Attorney Michael Troisi from the law firm Rivkin Radler LLP discusses the most recent impact of COVID-19 on business interruption claims and how courts are interpreting the Virus exclusion.
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Best’s Insurance Law Podcast
How COVID-19 is Changing Business Interruption Claims
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John Czuba: Welcome to Best’s Insurance Law Podcast, the broadcast about timely and important legal issues affecting the insurance industry. I’m John Czuba. Managing Editor of Best’s Recommended Insurance Attorneys. We’re pleased to have with us today, Atty. Michael Troisi. Mike is the leader of Rivkin Radler property insurance coverage practice group, which is part of Rivkin’s overall insurance coverage group, and one of the largest of its kind in the nation representing the country’s largest insurers. With 33 years of experience, Michael represents numerous commercial insurers in evaluating and litigating business interruption claims. Rivkin Radler has been retained by a large commercial insurance company as national coordinating council for all of its COVID-19 claims. The firm has also been retained by other insurers to represent their interest in COVID-related matters including the defense of class action. Michael, thanks for joining us today.
Atty. Michael Troisi: You’re welcome. Thanks for having me, John.
John Czuba: Today’s discussion is how COVID-19 is changing business interruption claims, and for our first question today Mike, what are your general observations about COVID-19 business interruption litigation we have seen across the country?
Atty. Michael Troisi: Well, we’ve definitely seen a pendulum swing John, from the beginning or the onset of the pandemic until now. At the beginning, we saw policy holder lawyers bringing suits, and alleging the actual presence of the virus in the business or within the business, and those allegations were made in a very general, and conclusory way. Almost to say that, the virus is everywhere, and therefore, it must be on our premises. I think that those arguments were pretty much, by and large rejected by most Courts. Those arguments were conclusory, and lacked any real substance or basis in fact, and couldn’t be proven, and therefore, those cases met with pretty swift dismissal. What I think we’ve seen now is, we’ve seen a changeover to adopting the argument that, in order to overcome the direct physical loss requirement that’s required, and is the trigger of coverage in virtually every property insurance policy. In order to meet that challenge, what the policyholders are now arguing is that, the loss of use of the premises is the trigger of coverage, and that is their physical loss that, they either can’t use the premises or the use of the premises has been diminished in a substantial way, and therefore, they’ve been harmed or damaged. And what we’re seeing there as well is that, the insurance industry in the majority of cases is prevailing on motions to dismiss those pleadings. So, and I think a little bit later on today, we’ll get into the nuts and bolts of that. The other thing that I think it’s important to note about the state of the litigation right now is that, early on policyholder lawyers attempted to establish a multi-district litigation or what we refer to as an MDL. MDLs are there to promote efficiency by centralizing cases that have common questions of fact, and law, so that it could be consolidated into one district before one judge. Back in August, that attempt to create an MDL was heard, and was rejected, and pretty much because, the Court found that the policies are all different, they contain slightly different language, which can lead to different interpretations, and of course, each policyholder is going to present a somewhat different set of facts to bring to bear, and to decide whether or not there is coverage under the policy. So, that effort failed on behalf of policyholders, and then, there was an attempt to create MDLs that were specific to certain insurers, insurers who had a lot of cases “in the hopper” so to speak involving COVID-19 business interruption claims, and those were largely unsuccessful too, with the exception of one insurer society where an MDL was created, and that’s pretty much the state of the litigation right now.
John Czuba: So, Michael, what arguments have policyholders advanced to meet the physical loss requirement?
Atty. Michael Troisi: The policy, in order to trigger a property insurance policy, and pretty much under any coverage, there must be direct physical loss of, or damage to property. Essentially, what the policyholders are arguing is that, the government orders whether it bars them completely from the premises or simply diminishes their ability to use their business premises that that is their loss, and therefore, that triggers coverage. That has been met by an overwhelming majority of the Courts by saying, “No, that is just too strained an interpretation.” It ignores the words direct and physical, and the policy, and the underpinnings of property insurance itself, which requires some type of demonstrable, tangible physical damage to property: a fire, water damage, a car running into the building, some physical damage. The case law on that subject across the country pretty much, is very much uh in favor of the insurers, I should say. What the policy holders have also done is, they’ve seized on this language of physical loss of meaning that, well, if you have direct physical loss of something, I’ve lost my premises, I can’t use my premises, it’s been diminished. The Courts pretty much said, that’s an absolutely strained reading, and if you go to the dictionary, you can’t write physical, the word physical out of this particular coverage grant, and therefore, the Courts have pretty much said, “No, this doesn’t qualify as a physical loss.” And so, that is an argument the policyholders have used to try to get coverage. They’ve been successful in a few jurisdictions, but overwhelmingly, the Courts rejected that. Interestingly, in a case in the southern district of New York, Judge Caproni in a case called Social Life against Sentinel, she summed it up by saying, “Look, a virus can damage your lungs, it can’t damage your printing presses.” And that quote got a lot of play, but it was interesting that, that has sort of been the theme on the direct physical loss argument.
John Czuba: So, have the Courts confronted the question of whether or not there has been direct physical loss?
Atty. Michael Troisi: Well, yes, and as I said, in most of these cases they’ve said, there has not been direct physical loss. What it what it sort of does is, it sort of turns the equation around when that argument is made. The policyholder is required to demonstrate direct physical loss or damage to their property that results in a suspension of their business in order to qualify for business interruption coverage. Here, it’s sort of they’ve flipped it around, and many Courts have observed this by saying, “I’ve had a suspension of my business ,and therefore, I’ve been damaged.” And what the Courts have noted is, it’s purely economic in nature. This is purely an economic damage, but it’s not a physical damage. You have not sustained an accidental direct physical loss.
John Czuba: Mike what arguments have policyholders advanced to address the virus exclusion?
Atty. Michael Troisi: Yeah. So, that’s the real, the second hurdle that obviously, policyholders face even if they get past the coverage grant, and establishing accidental direct physical loss of, or damage to property, the damage has to be caused by a covered cause of loss, and then obviously, they’re faced with the virus exclusion, and as you may know, the virus exclusion was adopted and included in response to the SARS virus outbreak in early 2000s or around 2003 or 2004, I believe, and it’s pretty broad and it has been ruled to be unambiguous in most cases. So, in these particular cases, some Courts when faced with a motion to dismiss, simply going right to the virus exclusion, and saying, “We don’t really have to decide the coverage grant because it doesn’t matter. The virus exclusion is clear. It’s unambiguous, and we’re going to enforce it.
What policyholders have attempted to argue, and for the most part unsuccessfully, is that, the approximate cause of their loss is the government shutdown, and not the virus. Many courts have said, “Well, wait a minute.” Even if you take an efficient proximate cause analysis of this, what you find is, but for the virus, there would have been no order limiting or shutting down a business. So, that argument really doesn’t ring true. Also, many of the virus exclusions contain language that says, something to the effect of, “If the virus causes a loss or damage either directly or indirectly,” here I would argue, it’s directly but even if it’s not directly, it is excluded, and then even some policies have what we call, anti-concurrent causation language or ACC language, which will say that, “It doesn’t matter, this loss is excluded if caused by a virus, and it doesn’t matter the order in which the sequence of events occurs that results in your loss. If virus was part of that sequence of events, or the existence of the virus, it is not going to be covered.” So, what we have seen is, that the Courts have taken a look at the virus exclusion, and said, “Yeah, this is unambiguous, and applies to these losses.” There was an outlier down in the Middle District of Florida, the URO Gynecology case I believe, it was against Sentinel, and the Court there ruled that, the exclusion was somewhat ambiguous. But again, I believe the language in that was not — if I remember correctly, I don’t think it’s the typical ISO language, and again, that case was an outlier. So, pretty much the virus exclusion has been upheld by most of the Courts.
John Czuba: How have the Courts interpreted the virus exclusion?
Atty. Michael Troisi: Well like I said, they’ve taken a look at it, and they’ve said that, it is unambiguous, and that it should apply to these cases, and the Courts have not been receptive to the argument that it was not the virus that caused the loss, but it was the government shutdown, and many of the courts even point out that the briefs in support or in opposition to these motions to the to dismiss, talk about the existence of the virus and the obvious effects that it’s had on businesses, and everything. But on by the same token argue later in the brief that, “No, it wasn’t the virus that caused it, it was the government shutdown.” So, I think that again, it’s a very tough road for policyholders to get over; number one, the physical loss component of the coverage grant, and then number two, the virus exclusion.
John Czuba: Michael, what’s the status of legislative efforts in various States to mandate that insurers pay business interruption crimes?
Atty. Michael Troisi: Yeah. So, we saw that particularly at the beginning of the pandemic. We saw several State legislatures try to introduce bills that would essentially rewrite the insurance policies or write out the virus exclusion, and mandate that insurers essentially cover business interruption claims that are submitted as a result of the COVID-19 virus. That obviously, I can tell you that, we’re not aware as of this state of any State that has passed such legislation. I think a lot of them have been stalled in the State legislatures, New York included. I think that, part of the reason for that is likely that, it is well-known that there will be a challenge to that based on the contracts clause to the U.S. Constitution essentially prohibiting the government from interfering or rewriting a contract, whether or not they can do that, and there have been cases where State governments have tried to do that, and the Courts engage in a balancing test as to whether or not, the law proposed by or enacted by the State government, it operates as a substantial impairment of a contractual relationship.
Well, this one, here they would be rewriting the contract, and whether the law is drawn in an appropriate, and reasonable way to advance a significant and legitimate public purpose. So, that obviously would involve a balancing act, and would invite, I’m sure very strenuous, very hard-fought litigation from the insurance industry because obviously, this is not something they have underwritten for, it’s not something they have planned for, because they specifically, attempted to write these types of losses out of their contracts. And I think probably, the State governments are aware of that, and there’s probably a lot of debates still going on as to whether or not that would be a prudent course to take.
John Czuba: Mike, thanks so much for joining us today.
Atty. Michael Troisi: Thank you, John. It was a pleasure.
John Czuba: That was Michael Troisi for the law firm Rivkin Radler, and special thanks to today’s producer, Frank Vowinkel, and thank you all for joining us for Best’s Insurance Law Podcast. To subscribe to this audio program, go to our webpage, www.ambest.com/claimsresource. If you have any suggestions for a future topic regarding an insurance law case or issue, please email us at [email protected]. I’m John Czuba, and now this message.
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