Business interruption insurance in 2020: what actually paid

The answer, with one meaningful exception, has been no.

The coverage language everyone is fighting about

Virtually every commercial property policy extends business interruption coverage only when a covered cause of loss produces "direct physical loss of or damage to" covered property. That phrase is doing almost all of the work in the current litigation. A secondary clause, Civil Authority coverage, pays when a government order prohibits access to the insured premises because of damage to nearby property. Both clauses run through the same physical-loss gate.

The policy forms themselves are largely standardized. ISO, the Insurance Services Office, publishes the CP 00 30 Business Income (and Extra Expense) Coverage Form that sits behind most of the policies in litigation, and after the 2003 SARS outbreak ISO introduced an endorsement, CP 01 40 07 06, that excludes "loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease." Many of the policies now in dispute contain that endorsement or a close analog. Some do not, and that fault line explains most of the case outcomes so far.

The broader stakes are familiar by now. The American Property Casualty Insurance Association estimated in spring 2020 that small-business continuity losses from COVID-19 were running between roughly $255 billion and $431 billion per month, and that industry surplus for all commercial lines combined sat near $800 billion, a mismatch the trade association used to argue that retroactive coverage mandates would be insolvency events for carriers. Whatever one thinks of that framing, it sets the scale of the fight.

The denials that are becoming the consensus

The early decisions came fast and went the carrier's way.

Social Life Magazine, Inc. v. Sentinel Insurance Co., No. 20-cv-3311 (S.D.N.Y. May 14, 2020), was the first widely noticed ruling. Judge Valerie Caproni denied a preliminary injunction from the bench, telling counsel that the insured's losses stemmed from the state's executive orders rather than from any physical effect on the magazine's offices. The transcript reasoning, now circulated in dozens of subsequent briefs, framed the policyholder argument as an attempt to read "physical" out of the policy.

Gavrilides Management Co. v. Michigan Insurance Co., No. 20-258-CB (Mich. Cir. Ct., Ingham Cty. July 1, 2020), was the first state court ruling on the merits. The court granted the insurer's motion for summary disposition, holding that the Michigan governor's orders did not cause physical loss of or damage to restaurant premises, and that the restaurant had in any event not alleged the virus was present inside.

Diesel Barbershop, LLC v. State Farm Lloyds, No. 5:20-cv-461-DAE (W.D. Tex. Aug. 13, 2020), dismissed on both the physical-loss point and the virus exclusion. Judge David Ezra read "direct physical loss" as requiring "a distinct, demonstrable, physical alteration of the property," a phrase the opinion borrowed from earlier non-COVID cases and that has since become boilerplate in carrier briefing.

Franklin EWC, Inc. v. Hartford Financial Services Group, Inc., No. 3:20-cv-04434-JSC (N.D. Cal. June 24, 2020), came to the same end on the virus exclusion. The Hartford's "All Risks" policy contained the ISO-style virus exclusion, and the court applied it without needing to resolve the physical-loss debate.

Mudpie, Inc. v. Travelers Casualty Insurance Co. of America, No. 3:20-cv-03213-JST (N.D. Cal. Sept. 14, 2020), dismissed a San Francisco children's retailer's suit by reading "direct physical loss of" to require "a distinct, demonstrable, physical alteration" of the premises, tracking the emerging federal pattern. The Ninth Circuit now has the case on appeal; argument has not yet been set.

10E, LLC v. Travelers Indemnity Co. of Connecticut, No. 2:20-cv-04418 (C.D. Cal. Sept. 2, 2020) and Pappy's Barber Shops, Inc. v. Farmers Group, Inc., No. 3:20-cv-00907-CAB-BLM (S.D. Cal. June 17, 2020), round out the West Coast trend, each turning on the same physical-alteration reading.

None of these opinions is controlling on any other court. But motion judges read each other, and the reasoning has been unusually consistent. A mid-November 2020 compilation by the University of Pennsylvania Carey Law School's COVID Coverage Litigation Tracker put federal court rulings on motions to dismiss at roughly 80 percent in favor of insurers. State court results have skewed more pro-policyholder in early procedural rulings, though fewer have reached dispositive stages.

The one that went the other way

Studio 417, Inc. v. Cincinnati Insurance Co., No. 20-cv-03127-SRB (W.D. Mo. Aug. 12, 2020), is the opinion every policyholder brief now leads with. Judge Stephen R. Bough denied the carrier's motion to dismiss a putative class action brought by Missouri hair salons and restaurants. Two features of the ruling mattered.

First, the court declined to read "physical loss" as synonymous with "physical damage." Missouri law, the court reasoned, treats the two phrases as separately meaningful inside the same coverage grant, so "loss" has to do work that "damage" doesn't, and the loss of the use of property, where the virus allegedly rendered it unsafe, can satisfy it. Second, the Cincinnati policies at issue did not contain a virus exclusion. That absence was load-bearing; the court noted it expressly.

Two follow-ons came quickly. Blue Springs Dental Care, LLC v. Owners Insurance Co., No. 20-cv-00383-SRB (W.D. Mo. Sept. 21, 2020), applied Studio 417's reasoning to a dental practice, and North State Deli, LLC v. The Cincinnati Insurance Co., No. 20-CVS-02569 (N.C. Super. Ct., Durham Cty. Oct. 9, 2020), ruled for a group of North Carolina restaurants on cross-motions for partial summary judgment, becoming the first state-court merits ruling for an insured. Both cases involved policies without a virus exclusion.

The pattern that emerges is less "policyholders are finally breaking through" and more "policies without the ISO virus exclusion are a different fight than policies with it." Where the exclusion exists, carriers have been winning on the exclusion. Where it doesn't, carriers have been litigating the physical-loss meaning, and on that narrower question the results are mixed.

The legislatures that tried and mostly didn't

A second front opened in state capitals. In late March and April 2020, legislators in several states introduced bills to retroactively require carriers to cover COVID business interruption claims regardless of policy language, usually for small businesses and usually with a state-administered reimbursement fund to backstop the industry.

New Jersey Assembly Bill 3844, introduced March 16, 2020, would have required every business interruption policy in force on the date of the state's public health emergency to be construed to include coverage for business interruption due to global virus transmission or pandemic, notwithstanding policy language to the contrary. After aggressive industry opposition, the bill was held in committee and replaced by a narrower study measure.

New York Senate Bill S8211A, introduced by Senator Andrew Gounardes in March 2020, tracked the New Jersey approach, extending coverage to businesses with fewer than 250 full-time employees and creating a reimbursement mechanism funded by assessments across the property and casualty market. It, too, did not advance out of committee through the 2020 session.

Massachusetts S.2655, Pennsylvania HB 2372, Louisiana HB 858, Ohio HB 589, Rhode Island S.2380, and the District of Columbia B23-0757 were all introduced on similar lines. None was enacted. The policy objection carriers pressed successfully was that retroactive rewriting of already-priced risk would violate the Contracts Clause of the federal Constitution and would in any case overwhelm the capital base of the industry at the scale contemplated.

At the federal level, Representative Carolyn Maloney's Business Interruption Insurance Coverage Act of 2020 (H.R. 6494), introduced April 14, 2020, would have prohibited insurers from denying COVID-19 business interruption claims on the basis of the virus exclusion going forward, without the retroactive posture of the state bills. The Pandemic Risk Insurance Act of 2020 (H.R. 7011), introduced May 26, 2020 by Representative Maloney, proposed a federal reinsurance backstop modeled on TRIA. Neither moved to markup before the end of the 116th Congress's regular session.

What is still open

Three questions are not yet settled.

The first is appellate. No federal court of appeals has yet issued a merits ruling on a COVID business interruption case. Appeals are pending in the Fourth, Fifth, Eighth, Ninth, and Eleventh Circuits, and several state supreme courts have certified questions pending from federal district courts asking for state-law rulings on the meaning of "direct physical loss." A carrier-favorable consensus at the district level can still be disturbed if even one circuit reads "loss" to include loss of use on its own.

The second is the multidistrict litigation posture. The Judicial Panel on Multidistrict Litigation declined on August 12, 2020 to create a single industry-wide MDL but consolidated carrier-specific proceedings against Hartford, Cincinnati, Society, and Erie in separate MDL dockets. That choice preserves the possibility of different outcomes for different insurers depending on their policy language, which tracks the legal reality that the virus exclusion, not a uniform physical-loss doctrine, is the principal pivot.

The third is what the industry does next. ISO has filed new pandemic-exclusion endorsements for use going forward, and renewal quotes in the second half of 2020 have routinely added express communicable-disease exclusions even on policies that did not previously contain them. The long-term market answer appears to be simpler contract language that removes any ambiguity the current litigation is exposing, not a reworking of the physical-loss standard itself.

Readers renewing coverage now should request the full endorsement schedule from the broker and read the virus, bacterium, and communicable-disease exclusions in their policies, not rely on a summary. Whether the existing litigation eventually produces a policyholder-favorable doctrine or not, the policy you buy in 2021 will almost certainly be drafted against the assumption that it does.

Sources

• ISO Form CP 00 30 10 12, "Business Income (and Extra Expense) Coverage Form," Insurance Services Office (standard policy form referenced in COVID litigation)
• ISO Form CP 01 40 07 06, "Exclusion of Loss Due to Virus or Bacteria," Insurance Services Office, filed 2006
• Social Life Magazine, Inc. v. Sentinel Insurance Co., No. 1:20-cv-03311-VEC (S.D.N.Y. May 14, 2020), hearing transcript and docket available via PACER
• Gavrilides Management Co. v. Michigan Insurance Co., No. 20-258-CB (Mich. Cir. Ct., Ingham Cty. July 1, 2020), https://www.ingham.org/
• Diesel Barbershop, LLC v. State Farm Lloyds, No. 5:20-cv-461-DAE, 2020 WL 4724305 (W.D. Tex. Aug. 13, 2020)
• Franklin EWC, Inc. v. Hartford Financial Services Group, Inc., No. 3:20-cv-04434-JSC, 2020 WL 5642483 (N.D. Cal. June 24, 2020)
• Mudpie, Inc. v. Travelers Casualty Insurance Co. of America, No. 3:20-cv-03213-JST, 487 F. Supp. 3d 834 (N.D. Cal. Sept. 14, 2020), on appeal to the Ninth Circuit, No. 20-16858
• 10E, LLC v. Travelers Indemnity Co. of Connecticut, No. 2:20-cv-04418-SVW-AS (C.D. Cal. Sept. 2, 2020)
• Pappy's Barber Shops, Inc. v. Farmers Group, Inc., No. 3:20-cv-00907-CAB-BLM (S.D. Cal. June 17, 2020)
• Studio 417, Inc. v. Cincinnati Insurance Co., No. 6:20-cv-03127-SRB, 478 F. Supp. 3d 794 (W.D. Mo. Aug. 12, 2020)
• Blue Springs Dental Care, LLC v. Owners Insurance Co., No. 4:20-cv-00383-SRB (W.D. Mo. Sept. 21, 2020)
• North State Deli, LLC v. The Cincinnati Insurance Co., No. 20-CVS-02569 (N.C. Super. Ct., Durham Cty. Oct. 9, 2020)
• University of Pennsylvania Carey Law School, "COVID Coverage Litigation Tracker," https://cclt.law.upenn.edu/ (rulings compiled through November 2020)
• New Jersey Assembly Bill A3844 (2020 Session), https://www.njleg.state.nj.us/bill-search/2020/A3844
• New York Senate Bill S8211A (2019-2020 Regular Session), https://www.nysenate.gov/legislation/bills/2019/s8211
• Massachusetts S.2655, Pennsylvania HB 2372, Louisiana HB 858, Ohio HB 589, Rhode Island S.2380, D.C. B23-0757 (each available via the respective state legislature's bill tracker)
• Business Interruption Insurance Coverage Act of 2020, H.R. 6494, 116th Cong. (2020), https://www.congress.gov/bill/116th-congress/house-bill/6494
• Pandemic Risk Insurance Act of 2020, H.R. 7011, 116th Cong. (2020), https://www.congress.gov/bill/116th-congress/house-bill/7011
• American Property Casualty Insurance Association, "Business Interruption Coverage Claims" (April 2020 estimates of monthly small-business continuity losses), https://www.apci.org/
• Judicial Panel on Multidistrict Litigation, Order Denying Industry-Wide MDL and Transfer Orders, MDL Nos. 2942-2964 (Aug. 12, 2020 and following), https://www.jpml.uscourts.gov/