Struggling merchants, insurers battle over pandemic coverage
Restaurants, bars and other merchants struggling to stay afloat during the coronavirus pandemic are desperately reaching out for a lifeline from insurers that in turn contend they are being miscast as potential saviors.
Shutdowns and crowd restrictions imposed by state and local governments to limit the spread of the virus have resulted in more than $1 trillion in estimated losses so far for thousands of rapidly sinking small businesses.
That has prompted a flood of claims under business interruption insurance policies that have been almost universally rejected for a variety of reasons, including provisions inserted by insurers after the SARS outbreak in 2003 to exclude disruptions caused by virus and bacteria.
“This is an existential threat,” said John Houghtaling, a New Orleans attorney who is representing restaurants and other businesses seeking about $8 billion in losses that he estimates they will suffer during the pandemic. “A lot of people who did the right thing and bought this coverage thinking they would be thrown a lifeboat if disaster struck are now being told, ‘Sorry, let the Coast Guard come and get you instead.’ ”
So many lawsuits have been filed against insurers in the U.S. that a Thursday hearing has been scheduled before a federal judicial panel in Washington to decide how to manage them all in the months — and possibly years — ahead. The panel’s review involves more than 200 federal complaints in addition to the other lawsuits filed in state courts.
Although sympathetic to their policyholders’ plights, insurers say most business interruption policies were designed to cover shutdowns caused by catastrophes such as hurricanes and terrorist attacks while excluding pandemics that cause widespread losses too staggering to cover, even for an industry sitting on $850 billion in reserves. Only a small number of businesses sought additional coverage that includes losses caused by pandemics, said David Sampson, CEO of the American Property Casualty Insurance Association, an industry trade group.
Even so, Lloyd’s of London has estimated the insurance industry still will pay out $107 billion in pandemic-related claims, more than the combined amounts doled out after the terrorist attacks in September 2001 and Hurricane Katrina in 2005. Besides businesses that bought special coverage, the claims include payouts to major sporting and entertainment events that bought cancellation policies coverage, such as the Wimbledon tennis tournament that is collecting about $140 million under its pandemic policy.
Insurers also are paying workers’ compensation claims for employees who get sick on the job.
In one of the first decisions issued on that question earlier this month, a Michigan state judge sided with an insurer’s rejection of a claim for $650,000 for two months of losses that Nick Gavrilides said he suffered at two restaurants, the Soup Spoon Cafe in Lansing, Michigan, and the Bistro in nearby Williamston, Michigan.
Gavrilides’ l awyer, Matthew Heos, contended business interruption coverage should apply because authorities prohibited customers from physically entering the property, an assertion derided as “nonsense” by Judge Joyce Draganchuk during a July 1 hearing posted online.
“There has to be something that physically alters the integrity of the property,” Draganchuk concluded i n her dismissal of Gavrilides’ case.