BUSINESS INCOME
AND COVID

Looking for possible solutions to
pandemic-driven financial woes

By Dawn Jackson

The past few years have been taxing on every business in some way. Unless you have been shipwrecked on a deserted island, you know that in 2020 nearly every state ordered businesses to close or limit operations to “slow the spread.” According to Statista.com, only 26% of small businesses were unaffected by the shutdown.

We didn’t know much about the virus early on, but we knew we wanted to do our part to keep our-selves and others safe. The closure was only supposed to last two weeks. Surely, we could give up two weeks for the greater good.

Unfortunately, most governors’ orders lasted five weeks or more. As a result, many small businesses suffered significant financial loss. Some businesses, primarily smaller ones, are still working to recover, while others have already gone out of business.

While the government provided loans and forgiveness (with conditions) of those loans, it was not enough for some. So, they turned to their insurance company.

Insurers denied the claims, stating there must be physical damage to property that requires restoration for business interruption coverage to apply. The dictionary at lawinsider.com says “physical damage” means “tangible damage to a property that materially adversely affects the use, marketability, or value of the property, whether caused by accident or otherwise, including, but not limited to damage caused by reason of fire, destruction of tangible property, defects in construction, land subsidence, earth movement or slippage, flood, earthquake, war, civil insurrection, or riot; … .” Because of the denials, businesses filed lawsuits for courts to enforce insurers to pay.

The lawsuits

Most of the lawsuits stated breach of contract, language ambiguity, bad faith, and the virus itself as causes. “Breach of contract” means one party did not uphold their part of the contract, “language ambiguity” means the policy language is subject to more than one reasonable interpretation, and “bad faith” means the insurance company has wrongfully denied a claim. For the virus to be physical damage, it must materially alter or damage the property to the extent that a period of restoration is necessary.

The lawsuits did not prevail with any of the stated causes because physical damage did not occur to the property. The virus itself could not have caused physical damage. Since business income coverage requires physical loss or damage to property, coverage is not applicable.

Even when the plain and ordinary meaning of physical damage is applied, there is no ambiguity. This is because physical damage requires the property to suffer tangible harm, demonstrable damage, or material alteration. Also, the losses did not require closure for a period of restoration. For example, only a quick spray of disinfectant in the air and disinfecting hard surfaces needed to be completed and did not require an interruption in services.

When the policy language is ambiguous, meaning more than one definition can reasonably apply to a term, a judge must find in favor of the insured. Unfortunately, this was not the case. Some insured’s have come close to succeeding, but when the policy’s language is clear, and the average person in a particular situation understands it, it’s not likely a winning case.

The lawsuits were not easy given so much financial damage. The courts felt for the insureds but still had to rule the cases based on law. Such as stated by the appeals court in the Santo’s Italian Café case, Santo’s Italian Café LLC v. Acuity Insurance Company, they must resolve cases following contract law, not based on emotions.

Case examples

When reviewing the court cases, we found other cases where insureds look-ed for reimbursement of lost income through similar coverages, such as property damage, business income, extra expense and civil authority. But again, these coverages only trigger when there is direct physical damage to property.

In the case of Sanzo Ents., L.L.C. v. Erie Ins. Exchange, Sanzo, doing business as Play It Again Sports, argued that deprivation of full access to the building and separation of the business from its customers constituted a loss of income.

Ryan Estes (Ryan P. Estes, D.M.D., M.S., P.S.C., v. Cincinnati Insurance Company) alleged that it had to take all reasonable steps to protect the property from further damage. Estes, a periodontist, stated the sue and labor coverage allowed his business to recover the cost incurred to preserve the property.

One case looked to all coverage avenues to prevail—Dakota Girls, LLC  v. Philadelphia Indemnity Insurance Company. Dakota Girls, a private preschool operator, used unique and plausible reasons to try and win its case. One argument claimed there was an actual illness on the insured premises. Yet another argument was that direct physical loss was not restricted to dispossession but also applied to loss of use. Its theory was that COVID-19 damaged surfaces within the property.

Dakota Girls also argued communicable disease and water-borne pathogen coverage. But these coverages require a government shutdown of operations from an outbreak occurring on the insured premises, not a government shutdown from a global virus. So, unfortunately, all paths lead to Dakota Girls failure in court.

We didn’t know much about the virus early on, but we knew we wanted to do our part to keep ourselves and
others safe. … Surely, we could give up two weeks for the greater good

The Uncork & Create case, Uncork & Create LLC v. The Cincinnati Insurance Company, stated the virus was the actual damage to the property since it prevented them from using the property for its intended purpose. Uncork, which offers instructor-led art and crafts experiences, suffered such financial hardship that it had to close one of its two locations. However, it still did not prevail in its case. The court found that neither the closure order nor the virus caused physical loss or damage to its property.

In nearly every case, civil authority coverage was used to try and collect lost revenue. However, for this coverage to apply, civil authority must close a business because of a covered peril to a nearby property (usually within a one-mile radius) and access to the insured business must be denied by civil authority. This was not the case during the government orders. Instead, many governments encouraged access to property but only to limit employee and customer activity on the premises.

Since the governmental action was due to a globalized virus, there is no coverage under civil authority, even with a virus outbreak at an insured’s premises. This is because the outbreak at that specific location did not cause the government to shut down other businesses.

As of October 2022, only one lawsuit has prevailed: Cajun Conti LLC, d/b/a Oceana Grill v. Certain Underwriters at Lloyd’s. In this case, the Louisiana Fourth Circuit Court of Appeal found that viral exclusions were available when the policy was issued, but Lloyd’s chose not to use the exclusions. The restaurant’s general manager also testified that he would not have purchased the policy with a virus or bacteria exclusion because they sell raw oysters. This demonstrated to the court the insured’s mindset when purchasing the policy. This type of testimony has been used in other cases where an insured was victorious. It is noteworthy that two of the five justices dissented from this opinion.

The prevailing case should not diminish the other lawsuits brought to litigation because they did not go without convincing arguments. On the contrary, they had great points and clever ways to use the policy language in their favor. Regardless of how coverage is argued, though, unambiguous policy language should always be the determining factor of a case.

Future direction

Some people wonder what might happen if insurance companies threw a bone or two the insureds’ way. One train of thought says that providing some coverage is better than providing none and could help an insured stay in business. Would doing so help or would it make the situation even more challenging?

Of course, it’s important to consider the implications of paying a claim when there is no coverage. Would there be unanticipated consequences? Would a carrier set a precedent that could possibly result in more lawsuits and payouts? When considering something like this, one wonders how far insurance companies could go without creating more significant issues for themselves.

These are not uncommon questions, particularly among the general population, but since most insurance companies are not charitable organizations, they need to earn a profit for their share-holders or, in the case of mutual, their policyholders. They must protect investors and maintain the financial wherewithal to continue servicing customers.

It’s important to remember that insurers answer to state insurance commissioners. If a company pays claims not anticipated by the policy and does not collect a premium for it, then insolvency can result. Insurers remain solvent by collecting the appropriate rate for risk. They offer coverage at a certain premium and the customers decide if they want to take it. The bottom line is insurance companies are for-profit and are not likely to pay out for an uninsured loss.

Despite the emotional tugs to the contrary, as difficult as it is to state, lines must be drawn. Everything in life has limitations and boundaries that should be set. Insurance is no different. The fact is carriers should not be expected to pay an uninsured loss where coverage was never intended and policy language is unambiguous. Unfortunately, no one really wins in this situation. An insured may lose their business and the insurance company may lose its reputation.

Government shutdowns have created significant financial issues all over the world. Unfortunately, at this time, insurance isn’t the answer to resolve this particular issue. Congress tried and failed with the introduction of two bills, H.R.7011 – Pandemic Risk Insurance Act of 2020 and H.R.6494 – Business Interruption Insurance Coverage Act of 2020. But both bills died in the 116th Congress. H.R.5823 – Pandemic Risk Insurance Act of 2021, was introduced in the 2021-2022 Congress, but the latest action on the bill was more than a year ago.

Over the past two years, a half dozen possible solutions were introduced to the Federal Advisory Committee on Insurance (FACI.) Each solution would create a business revenue replacement triggered by a covered event. Unfortunately, none of the programs presented have progressed forward since late 2021.

As the industry looks to future catastrophic events such as COVID, they must do so with insurer solvency in mind. As with the solutions presented to the FACI, a successful program will likely include private (insurance premiums) and public (taxpayer dollars) funding to provide optimal benefits. However, the focus of any program should always be helping an insured remain in business after a financial loss.

Unfortunately, at this point, it appears the federal government and the insurance industry are unable to resolve this issue together. Still, I am hopeful the insurance industry will continue to look for a possible solution to offer its customers.

We may not see a program that de-livers complete replacement of income and payroll, but I suspect insureds would believe that any help is better than none.

For more information on the programs presented to FACI, please visit Bit.ly/FACIRN.

The author

Dawn Jackson, CPCU, AU, AINS, is senior editor, Technical & Educational Products Division, at The Rough Notes Company, Inc. She has more than 25 years of experience in the property and casualty insurance industry with a primary focus on commercial lines. She worked for fifteen years as a commercial underwriter with both national and regional carriers. Dawn is also an experienced business analyst with a primary emphasis on commercial underwriting systems. She has experience as a P-C claims trainer as well. Dawn is a licensed Indiana resident P-C producer and she obtained her bachelor’s degree from the University of Indianapolis. Among the Technical & Educational Products Division’s offerings is Policy Forms & Manual Analysis (PF&M), a knowledge base consisting of more than 15,000 pages of coverage explanations offered through the Rough Notes Company’s digital solutions operation.