small minority of policy holders end up challenging denied claims, "the difference here is, with the business interruption group, we want to let everybody know, you've got to read the policies," Houghtaling said.

He said he's performed legal analysis on at least 700 policies throughout the country and they are not all the same. The one in the Michigan case is unlike the policies members of his business interruption group have, Houghtaling said.

"There are policies that are all-risk policies which do not have virus or pandemic exclusions at all. There are policies that are written in different ways in how the civil authority coverage applies," Houghtaling said. "It is important that these counsel who bring this before the court understand the different polices, and which may have coverage and the ones that do not."

Another central argument being made by insurance companies was articulated by Evan Greenberg, chief financial officer of Chubb. While he is confident his side will prevail in the looming litigation, if courts do make insurers pay business interruption claims during the pandemic the entire industry could become insolvent, Greenberg said in an interview.

"Most catastrophes, like a hurricane or earthquake, are limited by geography or time," Greenberg said. "Think of a hurricane. It hits a certain geography and it lasts for a certain period of time. A pandemic is very different. It could hit all insurers, or a large majority, for a loss all at once. It has no geographic bounds. It has no time limits, and so the insurance companies have finite balance sheets, but the loss potential from a pandemic is infinite. The only ones who could handle the infinite financial nature of that is the government."

However, Houghtaling argued that insurance companies are misrepresenting their solvency by failing to mention other cash reserves and the fact they purchased reinsurance, he said.

"Their first line is, 'Oh my God, you'll bankrupt us!' And my first reaction to that is, 'And so what?'" Houghtaling said. "Everyone else is going bankrupt, and you for some reason are untouchable? No business expected a global pandemic of this size, but they bought business interruption insurance and you sold it to them ... and you didn't put exclusions on your policies."

"In some places you sold policies that made viral clean-up a covered cause of loss, and now you're saying you can't afford to pay it?" Houghtaling continued. "What relevance does that have on your legal obligation to pay? I will tell you: zero."

According to the Insurance Information Institute, it would cost insurers $485 billion through the end of the year if members were required to pay business interruption policies.

One potential solution to the quagmire facing insurance companies and policy holders, Houghtaling said, is a recently introduced bill promoted by his group that would allow insurers to voluntarily choose to pay business interruption insurance claims and be reimbursed by the federal government from tax money.

Introduced by California Rep. Mike Thompson, D-Sonoma County, the Business Interruption Insurance Coverage Act of 2020 "will help sort through the confusion facing many businesses that closed due to the Coronavirus pandemic by creating a voluntary program that would reimburse insurers who voluntarily pay out business interruption claims," the bill introduction reads.

"This is what I believe is the solution that is necessary and my hope is that the insurance industry understands that," Houghtaling said, "It's good for the insurance industry. It's good for business. This would be a program that would be the perfect solution."

However insurance companies say it would create false expectations for American business owners while leaving taxpayers on the hook for risks insurers never agreed to take on.