By David DeMoss
When COVID-19 first hit the United States, the unknown repercussions of the virus on the various industry sectors were hard to comprehend. Now, approximately a year after nationwide social distancing protocols and mandatory business shutdowns, the shock wave of the pandemic is becoming more and more evident.
As soon as businesses began shutting down, G4 Risk Solutions started following the reporting on litigation of property damage claims. We covered insurers winning and opposing rulings on claims in anticipation of how the insurance industry would react. Below, Alwyn Scott helps explain how insurers are better defining exclusions in policies to avoid lawsuits moving forward.
U.S. insurers are strengthening language in policies that cover business losses to protect them from future claims related to the coronavirus pandemic or other widespread illnesses that disrupt operations, industry sources say.
New policies and renewals now define terms like “communicable disease” or “microorganism” – something existing policies often lacked, and which led to a flood of lawsuits that insurers have so far largely won.
An exclusion drafted by the Lloyd’s Market Association, for example, says insurers will not cover any claim “directly or indirectly arising out of, attributable to, or occurring concurrently or in any sequence with a Communicable Disease.”
Another, used by Farmers Mutual Hail Insurance Company of Iowa, excludes losses from even the “fear or threat” whether “actual or perceived” of a communicable disease or “any action in controlling, preventing, suppressing” it.
Some companies, such as The Cincinnati Insurance Cos., a unit of Cincinnati Financial Corp, said they are not adding exclusions because current policy language makes clear that pandemics are not covered.
Cincinnati has been named in 149 lawsuits for claims denial, ranking it second behind Hartford Financial Services Group Inc., with 222 suits, and well ahead of Chubb Ltd.’s 64 and American International Group Inc., with 38, according to data compiled by the University of Pennsylvania Law School.
Plaintiffs attorneys are pressing for coverage to apply. If insurers had been required to cover losses from business customers affected by the pandemic, it would cost them as much as $431 billion a month, according to an industry group. Critics have called that figure inflated.
“Rather than have those terms continue to be undefined, insurers are including definitions to expressly reference COVID-19 or other SARS-related viruses,” said Alan Lyons, who chairs the insurance and reinsurance group at law firm Herrick, Feinstein LLP in New York.
Judges have handed insurers victories by dismissing about 81% of the 205 state and federal lawsuits decided so far. But among just the state decisions, insurers have lost 65% of cases when policies lacked virus exclusions and 43% even when there was an exclusion, said Tom Baker, professor at UPenn Law.
Insurers have argued that business-interruption policies are intended to cover property damage, which the pandemic did not cause, and that their language does not specifically cover infectious illnesses and often includes exclusionary phrases.
“The policyholders are not entitled to recover because the virus does not damage property,” said Michael Menapace, an insurance lawyer at Wiggin and Dana LLP who also works with the Insurance Information Institute, an industry association.
Plaintiffs attorneys remain hopeful. They point to victories in Ohio and in the United Kingdom, where courts found insurers liable for some claims, even on policies with virus exclusions. The Ohio decision, however, is likely to go through lengthy appeals and U.K. decisions do not have much effect on the United States.