Suits Over COVID Losses Seeing Mixed Results

As retailers were forced to close their doors in the Spring, many filed business interruption claims with their insurers.

Not surprisingly, many of these claims ended up in court after insurers rejected them. Michael Miguel, principal at McKool Smith, says the insurance industry got in front of COVID claims early and has made well-coordinated arguments around the country in the COVID litigation. Still, he is seeing mixed results so far.

“At the early stage of litigation, courts have been asked by insurers to dismiss all claims because there is no possibility of coverage under the policies,” Miguel says. “Several—but not all—jurisdictions have agreed with the insurance industry and denied the COVID-related insurance claims. Miguel says one reason for these denials is that the nature of losses sustained by policyholders resulting from COVID does not neatly fit into traditional notions of “damage.” Initially, specific exclusions would appear to preclude coverage. For example, a landlord might have property coverage that also provides for business interruption losses.

“Insurers argue that the policy requires actual, physical damage to property for a claim to be covered, which is not always present where, like here, a civil authority mandated closure of businesses or provided rent relief to tenants, and a question exists as to whether actual damage took place,” Miguel says.

Miguel says exclusions to coverage, like those precluding coverage for pollution, bacteria or mold, have also been asserted by insurers. “Lastly, there are certain policies in the marketplace that exclude claims for damages resulting from a virus or communicable disease,” he says. “Insureds, on the other hand, argue COVID losses meet the definition of ‘damage’ under the policies and the exclusions do not specifically apply, and if they do not specifically apply, then coverage exists.”

COVID will change insurance policies in the future, according to Miguel. He says that has already started with insurers inserting language that precludes coverage for all damages caused in any way by a pathogen.

“As early as April 2020, our clients found insurers, during the renewal process, inserting exclusionary language directly targeting COVID-like claims,” Miguel says.

Miguel says that a policyholder can argue that this new exclusion is an admission that the other exclusions on which insurers rely do not preclude coverage.

“We believe insurers will continue to insist on this exclusion, or something like it, in future policies,” Miguel says. “Market conditions are ‘tight’ for insurance these days as it is, and a policyholder will likely face a significant increase in premiums to keep such an exclusion out of future policies.”

Miguel says attorneys who do not regularly practice insurance litigation have rushed into this space as the suits have piled up. That also hurts businesses as they go up against insurers. “These lawyers are coming up against experienced and well-funded insurance counsel,” Miguel says. “Unfortunately, the disparate level of experience is showing up in how claims are presented and the arguments being made (or not made) around the country by claimants and their counsel.”