Already reeling from the economic crash caused by the coronavirus, hundreds of U.S. companies say insurers are wrongly declining to honor policies they believed would help them weather unforeseen events, including the pandemic.
Roughly 1,100 suits have been filed against insurers since the public health crisis, mostly over disputes involving so-called business continuity, or “interruption,” insurance, said Robert Hartwig, a professor at the University of South Carolina’s Darla Moore School of Business. Such policies are designed to cover losses when an enterprise must temporarily shut down some or all of its operations, as companies were forced to do en masse earlier this year.
Retailer Century 21, for example,in announcing last month that the 60-year-old company would be closing for good. Century 21’s owner said it would likely have been able to stay open, and perhaps saved thousands of jobs, had its insurers paid on the retailer’s business interruption policy. Century 21 insurers have declined to comment on the retailer’s claims.
“It’s a cynical attempt to keep money and not pay policy holders who have been paying in premiums for years,” said attorney Walter Andrews of Hunton Andrews Kurth who is representing a number of commercial clients that claim they are being stiffed by their insurers. “Insurers recognize that if they pay what they owe, they will be hurt financially. Instead, the businesses they were supposed to help protect are getting hurt.”
Tough case to win
So far, judges around the country have generally sided with insurance companies and thrown out many of the early suits related to COVID-19 claims. In recent weeks, though, two judges — one in Missouri and another in New Jersey — recently denied insurance company motions to dismiss similar cases filed by a beauty salon and a group of optometry practices, respectively. That’s given policy holders, and the attorneys would represent them, some hope.
Legal experts say the thrust of most of the cases revolves around how courts interpret the phrase “physical loss or damage.” Sherilyn Pastor, a partner at law firm McCarter & English who is president of the American College of Coverage Counsel, said physical loss includes the loss of use of, or access to, a given property — not just physical damage.
“Damage has to mean something different than loss, or why else would both words be there?” she said. “There is pretty good legal precedent that loss of the use of your property is covered in these policies.”
But Hartwig, the business professor and an expert on continuity insurance, said companies face an uphill climb convincing courts to require the insurance payouts. “Every time there is a natural catastrophe there are enterprising plaintiff attorneys to invent coverage where none existed and was never intended,” said Hartwig. “This is no different this time.”
Hartwig said the term “loss” in the insurance arena has long been interpreted to mean theft, not access to a store, office or other location. What’s more, 80% of insurance contracts specifically exclude viruses. Most other policies do not address such incidents, he said.
Ralph Lauren files suit
Another case involves apparel company Ralph Lauren. The retailer in August sued its insurance company, Factory Mutual, saying it was defrauded of as much as $700 million and calling the insurer’s behavior “unconscionable” and “deceptive.” Factory Mutual was one of the few that offered policies that explicitly provided some coverage for losses from pandemics.
According to Ralph Lauren’s suit, the apparel company bought a one-year policy from Factory Mutual in May of 2019 and renewed it for 2020 Ralph Lauren claims the policy covers all risks, including “physical loss or damage” and, more specifically, “communicable disease response.”
The policy, which was reviewed by CBS MoneyWatch, specifies that Factory Mutual will cover both disease clean-up and interruptions that are caused by the presence of communicable disease at a company location. The clean-up coverage, though, is capped at $1 million.
Ralph Lauren says in its suit that the limit on clean-up costs shouldn’t stop it from claiming interruption and other losses resulting from the pandemic under other parts of its policy, which has an overall limit of $700 million.
Ralph Lauren began shuttering stores starting in mid-March as the coronavirus was spreading, and kept most of them closed for at least a month. The company said it contacted Factory Mutual on March 30 to make a claim. According to Ralph Lauren’s complaint, Factory Mutual in late April responded that it would cover the cost of clean-up at the retailer’s stores, such as wiping down surfaces, but little else.
According to Ralph Lauren, Factory Mutual told the company that under its policy it needed to experience some type of physical damage, and that COVID-19 did not cause “physical damage of the type that is insured.” The insurer also indicated that business losses sustained from closing stores due a government-ordered shutdown wasn’t covered, the clothing company’s suit contends.
In early August, Ralph Lauren sued. “The controversy between Ralph Lauren Corp. and FMIC is ripe for judicial review,” Ralph Lauren said in the complaint. “As a consequence of FMIC’s wrongful denial of coverage and fraudulent conduct, Ralph Lauren Corp. has suffered and continues to suffer significant damages.”
Ralph Lauren declined to comment for this story. A spokesperson for Factory Mutual declined to comment on the specifics of the case.
“FM Global values the long-term relationships we have with our policyholders and we are proud in leading the industry for claims service,” the spokesperson said in a statement to CBS MoneyWatch. “It is unfortunate when legal matters arise because we strongly believe our insurance policies are clear on the coverage provided.”
At least three other companies, including, New York City real estate company Thor Equities and barcode specialist Zebra Technologies, are also suing Factory Mutual over allegedly failing to honor their continuity coverage. The insurance company also faces a class-action suit on behalf of universities and colleges that bought the company’s continuity policies but have been denied claims.