U.K. and U.S. Courts Differ on COVID-19 Business Interruption Claims
A recent article in the New York Times reports that the U.K. Supreme Court recently ruled that insurers must cover COVID-19-related losses. This is a huge victory for small-business owners whose business interruptions claims often have been rejected by insurers. In contrast, many U.S. courts (state and federal) have sided with insurers and granted motions to dismiss the plaintiffs’ cases.
Legal test case: As in the U.S., many business owners in the U.K. discovered that insurers were reluctant to pay business interruption claims related to the pandemic. As the Times article explains, the many rejections caused Britain’s financial services regulator, the Financial Conduct Authority (FCA), to file a legal test case on behalf of policyholders in the country’s highest court. The goal, the FCA says, was “to urgently clarify key issues of contractual uncertainty for as many policyholders and insurers as possible.”
The test case sought to litigate key issues and obviate the need for individual policyholders to resolve their individual issues with their insurers. For its test case, the FCA identified 370,000 policyholders with 700 types of policies that were issued by 60 insurers.
According to the Times article, the Supreme Court’s recent judgment (Jan. 15, 2021) says pandemic-related losses and losses flowing from governmental shutdown orders are covered under two key terms that appeared in many of the policies. They are the “disease clauses,” covering losses from any occurrence of a disease that must be reported to authorities, and “prevention of access clauses,” covering losses when public authorities block access to the business premises. Further, the court ruled that businesses would be able to make claims for partial closure of business or orders that were not legally binding but that encouraged businesses to close days ahead of an order becoming law.
The FCA says it will work with insurers to conclude as soon as possible processing of eligible claims. The goal was to provide businesses with interim payments wherever possible.
Two hurdles: Meanwhile, in the U.S., business owners filing suit against insurers that denied claims for business interruption losses, in many instances, have failed to get beyond the motion to dismiss stage. Diesel Barbershop is a case in point. Here, a number of barbershops operating in Texas challenged the insurance company’s rejection of their claims under policies that were essentially identical. The policies included two hurdles to coverage. One was that they required an accidental, direct physical loss to the property. The court agreed with the insurer that the businesses were not “tangibly ‘damaged’ per se.” The plaintiffs did not plead direct physical loss to their buildings, the court said.
Further, the court agreed with the insurer that, even if the plaintiffs had shown direct physical loss to their properties, they still would not prevail on their claims because of the virus exception contained in the policies.
A companion case is Turek Enterprises, which arose in the Eastern District of Michigan and had facts similar to those in Diesel as well as an almost identical business insurance policy from the same insurer. This case, too, was dismissed.
Digests of Diesel Barbershop, LLC v. State Farm Lloyds, 2020 U.S. Dist. LEXIS 147276; 2020 WL 4724305 (Aug. 13, 2020), and Turek Enterprises, Inc. v. State Farm Mutual Automobile Insurance Co., 2020 U.S. Dist. LEXIS 161198 (Sept. 3, 2020), as well as the courts’ opinions, are available at BVLaw.
Source note: This article originally appeared in Business Valuation Update and is reprinted with permission from Business Valuation Resources. This article is intended for informational purposes only.