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COVID-19 Business Interruption Insurance

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COVID-19 Business Interruption Insurance

Business interruption insurance is intended to protect a business against loss. Does it protect a business against COVID-19? In this course we will explore the legal arguments that can be made by both policyholders and insurance companies in this billion dollar question. Take a crash course in business interruption insurance and litigation, with a special focus on COVID-19!


Evan Walker
The Law Office of Evan W. Walker


Evan Walker: Hello, welcome to COVID-19 and Business Interruption Insurance. We all know about COVID-19 and some of us know about business interruption insurance. We're going to talk about the interplay between the two, why? It's a billion dollar question and it's being litigated throughout the nation as we speak.

Now we're not going to dig deep into COVID-19, but we'll discuss business interruption insurance somewhat in depth. You should walk away with the general understanding of business interruption insurance, how it works and what to do when it doesn't work. About me I am from a small town outside of New Orleans. Hurricane Katrina ended on. No, I misspoke. My first week of my first semester of my first year of law school ended on a Friday. Hurricane Katrina was Monday. I evacuated to Houston as a FEMA evacuee. That was how my law school started. I graduated three years later in 2008. And by that time, New Orleans and the State of Louisiana were engulfed in Hurricane Katrina litigation. So I was hired by a small insurance defense firm actually whose office was on the other side of Bourbon Street off of Canal. And I worked for insurance companies defending Hurricane Katrina claims. I did that for a few years and then I moved to the East Coast and worked for another insurance company defending claims. I came out to California in 2015 and opened my own practice plaintiff work.

So about 60% of my practice now is high-end serious personal injury cases, the other 40% are catastrophic property damage cases. That usually comes down to first and third-party claims and we'll speak about some of those experiences. So a first-party claim is going to be a claim where the policyholder sues their own insurance company for a breach of contract or bad faith. A third-party claim is where you bring a property damage claim against the tortfeasor. Now early on in COVID, I did a few free consults on possible business interruption claims. However, I've rejected them all 'cause I didn't think there was anything I could do to help the potential client. And we'll talk about this a little more as the talk proceeds. But frankly, my take on it now looking a little bit into this issue, is that it's very difficult for a policyholder to make a compelling argument for business interruption, for a viable business interruption claim in the context of COVID-19.

Here's a road map. We're gonna talk about some background information. And then we'll talk about COVID-19. Then we'll speak about business interruption insurance, then coverages, then exclusions and then litigation. And the bulk of the talk will be centered on litigation and specifically, some recent cases that came down and then we will end our talk. So with that overview and roadmap set forth before us and knowing a little bit about me, let's get started.

Let's talk about the background. So insurance is contract law. Now, we're not concerned too much about offer and acceptance and the mailbox rule I guess that's still a thing, we're more concerned about contractual legal principles as it relates to interpretation. For example, that words are interpreted against the drafter. In this case, the drafter is going to be the insurance company. They wrote the policy of insurance. The policyholder had no input. Words are given their ordinary meaning. That's another contractual principle.

Another one is ambiguity. Specifically, that ambiguity is an objective standard not a subjective standard. Meaning you don't look at what the parties to the contract, the thought was ambiguous, you look at whether the ambiguity is objectively misleading or ambiguous. And we'll use these principles in litigation.

The other thing to keep in mind is that, this begins and ends with a contract. So we're talking about a policy of insurance which is a contract between two parties, the insurance company and the policyholder. So their relationship is limited to and defined by the contract. It's a contractual relationship. The somewhat exception to that is a bad faith, because that's quasi-contract and tort. And we'll talk a little bit about that near the end.

Insurance law is state law. So what that means is that, although there are some general overlapping principles that each state has their own insurance, right? They interpret it their own way, it's subject to their own statutory schemes, it's subject to their own state case law. And so, you may have contracts that are similar throughout the states, but how they are interpreted and put into practice may differ from state-to-state depending on the state case law. I'll mention just by way of example. In California, we have something is called the anti-concurrent causation clause. Say that three times fast. I don't think you have that in other states. So we're not gonna get into that, but that's just an example to let you know that insurance law is state law, and because of that, there could be some differences from state-to-state. You also have state bodies that oversee the insurance industry in each state. Here in California, that's the California Department of Insurance or CDI. And I often times refer potential clients to the CDI to file a consumer complaint against the insurance company. And I think that there are similar bodies throughout different states. Now, although most of the insurance forms, the insurance policies are standard, meaning they're written on what's called ISO forms, they may be interpreted differently according to state law. We kinda spoke about this.

So it's always important to know you have to look not only to the contract, but you have to look to your state law and see how it interprets the contract of insurance and particular words in that contract. But look, in practice, the difference is not that great. So you're not gonna find too much of a difference in this regard between different states. But like I said, sometimes it could make a difference and we spoke about the anti-concurrent causation clause in California. So just remember that state statutory law and state case law may make a difference when it comes to interpretation. Often times it doesn't, but it could. So you wanna do your due diligence and make sure you're aware of any issues like that.

COVID-19, well, at this juncture, it's safe to say that all of us at least have a general understanding of what it is. I think all of us have been impacted and affected from one way to the other. But just speaking in very simplistic terms and just on my understanding, we're talking about an infectious disease caused by a virus. Virus is the key term and we'll find out why later. A person infected with COVID-19 spreads the virus by liquid particles from their nose or mouth. For example, a runny nose or sneezing or frankly breathing. And my understanding of COVID-19 is that, it's rarely transmitted on surfaces which frankly, that's a good thing and we'll see later if that actually matters in this context. Also my understanding is that, it can survive on surfaces for hours or days. So even though it's rarely transmitted, it still can stay there for a period of time. In that regard, it's similar to the flu whereas it could live on the surface, but not for an extended amount of time, right? There's a half-life, at some point it just expires. Now, I think we saw that it could survive for a week on a surface under ideal conditions. And also my understanding is that, when it comes to living on surfaces, a lot depends on the type of surface. And also that COVID-19, the virus, doesn't live long when it's exposed to sunlight. In fact, that it lives longest at room temperature and when humility is low. And I bring all this up because it's important to understand just the mechanics of the virus and whether it can live on surfaces and what it does once it's there, how long is it gonna be there. 'Cause we'll see that this comes into play in some business interruption disputes.

Business interruption insurance, what is it? A business interruption insurance is an endorsement or writer to a CGL or a BOP. So a CGL is a Commercial General Liability policy and a BOP or BOP is a Business Owner's Policy. So let's look at some of these definitions. So an endorsement or a rider is a contractual modifier to an insurance company. For example, I'm sorry. Not to an insurance company to an insurance policy issued by the insurance company. So for example, in a homeowner's policy, you may have an endorsement for replacement cost coverage. And having that endorsement means that the insurance company cannot depreciate your real property or your personal property. So what's important to know is that, an endorsement changes the main agreement. It changes the insuring agreement. This is the actual, contractual. Oh, this is the actual contract, this is the standard of insurance. The policy of insurance between you and the insurance company. So an endorsement makes that policy more specific to your wants circumstances or preferences. And it may be that the insurance company itself decides that there needs to be some modifications to the insurance policy that it's issuing. And so this is where modifiers or endorsements come into play.

CGL, that's a Commercial General Liability policy. So that is an insurance policy issued to a business as opposed to an individual. Say that has been issued automobile policy or a homeowner's policy. A CGL is a comprehensive policy. So the insurance provided under a CGL to a business covers liability for personal injury and property damage. So we're talking about the liability protection against claims brought by third parties for either personal injury or property damage. And so you can tell by that that CGL on its own terms isn't gonna provide BI, right? I mean, it's called a Commercial General Liability policy. So BI is not liability, so that's why it's important or not important that's why it's necessary that if a business wants to get BI coverage where they're gonna have to add on a writer or an endorsement to the CGL policy.

Same approaches taken with the BOP, are the Business Owners Policy. That's even more comprehensive than a CGL, because it covers liability for personal property. I'm sorry, for personal injury, property damage by a third-party, and then property damage by a first-party. So then the BOP is a little bit more what you want in the sense that there is some insurance coverage for first-party claims, but there is not coverage for first-party claims when it comes to business interruption. So similar to the CGL, a BOP is going to need a BI endorsement. I don't mean to hit you over the head with all the acronyms. So just remember, BI, business interruption. So BI insurance it's just, it's a type of insurance. The CGL, the BOP, two types of policies issued to businesses that on their own do not have BI insurance. Therefore, what the business does is to buy an endorsement to either one of those policies so that they could have this additional coverage for business interruption insurance, that's the takeaway. So what does business interruption do? At its most basic fundamental level, business interruption protects against the loss of income caused by a suspension of operations during a period of restoration. That's an important phrase, so I wanna say that again. Business interruption protects against the loss of income caused by a suspension of operations during a period of restoration. Let's break some of those operative words down. So it protects against the loss of income. That's the first clause. So what's income, what are we talking about? Well generally, we're talking about the earnings that a business would have had if there was no suspension of business operations. We're talking about net profit. This is the net profit that a business would have had if it didn't have to shut down its business, simple enough. So now let's go down.

So protect against a loss of income, we know what income is, caused by suspension of operations. So suspension is sometimes understood as an interruption. You may see that in a policy and that's where the term business interruption comes from. You could also interchange it with business suspension insurance. But generally, this means that the business has stopped. It's inoperable, it's not up and running. Something else to keep in mind is that, actually going back to income, insurance companies, you may see this sometimes, they will often push back against a business saying that a business should not be in a better position than if there was no suspension of a business. So for example, let's say that there is a business interruption claim. The business makes a claim on the insurance and the business says, look, this is what I would have made. And what you can see sometimes is the insurance company comes back and say, no, no, no, you wouldn't have made X, you would have made Y, you're trying to get a windfall. So this is one area that could be litigated often in BI and this is kinda outside the scope of this talk and we're not getting into this during the COVID-19 discussion, but it's just important to know that's a very fertile area for disputes.

Getting back to the phrase. Protect against a loss of income caused by suspension of operations during a period of restoration. So that's important, what's a period of restoration? Usually, that is defined by the policy, because that's such an important term that you will often find that specifically defined in the policy itself. For example, you'll see a definition that the period of restoration means the date of loss, right? The date that the loss occurred to the date the property should and can be repaired. So let's think about that for a minute. You would probably realize that can be repaired. That's something that you would hope both sides, both the policyholder and the insurance company will be able to agree, right? I mean, obviously, if the lumber, if the bricks, whatever, are still on a shipping container off the coast of Los Angeles. Like a lot of things are right now, both parties can agree, look, the business can't be prepared. No doubt about it, all right? Here's where you're gonna run into problems, is where there's a dispute between the business and the insurance company as to the date when the property should be repaired. So again, we're not gonna get into that here, maybe that's another talk. But it's just important to realize that, that's another area of dispute. And this rises out of this very crucial phrase that's really the heart of BI insurance.

 So who should have this insurance? Well, it's the same analysis you wanna take for any type of insurance. Do I have the means to survive a catastrophic loss, or will I be wiped out? If you're going to be wiped out, get the insurance. I think that's a fair way to determine whether or not a person or a business should get any type of insurance. Can you walk away from this loss? Then you may not need insurance, if you can't, if it's absolutely catastrophic, get the insurance, protect yourself against the risk. That to me really is the point of insurance. Or more specifically, you wanna look at this and say, well, does the business, does it wanna be reimbursed for lost income, right? It's a cost benefit analysis. Is it worth the business, is it worth it to the business to pay the premiums and the deductible for this type of insurance? In the event that the business is shut down and they don't wanna lose the lost income? Or I'm sorry, I misspoke. They want to be reimbursed for the income that they didn't receive and they were expecting to receive? So like we talked about, usually the BI insurance is just an endorsement, it's an add-on to the CGL or the BOP. So it's not like most businesses are out shopping for a standalone business interruption policy, right? So that's why, I think in practice, this really isn't a big deal, it's just almost like an add-on that businesses get and I think there's probably a good chance that a certain percentage of them not even sure what it is, but they just get it anyway. Like I would think for a lot of people, they may just go ahead and get UM or UIM insurance on their automobile, but not really know what it means. Or they may get medical payments coverage, but they don't really know what it means. And I think that at least for a certain percentage of businesses, you may have the same approach that, look, they're really going out looking for a policy that's gonna protect against liability, that's gonna be CGL, or they want a policy that protects against liability and first-party property damage that's the BOP, any other case the insurance company will probably just go ahead and add-on, get the endorsement for the BI insurance. In practice, I think that's often probably how it plays out.

Let's talk about coverages. So we spoke about this just a minute ago that you need a loss of income caused by a suspension of operations during a period of restoration. What causes the loss, right? The loss of income matters because now we're talking about coverage. So this is the trigger for coverage, what is the loss? In other words, what is the peril? So it depends on the type of commercial policy, not the CGL or the BOP, we're talking about the really two main types of policies either which could be found in a CGL or a BOP.

It's all peril is the first type, second type is named peril. So all peril is a misnomer because it doesn't mean all perils. It means all perils except for the perils excluded by the policy. For example, flood is going to be an excluded peril. So a covered cause of loss think of that as a peril, is a non-excluded cause of loss. So that's a little verbose. So let's see if we can break that down. So if you have an all peril policy, what that means is that any peril and think of peril as an act of God, an act of nature, or sometimes it's not it could be a theft, cyber issue, things like that, think of a peril as a risk, so a peril is a risk. And a peril is a risk you wanna ensure against, all right? So if you're dealing with an all-peril policy, it does not mean that all perils at all risk are insured, are protected under coverage under that policy, what it means is that, all perils are covered unless the policy says, these perils are not covered. I hope that makes sense.

So for example, let's say you get, a business gets an all-peril policy and then you flip to page seven and it says, these perils are excluded by the policy, flood, theft by employees, cyber crime or sewage backup. All right, so if six months from there you have flood that damages the property, that's not going to be covered even though you have an all-peril policy. Now it's frankly good if you have that type of policy, because you as the business, the policyholder can argue that the peril is covered, right? That any loss to your property is a covered peril. Because policy holders as a general rule must prove coverage but insurance companies have to prove it an exclusion. So if you have an all-peril policy, the insurance company has the affirmative duty to show that the damage to your property was not caused by a covered peril. And that means more than just sending a letter out, it means the insurance company has to investigate the cause of the damage and then make a fair and accurate determination that the cause of the damage was a peril excluded by the policy.

So here in California insurance companies have to send a letter if they want to deny a claim and explain why and they have to cite the applicable policy language. And my position is, they have to do a little bit more than that. They have to put boots on the ground and make a fair and accurate determination as to the cause of the damage. The other type of policy is what's called a named peril policy. So think of it this way. In that type of policy, only the perils named in the policy are covered For example, let's say you have a name peril policy and on page seven it says, this policy protects against loss caused by fire, lightning, water, so what that means is, that are the only perils that the business is protected against. So if the business is damaged by anything other than those three perils there's no coverage. These types of policies are generally less expensive, because there's less coverage and that makes sense and therefore, there's less risk to the insurance company.

So those are the two types of coverages. Really, two types of of policies when it comes to coverage are all-peril meaning, all perils except those that are excluded, and name perils meaning, the only damage we pay for are perils that are named in the policy. So what you need to have in order to trigger the BI is you need to have a covered cause of loss. For example, a covered peril, right? Fire, wind, lightning, whatever, under either type of policy whether it's all peril or named peril. So that's important, right? That's the trigger, that's the actual act, that is an outside action, an outside actor that's doing something to the insured property. That's the peril, that's the risk of loss. So it's important to understand that you can't just make, well, you can, but it's not gonna be covered. An insurance company is not gonna cover a business's BI claim if there's no triggering event for coverage. So you need to know what the triggering event is. Just because a business shut down, that's not gonna make a BI claim. There has to be a triggering event. And the triggering event has to be covered under the policy. That's important to keep in mind. What's also important to keep in mind is this. The covered cause of loss, the covered peril, needs to cause physical damage to the property.

So let's think about this for a minute. We talked about the covered cause of lawsuits. It doesn't matter if it's an all-peril, it doesn't matter if it's name peril policy. Let's assume that there is a peril and it doesn't matter what the peril is. It could be fire, it could be lightning, it could be smoke, it could be hell, it could be. Well, no, water damage, not necessarily flood, but let's assume that there's just a covered cause of loss. Any of those perils work, all right? But there has to be physical damage to the property, all right? And that makes sense if you think about it otherwise what are you insuring against, why are you making a claim if there's no damage to your property? So that's why in most cases this is uncontroversial, right? For example, if there's a fire to a commercial building or if there's wind damage to a commercial building, you're gonna see the physical damage, right? The business is gonna be burnt up, the roof may be torn off, the structure may become collapsed. Fire and wind are commonly covered causes of loss or perils and they obviously cause physical damage to property. So that's why more often than not, this is not going to be a problem.

However, when it comes to COVID-19, it can be a problem and it can become controversial and we'll talk about that soon. But just the two main takeaways for this topic is that, one, there has to be a covered peril and we haven't gone into a discussion as to whether or not, COVID-19 or a virus is a covered peril.

So just leave that aside but just know before we move on, that the first thing to keep in mind under this topic is, the peril, the act that causes damage must be covered under the policy. And number two, the covered peril must cause physical damage to the insured property, you need both. Covered peril, damage to property. Let's continue this thought. All-peril policies, remember, all perils unless excluded by the policy and named peril policies. Unless the peril is named it's excluded. The burden is on the insurance company when it comes to exclusions. So that's what we're gonna talk about now for a few minutes. Typical exclusions are flood, we talked about that. Now you can get a flood endorsement. But generally speaking, whether it's a BOP, CGL, all named, named peril flood is not going to be covered. That's a very common exclusion. In fact, I had litigated this type of case for a commercial client who, actually, who had flood coverage for the dwelling, his commercial building, the dwelling, but did not have it for the commercial property which was a little bizarre and then it was just pretty strange how it worked out during that litigation, but I digress. Getting back to the typical exclusion. So you're going to have flood, wear and tear. So wear and tear of equipment business, equipment that's not going to be covered. Nuclear hazard, right? Let's just say there's a, God forbid, a three mile island accident and then there's nuclear fallout and then the business is literally wiped off the map. Well sorry, there's not gonna be any insurance coverage. Earth movement, uh-oh, that's a big one here in California. So again God forbid, is an earthquake and Los Angeles falls into the sea, well, all of the businesses there that have insurance they're not gonna be covered by earth movement, earthquakes, unless of course they have an endorsement that covers that. And then pollution, that's a big one in terms of this topic. So we'll get to that a little bit more, but those are just some typical exclusions. Flood, wear and tear, nuclear hazard, earth movement, pollution.

Here's another one, virus. The typical language you're going to see is that, the insurance company excludes from coverage loss or damaged caused by or resulting from any virus. Now we're getting close to home with COVID-19. So remember, let's let's keep our analysis tight. Let's assume that you have the policy, so then you wanna look at and say, okay, is there a covered cause of loss? Well, depending on, if it's an all-peril policy, look to see what the exclusions are, right? Remember, that covers all perils unless excluded. If it's a name peril policy, look to see if the peril is actually named. If it's not, it's excluded. So when we're talking about virus as exclusion, that's not really going to come up in the context of a name peril policy, you're really gonna see that in an all-peril policy 'cause this is gonna be a typical exclusion. So then what do you do, when you're a business and you look at your all-peril policy thinking, oh, I'm protected against all perils but then you flip the page eight and it says, virus, loss or damage caused by resulting by from. I'm sorry, loss or damage caused by or resulting from any virus is excluded. Uh-oh, so even if you have coverage, and even and this is a big if, you can argue that the virus caused physical damage to property. If the virus is excluded there's no coverage, period. It's just not. Now, this is where it gets interesting though. The insurance company has to prove that. So remember, when it comes to exclusion, the insurance company has the burden of exclusion not the policy holder.

So getting back to the example of exclusions. I mean, this is so significant and it's just incumbent to understand this. So let's say the damage was caused by flood. It doesn't matter how extensive the damage. It doesn't matter how bad it is, it's not covered. I mean, we saw this in Hurricane Katrina when most businesses, some was not true, but most businesses, most homeowners didn't have flood. And so we all saw how extensive the damage was. Doesn't matter if it's excluded. Now as far as the history of the virus exclusion, what we saw was that insurance companies began using this exclusion in the early 2000s. So what was happening then? Well, not so much the United States, but in Asia, East Asia and Southeast Asia it was SARS. That's when insurance companies started writing in these virus exclusions into their policies.

So what if you don't have a virus exclusion, right? So let's go back to the all-peril policy. All perils are covered, there's no virus exclusion. So now you as the business owner or as a client representing the business owner, you're thinking okay, great, now all perils are covered and virus is not excluded. Before I get to the the physical damage part, you start to scan the exclusions and see if there's anything else that may be applicable you come across the pollution exclusion, uh-oh. Sometimes, well not sometimes it's often. The pollutants exclusion is often defined as solid, liquid, gas or thermal irritant or contaminant. That's very broad. And what we've seen is some insurance companies try to argue that COVID falls under the pollution exclusion. So what you may see is that even though the policy may not cover, may not exclude viruses, it'll have a pollutant exclusion. And so the insurance company will push back and say, look, business, yes it doesn't have a virus exclusion, yes, COVID-19 is a virus, but the policy has a pollutants exclusion and COVID-19 is a quote thermal irritant or contaminant or liquid, gas, whatever. And some insurance companies have been successful with that argument.

Now we're gonna start to close this out by talking about litigation. And so we're gonna first kinda take a 30,000 foot view of litigation, the types of lawsuits, and then we'll get down to specifics and kinda tie things together as to what a COVID-19 BI lawsuit may look like and then we'll talk about some actual cases and how these cases have been decided by the courts and how they've been argued by businesses and participants. so let's get started, types of lawsuits. Really two types, Breach of Contract and Breach of Good Faith and Fair Dealing.

Remember, what we're talking about in this context is a contractual relationship between the business and the insurance company. The policy of insurance is a contract. And so the rights and the duties of the parties are spelled out and arguably limited by the contract. I say arguably because you do not take the contract in a vacuum. Remember, insurance law is state law. So you wanna look to see how your state statutory scheme or case law have interpreted the contract either particular provisions or how they have defined terms or how they have might even have read into the contract certain provisions that are not there. So you always need to take a look at that. So when you're looking at the breach of contract lawsuits, what's the dispute about, is a dispute over the terms? Well usually, oftentimes you'll see that. If that's the case, are the terms clear? Is this an adhesion contract? Now I don't think that argument's gonna get you very far for reasons we don't particularly need to go into, but you want to look at whether the terms are clear. What about the definitions, are certain words defined, or other words not defined? How do you understand the interplay between some of these words? Remember that at all times, the contract, the policy, is interpreted against the drafter which is always the insurance company.

So if there is any ambiguity when it comes to terms or when it comes to interpretations, if you're representing the business, you want to argue that any ambiguity is construed against the insurance company and in favor of the business. And in breach of contract you need it to decide, well, what's the breach? Actually, it's a two-step analysis as I see it. What was the insurance company supposed to do? And secondly, what did the insurance company not do? But that's not the end of the analysis, you also need to look at what did you do. And if any of y'all are litigants or trial attorneys, you'll know the term failure to mitigate. So that may be what the insurance company says is, well, what's your failure to mitigate? Because what you will often find in the policy is what's called a duty to cooperate, is that the policy requires the policy holder which in this case is the business to cooperate with the insurance company in the event of a loss. That doesn't mean don't sue the insurance company, it just means you have to cooperate in the claims procedure.

Finally, when it comes to the breach of contract, what are your harm, what's the business's harm? What are the damages, if there are really no damages or if the damages are minuscule, why go through the expense and stress and uncertainty of litigation? And I tell that to people that that often call litigation is more expensive than you think, it takes longer than you think, and it's more stressful than you think it is. And undertaking a lawsuit against an insurance company is something that needs to be done seriously. And with wide open eyes, you need to know what exactly it is you're doing. That's breach of contract.

The other type of lawsuit you may wanna consider is breach of good faith and fair dealing also known as bad faith. What the law does is that it implies. We talked about this a minute ago. It implies into every insurance policy that the insurance company will treat the policyholder with good faith and fair dealing. You're not gonna find that in the policy. The insurance company is not gonna say, I agree to treat you policyholder with good, with fair dealing and good faith. Although Allstate will say, what do they say, good hands or whatever but don't let me start it on Allstate. The point is this, is that the law is gonna imply that into the insurance policies. In other words, that's a crass way to say it is insurance companies don't screw your policyholders. Think of it as the golden rule, because a common definition or at least a common principle of what good faith and fair dealing mean is that, the insurance company has to treat the policyholder or the business with as much consideration as it gives itself. So to me that's a huge standard, it puts the policyholder on equal footing with the insurance company. Bad faith claims are also a hybrid of contractual law and tort law.

So what that means in practice is, not only are you looking to get and collect the economic damages from the contract, but oftentimes you can collect attorneys fees and emotional distress damages. So when you're looking at a bad faith lawsuit, what you wanna focus on is, what were the insurance companies duties? For example, here in California we have the fair claims settlement regs or regulations. And what's spelled out there in black and white is the insurance company's duty to pay covered claims. The insurance company's duty to pay covered claims in a timely manner. So look at your state law and see if you can find actual black letter law or principles saying these are the insurance companies duties and that would be a helpful springboard if you're considering bad faith. But really, at the end of the day the analysis is this. Did the insurance company act unreasonably? And that's really when you get into the the tort analysis because we all know the proverbial reasonable man. So that's what you're looking at when it comes to bad faith. So that's an overview the type of lawsuits that you may bring. Breach of contract or breach of good faith and fair dealing.

Now, let's kinda play with this a bit. Assume that you have an all-peril policy, right? We kinda talked about this before. So all perils arcs, all perils are covered unless they're excluded. Let's assume you're a business owner or your attorney representing a business owner, COVID-19 has started, they've shut down their business ostensibly because of COVID- 19, and they turn to you and say Mr. or Mrs. Attorney, I wanna claim my BI insurance, right? I have a a lost income 20 grand a month, what do I do here? I'm looking at a six-month shutdown, that's 180 grand. What do I do? Well you start to you flip to page eight of the policy, you look at the exclusions, virus is excluded. To me no coverage. It is just not, I mean, well to be completely fair you still wanna make the claim and then you still want the insurance company to come out and prove their burden of exclusion. But I'm telling you, I look at this and say there's no coverage and so I really don't see the use in filing a lawsuit unless you think you can argue around the virus exclusion. Or otherwise, if you think that the insurance company can't prove that the exclusion applies, that may be another tact you wanna take, but frankly, that's a bold move, it's not one that I could get behind.

So let's go back to this hypothetical. Now assume that there is no virus exclusion. So what do you do then? Actually, let's play with that a little bit more. Let's assume that there is no virus exclusion and there's no pollution exclusion. So you look at this and you're thinking, okay, we have an all-peril policy, all peril are covered unless excluded. Virus is not mentioned, pollution is not mentioned. So ostensibly, they're covered. All right, boom, you're thinking it's good to go. What's the next step to the analysis? Now you have to argue that the virus caused physical damage to the property. And remember, you as the business or the attorney representing the business, the policyholder has the burden of coverage. You have to show this. Here's where it gets difficult. Physical damage to property is generally not defined Merriam-Webster defines damage as loss or harm resulting from injury to property. So what can you do with that? Remember, contract law principle. You construe the terms against the drafter. So you would argue this against the insurance company. Well, also remember that contract law is state law. So you wanna see how your state has understood that term if it's not defined in the policy.

So for example, there's a case in California. Simon Marketing v. Gulf Ins Insurance Company. This is 2007 that says, physical damage means physical loss. Well, here that's not gonna be too helpful to us. There's another case here in California. MRI Healthcare Center of Glendale v. State Farm 2010 case, which says that the loss should result in actual change to the property. So we're talking about something physical or tangible. That's not really helpful to us if we're here in California. Compare that however to other cases. So there is a 1999 Minnesota case called Sentinel Management Company v. Aetna that said asbestos can cause physical loss if there's a health hazard. Well in that scenario, you're arguably getting a little bit closer to COVID-19. Then there's another Minnesota case from 1989 called Pillsbury v. Underwriters at Lloyd's. Lloyd's which said that bacteria can cause physical loss to property. Uh-oh, now you're one step closer. Then you have a 1968 although it's a little dated colorado case, Western Fire v. First Presbyterian that said fumes can cause physical loss. And then you have a Massachusetts 1998 case, Pirie v. Federal Insurance that says lead can cause physical loss. So if you're in these states you could make an argument that COVID-19 is akin to some of the losses in those case, bacteria or asbestos or maybe even fumes and see if you can get some traction out of that type of argument.

So let's kinda wrap this up with this. I mean, let's put this in practice and see how this is recently played out. Like we said in the beginning of this talk, this is a billion dollar question. So how have cases, and it's billion dollar question currently being litigated. So how have some of these cases played out. Well, oh, this is a great case name. 2021 case here in California, Mudpie v. Travelers. I love that case, I love that caption that case. It's a federal case. The lower court held that Mudpie's policy required there to be physical damage to the insured property. The ninth circuit affirmed that case. So Mudpie claimed that COVID-19. Mudpie made a BI claim for COVID-19 and the court said there's no coverage, there's no physical damage to the properties. This is exactly what we're talking about. Even if you have a policy where virus is not excluded, the court at least in this case, is going to say, there needs to be physical damage. And this went up to the ninth circuit and they affirmed it. That's not helpful to businesses. There's another 2021 case. This is the Inns by the Sea v. California Mutual Insurance Company state case. This was the question. Does a commercial property insurance policy provide coverage for a businesses lost income due to COVID-19? Well, that's exactly what we're talking about. So how did the court come down? Well, the analysis was that, although the COVID-19 virus was throughout the county not only on the plaintiff's property, but it's not a covered loss because there was no direct physical. Well, I'm sorry, so there are two problems. Number one, there is not a covered loss.

And then number two, there's no direct physical damage. So this is very similar to the federal case we just discussed. So that's how the courts are looking at this issue. So it's exactly what we talked about. The analysis is one, is the virus excluded under the policy of a name peril, often times it is. If it's not, then the next step of the analysis is, well, does the virus somehow cause physical damage to property, unless you're in one of those states that arguably has some case law, I don't see how you can make that argument. And so on the side of the policyholders, the business, you're in a really tough spot when it comes to making a viable business interruption claim. And that's the end of our talk.

So we went over business interruption, and specifically, business interruption in the context of COVID-19. A road map was going through the background, COVID-19, business interruption insurance, coverages, exclusions and litigation. And as I just mentioned, frankly, I'm skeptical that a policyholder will win these cases against the insurance companies. The few times that I consulted potential clients about this during the beginning of COVID-19, I just came away with the impression that I couldn't, for these particular clients, I couldn't help them. I didn't see a viable argument. And now seeing how some of these cases have worked their way through the courts and some decisions have been handed down, I don't see any helpful case law certainly here in California. So I think that the policyholders, the businesses are in an uphill battle when it comes to business interruption insurance and the age of COVID-19. And it is unfortunate and it's a huge loss, but it comes down to what does a contract say.

That's it for me, this has been fun. Contact me with any questions, take care.

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