Legal intelligence

Lawmakers in at least eight states are considering legislation that would require insurers to honor financial claims from companies that were ordered closed by local and state governments in efforts to control the spread of the COVID-19 virus. Insurance companies, not surprisingly, are resisting what they see as an unwarranted rewrite of contract law that could have devasting implications.

The list of aggrieved businesses is broad and deep: Bars and restaurants, bars, hair salons and barber shops, retail stores, dental and medical practices, hotels and many others have lost critical revenue and in most cases been compelled to furlough staff and eliminate jobs altogether.

Many of those companies have seen claims denied by carriers who say the pandemic amounts to an unforeseen development not specifically covered by policies. The key for companies mounting legal challenges to those denials will be whether the contracts included language specifically excluding coverage of an event like a mass public-health crisis.

The broader question for public policy is whether an insurance policy is a private contracts in the traditional sense of business-interruption insurance. To this point, insurers are rallying around an argument that the virus itself caused no loss or damage to the business premises, unlike fires, flooding or storms.

“A typical business interruption provision makes clear that the business suspension must be caused by ‘direct physical loss of or damage to property’ at the insured location,” said Bruce Moothart, a partner with the Seyferth Blumenthal & Harris law firm in Kansas City. But even assuming that such surface contamination by a virus qualifies as physical damage, he said, business owners may still face an uphill battle to obtain insurance benefits. That’s because it may be difficult to demonstrate the virus was actually present, and thus caused direct physical loss in the particular business seeking coverage.

“As the number of lawsuits grow,” Moothart said, “courts of various jurisdictions will undoubtedly struggle to come to consistent rulings on these issues.”