Logic & Language and Forms & Facts The Final Word on COVID-19 and Insurance?

Since this is an insurance coverage column, it’s perhaps fitting to initiate the new year with a look back at the biggest coverage issue of the past year and probably the past couple of decades. In 2001, the coverage question was whether the terrorist strike at the World Trade Center was one or two occurrences.

The coverage issue today is whether business income insurance covers pandemics, in this case, the COVID-19 SARS-CoV-2 viral pandemic. As I write this article in early December 2020, according to attorney Roy Mura, of the almost 1,400 COVID-19 lawsuits, about 80 insurer motions to dismiss (MTDs) have been the subject of summary judgment so far.

Two-thirds of the cases have been heard in federal court and one-third in state court. Overall, decisions have favored insurers 75% of the time. That percentage in federal courts is over 90%, whereas insurers have a 50/50 chance of prevailing in state courts.

The first case that appears to actually be going to trial is Cajun Conti LLC et al. v. Certain Underwriters at Lloyd’s et al., which was reportedly the first COVID-19 lawsuit filed in the country. It will be interesting to see the logic behind the ruling at this New Orleans trial court, but that won’t be the end of the litigation.

In October, fittingly on Halloween, I published my fifth book, this one entitled “Why Insurance Doesn’t Cover the COVID-19 Pandemic.” My goal in this month’s column is to condense the 164 pages and 50,000-plus words in that book down to a couple of pages and less than 1,500 words.

The industry-standard policy language for business income coverage comes from the Insurance Services Office (ISO) form CP 00 30 – Business Income (And Extra Expense) Coverage Form. There may be eight edition dates of this form in the marketplace, along with some proprietary insurer forms and an unknown number of variations on the ISO language.

In the ISO form, there are two major sources of business income coverage. The first, primary coverage is triggered by “direct physical loss of or damage to property” caused by a covered peril to property on the declared premises. Secondarily, a time-limited (two to four weeks) coverage extension is provided when access to the premises and a specific geographical area is prohibited by an order of civil authority due to damage to property away from the declared premises by a covered peril under certain conditions. If this sounds complicated, that’s because it is. That’s especially true for the “civil authority” coverage extension because the language in that policy provision was significantly revised by ISO in 2007.

In my view, there are three main reasons why this and similar business income forms do not cover COVID-19 claims: (1) there must be demonstrable “direct physical loss of or damage to” property, (2) the same requirement applies to the civil authority coverage extension plus, in the majority of forms in the marketplace, an area-wide prohibition of access must apply, and (3) insurance doesn’t cover potentially catastrophic losses that can impact virtually every insured almost simultaneously.

The vast majority of legal jurisdictions have held that “direct physical” loss or damage requires some material alteration, usually of a permanent nature, to tangible property. This interpretation is supported by the definition of “period of restoration” in the form which governs the amount of recovery under the policy until the insured relocates or the property has been “repaired, rebuilt or replaced.”

Even if the SARS-CoV-2 virus exists at a premises, according to the experts its surface presence can be remediated by cleaning with a household disinfectant. A restaurant manager would not hand an employee a spray can of Lysol or a Clorox wipe and instruct him or her to “rebuild” the table tops in the dining area. That’s a ludicrous premise, as supported by recent and past case law.

‘The vast majority of legal jurisdictions have held that “direct physical” loss or damage requires some material alteration, usually of a permanent nature, to tangible property.’

Policyholder attorneys have pointed to a minority of cases finding coverage for surface or atmospheric contamination by asbestos, ammonia and even cat urine. Aside from the “cleaning” argument above, another critical point distinguishes those cases from most COVID-19 cases …the asbestos, ammonia and urine actually existed. To my knowledge, there is no evidence in any of the 80 MTD cases thus far that the SARS-CoV-2 virus was actually present at any premises. In fact, in almost 80% of the 80 MTD cases, the presence of the virus was not even alleged to exist at any insured’s business.

Most likely, the reason for this is that the coverage most policyholder attorneys are hanging their hats on is the order of civil authority coverage extension. The problem with that argument is that, in the ISO CP 00 30 forms prior to 2007, the insuring agreement of this coverage required “direct physical loss of or damage to” property. The “direct physical” requirement was later dropped by ISO so that the 2007 and 2012 editions of the form only require “damage” to property. However, those two most recent editions of the form require damage by a covered peril and the ISO Causes of Loss forms are only triggered by “direct physical loss.”

Some policyholder attorneys argue that “loss of” (vs. “damage to”) property includes “loss of use of” that property. I counter that argument on the premise that, if the contract language had intended coverage for “loss of use of” property, it would say “loss of use of” and not just “loss of.” To coin a phrase (or at least borrow from one used by statisticians), “Torture policy language and it will confess to anything.” The phrase “loss of” is inarguably distinguishable from the phrase “loss of use of.”

To demonstrate that point, take a look at the definition of “property damage” in the ISO CG 00 01 (CGL) policy, which addresses three types of loss to property, two of them specifically being “loss of use of” that property. The same cannot be said of the CP 00 30 form also drafted by ISO.

However, aside from this issue, given that most CP 00 30 forms in the marketplace are likely the 2007 or 2012 editions, civil authority coverage is only triggered if the civil authority:

“… prohibits access to the described premises, provided that both of the following apply … Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property.”

The problem is that the vast majority, if not all, of governmental orders thus far have not prohibited access to premises (the property owners can still conduct some operations), nor have any of the orders to my knowledge prohibited access to an entire geographical “area.” This type of prohibition is common following, for example, a tornado or hurricane, but not a virus. If we’re really being honest with each other, the reality is that the rationale for these governmental orders is prevention of disease transmission, not remediation of property damage.

Finally, as I wrote in my book “When Words Collide: Resolving Insurance Coverage and Claims Disputes,” when a judge hears an insurance coverage case, the first order of business when examining the language of the insurance contract is to seek to determine the intent of the policy language. I contend that it is not the intent of ANY property insurance policy to cover losses that can impact virtually every insured almost simultaneously. The very essence of insurance is that the transfer of risk from a multitude of insureds to an insurer is enabled by the ability to spread the risk of loss among the insureds. If that’s impossible because every insured can be impacted at the same time, then the risk is uninsurable.

The purely economic losses created by a pandemic, and perhaps arguably exacerbated by questionable and equally uninsurable decisions by governmental authorities, is not an insurance issue. It’s a societal issue which no single industry should or could be expected to solve.

Here’s hoping that the judicial system will review insurance contract language in its clear and unambiguous meaning as intended and that 2021 will be a return to prosperity by all.