Exploring Litigation Risks and Business Interruption Coverage Disputes in the Context of Commercial Insurance

By IMS Insights Podcast

In this exclusive expert video briefing from the IMS COVID-19 Research Insights Series, we speak with Commercial Insurance Industry Expert, Ty Sagalow, about litigation and business interruption disputes as a result of the COVID-19 pandemic.

Chris Ritter: Hello, Ty. It's good to see you.

Ty Sagalow: Good to see you, Chris.

Ritter: I hope you're well. I hope your family's well and you're staying productive during this very strange time we're in.

Sagalow: I am. And you too.

Ritter: Yeah. Thank you. Ty, you've been doing insurance work for a good long time. I think probably close to forty years. And I know you have gone through a lot of what would be considered the prior disasters, hurricanes and earthquakes and fires and 9/11 and all that other stuff that have kept us on our toes over the last few years. But this is a unique situation, and I guess I'd like to talk with you about what you see are some of the issues as a result of the COVID-19 epidemic and all of the things that it's had and the effects that it's had on our lives. What do you see as the issues?

Sagalow: I'll tell you, Chris. I've been in the insurance business for 37 years in various capacities, whether on the insurance executive side for most of that or as a consultant or as a startup insure tech guy. And this is the most complex situation that I have ever seen. It is prompting coverage litigation, litigation generally, real turmoil for the insurance industry and for policy holders. As of the recording of this interview, there has been over 570 active litigation cases arising out of COVID-19. 69 legislative bills on both the federal and state level.

Sagalow: The litigation can be characterized and categorized in various buckets. Certainly, a lot of coverage litigation. The ones that people probably are thinking mostly about are business interruption, restaurants, hotels that have found themselves shut down as a result of the virus, as a result of government orders that are losing business and putting in claims into their insurance carrier under their property and business interruption policies.

Sagalow: But it's not just business interruption polices that there are coverage disputes under. General liability, new definitions of unfair business practices, directors and officer’s liability insurance policies, cyber liability, public officials’ liability — there'll be coverage disputes. And then outside of coverage disputes between insurance carriers and policy holders, there'll be just a lot of litigation. We're reading about tons of cases against directors and officers alleging nondisclosure in violation of the securities laws. We expect to have a lot of cases against insurance brokers alleging negligence. There'll be employment suits arising out of alleged unfair work environments when people go back to the office. There are worker's compensation cases, defining what that means in terms of viruses.

Sagalow: And then we expect to have litigation arising out of the various legislative proposals and immunity laws. So, no matter where you go, there's going to be a lot of work for the lawyers at least.

Ritter: Well, you've raised a variety of different kinds of claims. You raised first party insurance claims, third party claims, things which are maybe not directly related to insurance but other types of claims that may be brought by people who've been injured as a result. Let's focus if we can a little bit on something that's been in the news a lot. I think it's been in the news a lot because it is such a dramatic series of events, which is all the companies, all the events, everything that's had to shut down and the interruption that that's generated in business. And, of course, if you use the layperson's definition, here's my business. It's been interrupted. I should have insurance.

Ritter: I suspect that that's going to raise a lot of claims. How do you see, I'm not looking for predictions necessarily but how do you see this shaping up?

Sagalow: It's a very emotional issue and there are sympathies, frankly, on both sides of the aisle. You can't help but have a sympathy for that small business owner, whether it's a retail store, whether it's a restaurant, family owned, working hard, many times with very, very small margins. And then due to no fault of the owner, he has to shut down; she has to shut down, lose business, sometimes be unable to open up because of this terrible, terrible virus. You're right. All they know is they bought an insurance policy that's called business interruption. Technically it's called property coverage, but their agent probably said it includes business interruption and their business is interrupted. They say, "Well, I need the money in order to open up." And you can't help be sympathetic.

Sagalow: But on the other side of the coin, you can't help be sympathetic to the insurance carriers as well. I know that's radical to a lot of people that might be hearing this but hear me out. They have an insurance contract and they charge for the coverage given by that insurance contract. And that insurance contract covers some things and doesn't cover others. And there are a lot of arguments as to what's covered, but they have a right not to cover things that aren't covered. And I think sometime during this conversation we'll talk about the solutions but not every solution is having the insurance industry pay for things that they didn't get a premium for.

Sagalow: So, the issue is did they get a premium for this type of loss and that can get tricky because it depends upon how the policy is worded. And we could spend the entire hour talking about whether there is coverage for this business interruption loss under a business interruption policy. But I'll just highlight a few of the issues.

Sagalow: A business interruption policy, which is a part of a property policy, comes in two main varieties. There's a named peril policy. Now that's the easy one because it says you only have coverage if it's a named peril. That's like a fire or a wind or water. Virus is not a named peril. So, if you have one of those, you're in bad shape. But most of business interruption policies are called all risk. That sounds pretty good. All risk is all risk.

Sagalow: However, all risk is not really all risk. It requires direct physical loss or damage to your property and that's what people are arguing about, whether the virus causes direct physical loss or damage. And the carriers are going to argue quite strongly that the virus does not cause, or the policy holders can't prove that it caused any direct physical loss or damage, absent unusual circumstances. Now, there are policy holder arguments as well that they will argue, for example, that the mere presence of the virus in or around the business property had rendered the property unsafe or unfit for its intended use. And there are some arguments along those lines in some courts. But it is a challenge in most jurisdictions.

Sagalow: Policy holders are also expected to make references to some asbestos cases that have said that asbestos does not alter a building's physical structure but nevertheless causes direct physical loss. Carriers are expected to argue that, one, those cases don't apply. And second, even if they do, the virus only around for two or three days.

Sagalow: Another aspect of these types of policies is civil authority. And again, it all depends upon the language. Most of the time the civil authority clause, and that's a government order, and there's been government orders, right? But most of the time the civil authority clause requires direct physical loss of damage to an adjacent property. So again, you have the same problem.

Sagalow: Now, without getting too geeky here, if you get through the insuring clause, you still have exclusions. Now, there are a whole bunch of different versions of the exclusions. There are exclusions that specifically exclude viruses that have been created after 2003 due to SARS. That is the biggest hurdle for policy holders because that was created due to SARS. On the other hand, there are some exclusions that don't mention viruses, that mention only microorganisms or even worse, from the point of the view of the insurers, they don't mention that either, they just mention pollution. They don't mention viruses at all.

Sagalow: So again, it all comes down to the language. And by the way, if you get through the insuring clause and you get through the exclusions, then, of course, you have to prove loss and then the issue is once the restaurant hypothetically reopens but people don't show up because they fear the virus is still around but there's no now civil order, you now have to have an expert show the level of fear is still showing a causation between the virus and the business interruption. Those are only some of the issues that we expect to have from both the policy holder's point of view and the carrier's point of view in wrestling with this very difficult issue of business interruption loss.

Ritter: So as I understand you, first, you really have laid out a very interesting matrix. You've talked about there are three major things that have to be examined. One is whether or not the insurance itself even applies, the insuring agreement. Then there's the question of are there any exclusions or anything which take whatever coverage there may have been away. And then on top of that, if you can get that far, you've got to figure out damages and it sounds like particularly with respect to damages, we're facing something that we really are not familiar with, something that we've not seen in a lot of other claims. Is that a fair statement?

Sagalow: Yes. It is probably one of the most complicated situations. Although, again, it all deals with the language. Sometimes the language is very favorable to the insurer and the policy holders have a very difficult battle on their hands. On the other hand, sometimes the language is favorable to the policy holder and the insurer is really stretching things when they try to exclude the claim.

Ritter: So, overarching all of this very complex structure is, as you say, the specifics of the language of the contract?

Sagalow: Indeed.

Ritter: And the process that that has to be honored whichever side is benefited by those terms ultimately.

Sagalow: Yes.

Ritter: I'm going to ask, I may not get an answer, but any guesses on how all of this is going to turn out?

Sagalow: Everything is so fact specific. I think that most of the policies that I see after SARS have some pretty strongly worded exclusions. I think most of the cases that I see have a pro-insurer view of direct physical loss or damage. Fast forwarding toward the end, the ultimate resolution for us as a society might be a public/private partnership similar to what we did with terrorism. But again, it's very fact specific. I certainly would encourage individuals and companies to look carefully at that language. Submit the claim because you never know and consult advisors.

In Depth Analysis

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FEATURING: Ty Sagalow

Mr. Sagalow is a 37 year senior insurance executive veteran, 25 of which at AIG where he held various positions including Chief Underwriting Officer and General Counsel of AIG Executive Liability (D&O, E&O), Chief Operating Officer of AIG eBusiness Risk Solutions (Cyber insurance) and President of AIG Product Development. Read more about Ty Sagalow>>

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