Emergency orders in response to the COVID-19 pandemic have compelled most restaurants to close their doors to dine-in service. Despite this, insurance companies are generally denying business interruption coverage – even to those businesses with "all-risk" policies. In this Q & A, partners Mike Davis and David Feinberg of Venable's Insurance Group discuss their representation of some of DC's finest restaurants in an insurance coverage lawsuit; their unique expedited strategy; the high stakes involved for the restaurant industry; and the implications for policyholders in all industries going forward.
Q. What is the insurance industry's position regarding business interruption coverage related to the pandemic?
David Feinberg: Right after the pandemic hit the United States, spokespersons for the insurance industry and related interest groups quickly staked out their position that there is no pandemic-related coverage. The industry's position is that business interruption insurance is only intended to cover a fire or a similar event that causes structural damage to your premises. We don't believe that is how these policies should be interpreted.
Mike Davis: Carriers are basically saying that there has to be something structurally wrong with the property to trigger physical loss or damage coverage, like a collapsed roof. As viruses don't cause this type of visible structural damage, insurers are arguing that they don't count. The good news for policyholders, however, is that courts have held that "physical loss or damage" is not limited to "structural damage." Moreover, limiting "loss or damage" to only damage, as the insurers are trying to do, is not a reasonable or fair interpretation of that two-part phrase which also includes "loss." Something "lost" is simply not the same as something "damaged."
Q. What are the factors that tend to influence how courts interpret the policies?
David Feinberg: The actual words of the policy are paramount. For example, the restaurants that we're representing purchased "all-risk" policies that clearly say coverage will be triggered by loss or damage. Furthermore, any reasonable definition of loss clearly includes loss of use. This is exactly what our clients are suffering. They have lost the ability to use their restaurant space for dine-in services because of the virus and the resulting government orders that prevent them from providing table service. Per the language in the policy, that constitutes a loss of use and therefore is a loss that doesn't require any type of structural damage to have occurred.
Q. What is different about the strategy you are adopting in this lawsuit?
Mike Davis: Restaurants are under enormous financial strain. In the DC Restaurant case, we are advancing an expedited theory of coverage in order to get a ruling as soon as possible – we hope by the end of June or early July. Most claims filed by others are being submitted as regular claims that will likely not be decided for years. That type of delay is unacceptable to our clients, as they need insurance payments now.
David Feinberg: There are specific rules that allow anyone who files a complaint to inform the judge that this is an emergency needing immediate attention, and that no discovery or trial is necessary. Instead, all that is required is for the judge to review the insurance policy and the parties' legal arguments and decide who is right. With this strategy, our clients hope for a declaration within 30-45 days.
Q. A recent Washington Post article covering this and other lawsuits brought by restaurants seeking business interruption coverage suggested that insurance companies may face bankruptcy if they have to pay these claims. What are your thoughts on that?
Mike Davis: There has been no analysis that we know of that demonstrates insurance companies can't afford to pay valid claims. To the contrary, insurance companies are regulated by states, and they are required to have sufficient financial reserves to cover those claims. In general, most insurers are well capitalized and can afford to pay claims here, just as they would after a hurricane, tornado or other, similar event.
David Feinberg: Our clients purchased an all-risk policy with the natural expectation that all risks would be covered. It was the insurance company that offered the all-risk policy, marketed the policy, and crafted the terms under which their customers bought the product. Insurers cannot market a product to an American business or individual saying they are going to cover them for every eventuality if they do not intend to honor that promise.
Q. What advice do you have for policyholders going forward?
Mike Davis: With respect to business interruption claims arising from the pandemic, unfortunately policyholders will have to fight for coverage. Many insurance carriers are not going to pay these claims, and so businesses will have to file litigation. In terms of claims that have not yet arisen, businesses should examine their policies carefully for risks in connection with reopening. For example, they should check to see if their policies have a virus or pandemic exclusion. If they do, there may be no insurance coverage. Furthermore, insurance carriers might not offer coverage going forward that covers pandemics. After 9/11, some insurers said they would exclude acts of terrorism from their policies, but Congress passed a statute that said the government would backstop terrorism-related claims. Congress should consider doing something similar for pandemics.
Venable is actively monitoring these issues and working with clients to evaluate and respond to other emerging business, legal, and operational challenges arising from the pandemic. Visit our COVID Task Force for more information or to connect with one of our professionals. You can also find an extensive collection of relevant analysis, webinars, and news by exploring our COVID-19 Resource Center.