Tuesday, March 30, 2021

COVID-19 and Business Interruption Insurance

As a teaser to a forthcoming article I coauthored with two of my students (who co-presented with me) for the Business Law Prof Blog symposium back in the fall, I offer a short excerpt on business interruption insurance litigation resulting from governmental actions forcing business closures as a result of the pandemic, focusing on a recently decided Tennessee case.

In general, business lawyers got inventive in bringing legal claims of many kinds. A federal district court case recently decided in Tennessee, Nashville Underground, LLC v. AMCO Insurance Company, No. 3:20-cv-00426 (M.D. Tennessee, March 4, 2021), offers a notable example involving the interpretations of a business interruption insurance policy. The plaintiff in the action, a Nashville bar, restaurant, and entertainment venue, claimed coverage under the food contamination endorsement in its business interruption insurance policy for the damages suffered when it was forced to close its doors by governmental orders issued in March 2020 in response to the COVID-19 pandemic. The insurer denied coverage. The court held for the defendant insurer on its motion to dismiss for failure to state a claim, finding the contract language unambiguous. The court’s conclusion in its opinion noted sympathy, in spite of the outcome.

Like many Americans, the undersigned can sympathize with Plaintiff and so many of our other small to medium-sized businesses that seem to have borne much of the brunt of the effects of the COVID-19 pandemic. One could understand if Plaintiff (or anyone else) lamented that it simply is not right that this should be the case. But it also is not right, or lawful, for a business's insurer to be on the hook for coverage it simply did not contractually commit to provide. Presumably like a myriad of other enterprises throughout this nation, Plaintiff in retrospect perhaps would have bargained for broader coverage but simply did not foresee such need before the unprecedented pandemic conditions arose in 2020. Accordingly, Plaintiff was unfortunately left without the coverage it now asks this Court to find in an insurance policy that simply does not provide it.

Nashville Underground, supra.  Sympathy notwithstanding, cases of this kind are decided on the basis of specific contract language. Although overall insurers tend to be winning in these contract interpretation battles, insureds are prevailing in some cases, at least in pretrial and summary judgment motion battles. See, e.g., Kenneth M. Gorenberg & Scott N. Godes, Update on Business Interruption Insurance Claims for COVID-19 Losses, NAT’L L. REV. (Oct. 29, 2020), https://www.natlawreview.com/article/update-business-interruption-insurance-claims-covid-19-losses; Richard D. Porotsky Jr., Recent Federal Cases in the N.D. Ohio Split on COVID-19 Business Interruption Insurance Coverage, NAT’L L. REV. (Jan. 26, 2021), https://www.natlawreview.com/article/recent-federal-cases-nd-ohio-split-covid-19-business-interruption-insurance-coverage; Jim Sams, Judge Rules in Favor of 3 Policyholders With COVID-19 Claims in Consolidated Case, CLAIMS J. (Feb. 21. 2021), https://www.claimsjournal.com/news/national/2021/02/24/302197.htm.

The opinions in these cases constitute an interesting emergent body of decisional law relevant to contract and insurance law and practice.  Along with litigation relating to, e.g., force majeure and material adverse change/effect, the legal actions interpreting language in business interruption insurance contracts are bound to offer important lessons and tips for legal counsel and their clients--a legacy likely to affect practice and litigation for many years to come.

The article from which the above quoted text (reformatted for posting here) comes, Business Law and Lawyering in the Wake of COVID-19, is scheduled for publication later this spring in Transactions: Tennessee Journal of Business Law.  I will promote the article here once the final version is available and has been posted to SSRN.  In the meantime, you have a a short preview of one part of the article in this post!


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In March, 2020, my engagement for review of these types of policies blossomed. A few constants that I noticed were: (1) the small-businesses purchases of business interruption policies were “incident to” their general liability, product liability and real property insurance policies rather than as a primary insurance concern – almost as an afterthought; (2) the policies I reviewed were solely wedded to actual physical damage to the business premises requiring the premises be wholly unusable for continuation of the business; (3) the insurance policy exceptions as to cause of physical damage to the business premises almost wholly swallowed an event giving rise to insurer paying off; and (4) the related premiums for these business interruption policies were quite low.

My general experience is that small business owners tend to insure through their personal agents and in relatively few events are these agents also operating principally in a commercial market. Unsurprisingly, it’s only in the situation of claims made that the insured actually discovers the limited scope of the coverage. Sadly, in those matters I reviewed and with the pages and pages of exceptions coverage is almost illusory.

Traveling through this unique experience (in my lifetime), I suspect that acquiring business interruption insurance that would cover a future event such as the Covid lockdowns and government imposed limits on patron access will be prohibitively expensive.

Posted by: Tom N. | Mar 31, 2021 8:15:06 AM

Tom N., thanks so much for your comment and the wealth of experience it represents--a real treasure trove. In working on small nonprofit boards, I have observed much the same. It is unfortunate that hindsight is 20/20 vision in many of these cases.

Your observations make a good case for looking at different sources for policies as well as more careful review of policies, regardless of the source. I appreciate the contribution. Very meaningful.

Posted by: joanheminway | Mar 31, 2021 8:59:07 AM

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