(Reuters) - For Steven Badger of Zelle, who specializes in representing commercial insurance companies in coverage disputes with policyholders, business has never been better. It’s a peculiar quirk of his practice that disasters breed demand for his services – and for the insurance industry, Badger told me, COVID-19 is a catastrophe like no other. “It’s like a hurricane that has hit all 50 states,” he said.
Commercial insurers are facing two gigantic threats, according to Badger. The first is millions of claims by small businesses that want their insurers to cover their losses from COVID-19 lockdowns. The industry, as I’ll explain, is of the view that the vast majority of those claims are either unwarranted under the language of their policies or specifically excluded because of exceptions that insurers began to impose in 2006. But the potentially more dire risk to insurers, Badger said, is from state legislatures considering laws to force the industry to provide retroactive coverage to policyholders, regardless of the language of their insurance contracts. Lawmakers in seven states, including hard-hit New York, New Jersey and Louisiana, have introduced such bills, though no law has yet been enacted.
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Badger said he’s confident that any government attempt to rewrite insurance contracts would ultimately be deemed unconstitutional under the Contracts Clause of Takings Clause. But havoc could rain down on the industry in the meantime, he said. Commercial insurers hold more than $800 billion in reserves. If they’re forced under proposed state laws to liquidate those reserves to pay policyholders for virus-related losses, Badger said, insurers won’t be able to pay other legitimate claims – and reinsurers may well balk at acting as a backstop for risk that’s not addressed in their contracts with insurers.
“That will completely disrupt and could bankrupt the insurance industry,” Badger said. “And it’s horrible policy.”
As it happens, Badger’s chief antagonist on the policyholder side, John Houghtaling of Gauthier Murphy & Houghtaling, told me he agrees with Badger on proposed legislation to put insurers on the hook retroactively for business interruption losses they didn’t actually insure. Houghtaling, who has tangled with Zelle lawyers for years over insurance coverage for natural disasters, filed what he believes to be the first U.S. suit against an insurer that refused to pay a COVID-19 business interruption claim, on behalf of the New Orleans restaurant Oceana Grill against Lloyd’s of London. Houghtaling has since teamed up with a cadre of celebrity chefs, including Thomas Keller, Daniel Boulud and Jerome Bocuse, to advocate for the restaurants demanding coverage from insurers.
“I don’t believe the proposed laws are fair or constitutional,” Houghtaling said. They’re also a red herring, he said, because the draft laws allow the insurance industry to cast itself as a victim of government overreach. Houghtaling said his preference is for insurers to be held to the contracts they signed with policyholders.
Where Badger and Houghtaling part ways is on exactly what those contracts require. Badger and his law firm have been outspoken as industry representatives since early March, when Zelle issued a 10-page white paper explaining why business interruption and civil authority clauses in insurance policies do not extend to losses from COVID-19 shutdowns.
In a nutshell, Badger told me, the problem for policyholders is that they’re required to show physical loss or damages to make a claim for business interruption. Typically, he said, insurers will pay out business interruption insurance if, for instance, a company has to shut down because of a fire or a natural disaster. Civil authority provisions cover shutdowns mandated by state or local governments in response to nearby disasters, such as a business that’s ordered to close its doors because of a chemical release at a manufacturing plant down the street, Badger said.
COVID-19 shutdowns, he said, don’t fit either of those scenarios. Policyholders whose businesses were closed because COVID-19 molecules were found on their premises may argue that the virus constituted physical damage. That will be a question for courts to decide, Badger said. But widespread shutdowns of uninfected businesses, in order to slow the spread of the virus, cannot trigger business interruption or civil authority coverage.
“The entire concept of insurance depends upon just a few people having losses that everyone contributes to with their premiums,” Badger said. “The concept doesn’t work when everyone has the very same loss.”
Even if policyholders could invoke business interruption or civil authority coverage to address mandatory shutdowns, Badger said, many policies contain an exclusion for closures attributable to viruses or bacteria. Virus exclusions, he said, were approved by states and widely adopted in 2006, after SARS and other epidemics.
“It’s a tough situation,” Badger said. His clients understand that policyholders who’ve paid their premiums year after year are now going to want insurers to come through with coverage, he said. But paying your premiums, he said, does not entitle policyholders to coverage beyond the scope of their contracts. Badger drew an analogy to a homeowner with an old roof asking her insurer to pay for a new roof after sustaining minor damage in a hailstorm.
“Just because you’ve paid premiums and have an old roof doesn’t mean the insurance company has to pay for (a new roof) under the terms of the policy,” Badger said. “If it’s not covered by the policy, simply having paid premiums does not give you a right to be compensated.”
Policyholder lawyer Houghtaling told me the industry’s interpretation of business interruption and civil authority clauses is “morally indefensible.” Businesses were interrupted, he argues, by shutdown orders that were mandated not just for social distancing — but because the COVID-19 virus can stick to surfaces, creating a dangerous property condition and a loss.
From the moment Badger’s firm issued its March 11 white paper, he said, “it was very clear that the industry was not going to pay policies no matter what the policies actually say.”
Houghtaling said his client Thomas Keller, whose legendary restaurant group includes Per Se and The French Laundry, had an insurance policy that specifically included a clause mandating coverage for viruses and epidemics. His claim was nevertheless rejected, said Houghtaling, who is representing Keller in a declaratory judgment suit in California state court against his insurer, The Hartford. (The insurance company did not immediately respond to an email requesting comment.) Broadly speaking, Houghtaling said, the insurance industry has exaggerated the prevalence of provisions excluding interruptions due to epidemics from coverage. “It’s just not true,” he said, predicting that insurance suits spawned by COVID-19 could turn out to be the biggest civil litigation in U.S. history.
Badger, meanwhile, said he continues to visit restaurants when he goes out for daily walks from his apartment. (He’s happy, he told me, that Texas now allows drinks to go, so he can pick up a beer along the way.) He was even filmed in front of a shutdown restaurant for a local TV spot about insurance disputes. Wherever he stops in, he said, he asks restaurant owners if they have business interruption insurance. (Only about 30 percent of small businesses in the U.S. do, Badger said.)
If the answer is yes, Badger told me, he urges the owners to file a claim. “I tell them, ‘Go through the claim process, because that’s how insurance works,” Badger said.
This article has been corrected. A previous version incorrectly characterized Houghtaling's theory of why businesses experienced property damage and loss.
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