As the COVID-19 pandemic caused hotels across the country to close their doors—in some cases for a short period and in others, a more extended time—those owners and operators were expecting that their business interruption insurance policies would cover some of their losses. But as they have begun filing claims, they have found that their insurers are denying them coverage.
While each individual policy is different, the key sticking point on what will trigger most business interruption policies is whether physical damage to the premises took place causing the disruption. From the insurance companies’ point of view, the COVID-19 virus and the accompanying business shutdowns have not caused physical damage to a business.
“The simple part of the claims and the response is that in order to trigger a loss of income or business interruption insurance, you have to have physical damage to the premises. Think of it this way: an explosion, vandalism, something that physically damages the premises,” said Barry R. Cohen, president, Cohen Partners LLC, a national insurance broker. “The decisions that the insurance companies have made is that the virus itself did not physically damage the premises of the insured. Since there was no property or physical damage, that is why they deny the claim. Then it becomes policy interpretation.”
As the claims have been denied, hospitality companies are now turning to the courts in hopes that they will find that the insurers are incorrectly interpreting the policies and that COVID did, indeed, cause physical damage.
Many law firms have taken the cases on a contingency basis. “We have been involved in the legal roller coaster of these cases from the very beginning, probably going back to March and April 2020 when the first shutdowns started happening,” said Frank A. Florio, attorney, Kozyak Tropin & Throckmorton. “It was our impression that the insurance industry—at least with our clients as a whole—was taking the approach that there is no coverage, period. Our clients got denied outright, and that is when the attorneys get involved and file a lawsuit for breach of the insurance contract.”
Florio believes that hospitality companies should be covered. “Our clients faithfully paid premiums month to month or year to year for insurance coverage,” he said. “They were promised that they would be covered for business interruption. Their business was interrupted and now they are denying the claim in violation of the policy.”
Early rulings from courts in many cases have favored the insurance carriers—and their assertion that the virus did not cause any actual physical damage. The rulings have come very early on in the process, during the motion to dismiss phase. “We file our complaint and say this is what is going on,” he said. “The insurance carrier moves to dismiss the case outright, claiming that we haven’t asserted a claim.”
The hospitality companies argue that the virus and shutdown orders caused physical loss of the property. “The owners physically lost the ability to use the property as it was intended,” said Florio.
The courts so far have not agreed. “As the law developed, it became apparent that courts around the country were not really seeing this as direct physical loss because they thought it had to be something tangible, maybe even structural damage to the property,” he said. “…As the case law developed, and the data around the virus developed for months, [we]started to also allege that the virus itself caused damage to the property by getting into the property, attaching itself to the furniture, spreading among people at the property.”
While the courts are still deciding the interpretation of the law, both Cohen and Florio have the same advice for the insured companies: File a claim.
“My advice to all of the clients is, at the very least, file your claim if you haven’t, to preserve it,” said Florio. “You are likely going to get denied, but depending on where you are and the statute of limitations of your state for these types of claims, you want to at least preserve the ability to file a lawsuit if the legal landscape changes. If you are in a state where there is a better chance that your lawsuit might proceed, then potentially a law firm in that state will take on that case and move forward with you.”
“Put the claim in,” said Cohen. “There is no downside to it.”
Cohen Partners account executive Daniel Cohen noted that a claim will also be proof if the government creates a fund for businesses affected by the pandemic, adding, “In a year or two, maybe more, there might be some kind of local or government fund that is set up for those businesses who suffered from this, possibly similar to what we had in New York with Superstorm Sandy where companies literally had to show the government that they had claims denied so they could qualify for this compensation from the event that happened.”
But the fight in the courts is not over. “We are still pushing these cases and there are cases going up on appeal. There are plaintiff’s firms, like my firm, that are still fighting,” said Florio. “We haven’t given up and now we are going to keep fighting for our clients until we can’t anymore because we know how badly people have been affected by this.”