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February 20, 2023 Business Interruption

CT Supreme Court sides with insurer on pandemic-related property insurance claims

PHOTO | COSTAR The headquarters of property and casualty insurer The Hartford.
By Andrew Larson

Tens of thousands of companies claimed they lost income during the COVID-19 pandemic as a result of government-mandated shutdowns or other interruptions in business related to the public health crisis, and sought compensation through their property insurance policies. 

When their claims were denied, more than a thousand businesses filed lawsuits against their insurers. Years later some of those legal challenges are still ongoing, but companies hoping for a legal victory against — and payout from — their insurer suffered a major blow in Connecticut in recent weeks.

The Connecticut Supreme Court in January upheld the denial of coverage in two separate cases brought by a group of medical practices and a shoe manufacturer, setting a precedent in favor of insurers that has sweeping implications for businesses.

The state high court’s opinion — that the policies did not cover the plaintiffs’ claims because they did not suffer any “direct physical loss of covered property” — is consistent with court decisions across the country, and is seen as a disappointment for companies hoping to recoup pandemic-related losses, and a relief for insurance companies that were potentially on the hook for billions of dollars in claims.

The implications are particularly important in Connecticut — home to many insurance companies that underwrite commercial all-risk property insurance policies and other similar business interruption coverages that have been in the legal crosshairs since 2020.

Those insurers have responded to the pandemic by modifying language in new policies to account for the potentially crippling effects of another virus outbreak.

That includes adding virus exclusions to policies, which specifically exempt damage arising from a virus, industry observers said. 

Eric George

“One thing that insurance companies are always doing: They're always trying to forecast the next eventualities,” said Eric George, president of the Insurance Association of Connecticut. “It's impossible to be precise because we don't have crystal balls. You can get very close to precision through strict actuarial analysis. But now we know that the world can shut down because of a virus, because we saw it happen.”

CT cases

The cases before the state’s high court both involved subsidiaries of locally headquartered property and casualty insurer The Hartford, and the commercial all-risk property insurance policies it underwrote.

The plaintiffs in one case included Connecticut Dermatology, which has locations across the state; Live Every Day LLC, an orthotics and prosthetics service in Simsbury; and Ear Specialty Group of Connecticut, based in Farmington.

In the second case, Moda LLC, a fashion footwear manufacturer based in Greenwich, claimed it lost $100 million in business income as retailers canceled orders following government-mandated shutdowns.

The court’s analysis concluded that COVID-19 did not have a tangible effect on any of the plaintiffs’ covered property. As a result, the justices agreed with the trial courts that ruled in favor of the insurers.

Patrick Kennell

“The question at the core of both decisions is whether the virus itself causes physical damage to property,” said Patrick Kennell, a partner with New York-based law firm Kaufman Dolowich & Voluck. “It has been clear throughout the country that, in almost all cases, the courts have said now that there's no damage just by the presence, or fear of the presence, of the virus.”

The opinion, written by Chief Justice Richard Robinson, draws a distinction between loss of access to property and loss of property. The court rejected the plaintiffs' argument that their case was similar to ones in which "contamination of a property by harmful substances or bacteria was deemed to be a direct physical loss."

The plaintiffs did not show that their buildings became “nonfunctional or inherently dangerous to persons who entered them," the opinion states.

The decision was not a surprise to attorneys who follow the insurance industry, but it will have a significant impact, setting the stage for hundreds of lawsuits filed by businesses seeking insurance compensation for COVID-19 losses to be dismissed, experts said.

For example, U.S. District Judge Kari A. Dooley cited the Connecticut Dermatology case in her Feb. 1 decision dismissing a complaint filed by New Haven entertainment venue Toad’s Place, which sought compensation from its insurer after it was forced to close during the pandemic. 

“The court sees no meaningful basis upon which to distinguish this case from those (Connecticut Supreme Court) cases,” Dooley wrote. “Accordingly, the court concludes that the term ‘direct physical loss or damage’ to property unambiguously requires actual physical damage or physical alteration to the covered property.”

Policyholders’ argument

Attorney Richard Lewis, with Pittsburgh-based law firm Reed Smith, was part of a team that filed an amicus brief on behalf of policyholders in the Connecticut Dermatology case.

He said hundreds of thousands of business owners have brought claims for lost income resulting from COVID-19. In some cases, the loss is due to the virus itself. In others, the policyholders claim losses due to orders of a civil authority.

Attorneys for policyholders in states like New York and California are still trying to persuade state courts to look beyond the consensus in federal courts — that there is no coverage for COVID-19 — and apply the law “as it existed prior to the pandemic,” Lewis said. 

Among decisions prior to 2020, Lewis said it was “fairly clear that events which rendered your property unusable or unsafe cause physical loss or damage regardless of whether it altered the property.”

The insurance industry has fiercely defended itself from COVID-19 lawsuits and has maintained from the pandemic’s start that policies generally do not cover losses stemming from a virus.

Ironically, the Connecticut cases were heard at the Supreme Court building on Capitol Avenue, less than a half-mile away from The Hartford’s headquarters. 

Christopher Swift, CEO of The Hartford, in a June 2020 opinion column published by CNN Business and the Hartford Business Journal, said that viruses are outside the scope of business interruption coverage.

PHOTO | CONTRIBUTED
The Hartford’s CEO Chris Swift.

“Property insurance, where most business interruption resides, requires the pooling of policyholder premiums together to pay for disasters that damage the property of a limited number of customers for a short period of time," Swift wrote. “Pandemics violate that fundamental principle of insurance. Simply put, you can't define, pool or price risk for something that affects so many, all at once, for an indefinite period.”

The Hartford declined to comment for this story.

Policy language

Attorney Michael McCormack, a partner with Glastonbury law firm O'Sullivan McCormack Jensen & Bliss, who represents businesses and policyholders, said he thought the state’s high court applied a reasonable interpretation of the language in the policies. 

Michael McCormack

McCormack said that because insurance companies are usually the party that drafts the policy, courts tend to rule in favor of policyholders when there is any ambiguity about the meaning of a word. In this case, such ambiguity did not exist, he said.

McCormack said that businesses often don’t know they need a certain type of coverage until an unanticipated event occurs.

“Oftentimes, the coverage issue does not become known until there's a claim and the business says, ‘What do you mean I'm not covered for that? I thought I had that type of coverage,’” McCormack said. “So, these businesses have to understand what their potential risks are.”

One takeaway for businesses is that they should talk to their insurance brokers about exactly what their insurance does, and does not cover, said George, the state insurance association president. 

Companies can purchase riders if they’re worried about a specific type of loss, aside from property. However, that will be more costly.

“You have to talk to your broker, or whoever your insurance agent is, and find out what's available to you,” George said. “What are you willing to spend in terms of your premium dollar to get coverage? Because as we know, with the typical business interruption policy, there needs to be property loss.”

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