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| Richard Lewis |
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| Adrienne Kitchen |
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| Douglas Rawles |
However, the author, Sherman Joyce, ignores that business interruption forms have been around for over 100 years[1] and their legal meaning has been the subject of intense litigation since the Sept. 11, 2001, attacks through Hurricanes Katrina and Rita to the present day. America's traditional regulatory practices and procedures were not intended to operate as Joyce suggests, nor will lawsuits regarding coverage regulate as he posits.
Whether Congress provided aid — and it is less than a penny on the dollar — cannot and does not affect independent promises in separate insurance contracts, or any available remedies thereunder including lawsuits.
Lawsuits and Regulatory Norms
In his article, Joyce charges litigators with manipulating the American judicial system to circumvent our nation's traditional insurance regulatory practices and procedures. Precisely the opposite is occurring: Insurance companies are manipulating the American judicial system to circumvent regulatory procedures.
Prior to the SARS epidemic in 2002, the insurance industry knew that the standard-form property policies they sold on a take-it-or-leave-it basis covered loss and damage associated with infusion of disease-causing agents. The insurance industry, well knowing of this long string of very public authority, starting with the U.S. Court of Appeals for the Sixth Circuit's decision in American Alliance Insurance Co. v. Keleket X-Ray Corp,[2] did not pursue any changes to these forms with regulatory authorities.
This is the traditional regulatory procedure: Insurance industry drafting organizations would have had to present proposed changes to regulators, and the regulators — the only body with the ability to negotiate the substance of these changes — would either approve them, disapprove them or approve them with an adjustment to rates.
After the SARS epidemic, the insurance industry paid a number of high-profile claims alleging loss and damage from the presence of the SARS virus. The insurance industry drafting organizations sought to change the standard forms their insurance company members sold by adding a virus or bacteria exclusion.
To do so, they had to go through the traditional regulatory process. In that process, they falsely told regulators that "property policies have not been a source of recovery for losses involving contamination by disease-causing agents."[3] Regulators approved the new exclusions on that basis, with no adjustment in rates.
Now, however, the member companies seeking to avoid paying loss and damage from the presence of COVID-19 on property are telling courts that they must disregard traditional regulatory practice and procedures. They are telling courts to look at the virus exclusion, and not what their agents told regulators to get those exclusions approved.
The industry also is claiming that a finding of coverage would bankrupt it, at the same time they are raising rates because of the pandemic. This is not a new tactic. All these are examples of the industry's attempt to circumvent regulatory procedures.
Business Interruption Cases Pre-COVID-19
Contrary to Joyce's assertion, business interruption insurance has not generally been limited to protect against only those losses caused by physical destruction or property loss.[4]
While most policies require "physical loss of or damage to" property to claim resulting business income loss, the courts are clear that this can exist in the absence of a claim for property damage, and in the absence of bricks-and-mortar damage, such as a condition which affects property — smoke, dust, ammonia or virus — which attenuates over time.
Before the novel coronavirus, courts recognized that direct physical loss occurs without any alteration in "appearance, shape, color or in other material dimension" of the covered property.
For example, there is Travco Insurance Co. v. Ward,[5] where the U.S. District Court for the Eastern District of Virginia found physical loss to a house built with drywall which emitted toxic gases, causing the policyholder to move out, despite the fact that it was "physically intact, functional and ha[d] no visible damage."
In so concluding, the court noted that the majority of cases nationwide hold that "physical damage to the property is not necessary, at least where the building in question has been rendered unusable by physical forces").
Likewise, there is Murray v. State Farm Fire & Cas. Co.,[6] where the U.S. District Court for the Western District of Virginia held that rocks threatening to fall on property below a hillside triggered coverage under a property policy, despite the fact that the rocks had not yet fallen.
Had Joyce considered the history of the insurance industry's actions before regulators and precedent of courts interpreting and applying the terms of contracts — in which insurers agreed to accept the risk of loss from business interruption due to property damage — when writing his article, then he could not have reached the conclusion he did, nor applied the Reich op-ed as he attempted to do.
Instead, he might have pondered why policyholders sustaining heavy losses from the impact of the coronavirus pandemic were left without protection from an industry that had promised to be there in the time of need. Indeed, when insurers say "no," a policyholder can either accept that rejection and close her business, or she can fight back. 1,300 lawsuits tells you all you need to know about the choice many policyholders have made, all on their own.
Richard Lewis is a partner, Adrienne Kitchen is an associate and Douglas Rawles is a partner at Reed Smith LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Lawsuits over coverage for Business Interruption losses date back to at least 1909, and policyholders have filed suit on such forms every decade since. Grand Pacific Hotel Co. v. Michigan Commercial Ins. Co.
, 243 Ill. 110, 90 N.E. 244 (1909).[2] American Alliance Insurance Co. v. Keleket X-Ray Corp.
, 248 F.2d 920, 925 (6th Cir. 1957).[3] New Endorsements Filed To Address Exclusion of Loss Due to Virus or Bacteria, dated July 6, 2006 (filed in relation to the proposed Endorsement CP 01 40 07 06 - Exclusion Of Loss Due To Virus Or Bacteria), at 7 of 13.
[4] Schlamm Stone & Dolan, LLP v. Seneca Ins. Co.
, No. 603009/2002, 2005 WL 600021 (N.Y. Supr. Mar. 16, 2005) (finding that the policy does not condition a business interruption claim upon the filing of a property damage claim).[5] Travco Insurance Co. v. Ward
, No. 2:10cv14, 2010 WL 2222255, at *8-*9 (E.D. Va. June 3, 2010).[6] Murray v. State Farm Fire & Cas. Co.
, 509 S.E.2d 1 (W. Va. 1998).For a reprint of this article, please contact reprints@law360.com.