When the Great Lockdown started in Michigan, Nick Gavrilides closed the dining room of his Soup Spoon Cafe in Lansing, had some farewell beers with his workers and set to work on an insurance claim.
He had paid for business interruption insurance, a type of coverage that replaces a portion of a firm’s lost revenue when a disaster forces it to suspend operations, and was expecting his carrier, Michigan Insurance Company, to cover at least some of his losses. He didn’t get a cent.
“At first I thought, OK, we’re toast, this is it,” Mr. Gavrilides said. Then he sued.
Since the pandemic hit the United States this year, thousands of business owners like Mr. Gavrilides have discovered that the business interruption policies they bought, and have been paying thousands of dollars in annual premiums to sustain, won’t pay them a thing — just as they are struggling through the biggest business interruption in modern memory.
Now, many of them — from proprietors of gyms and dental practices to high-profile restaurateurs including the Chez Panisse owner Alice Waters, the owner of Cheers in Boston and even a National Basketball Association team — are taking their insurers to court, hoping to force them to cover some of the financial carnage. So far, more than 400 business interruption lawsuits have been filed, according to insurance lawyers.
“I think business interruption claims should be paid when business is interrupted,” Mr. Gavrilides said.
Insurance companies don’t see it that way. Most business interruption policies include highly specific language stating that for a claim to be paid out, there has to be “direct physical damage” — say, a flood that washes away a building or a fire that burns down inventory, forcing a business closure.
On top of that, after SARS swept through Asia nearly two decades ago and caused widespread economic damage, many insurers began to write in language that excluded business interruption caused by viral epidemics. For instance, Mr. Gavrilides’s policy states that the insurer “will not pay for loss or damage caused by or resulting from any virus, bacterium, illness or disease.”
Insurers say they aren’t being stingy; they simply don’t have enough capital to cover all coronavirus-related claims and would suffer enormous losses if they had to pay out.
The industry’s position hasn’t deterred business owners. Some plaintiffs are arguing that the pandemic calls for new interpretations of what “direct physical damage” means for their business. Others are highlighting the spillover effects of closures on local economies.
When the governor of Louisiana banned gatherings of more than 250 people in March, John W. Houghtaling II, a New Orleans lawyer and veteran of the insurance wars that followed Hurricane Katrina in 2005, didn’t wait for his client’s insurance claim to be denied before suing. Mr. Houghtaling represents Oceana Grill, a 500-seat restaurant that is insured by an underwriting group with Lloyd’s of London, the insurance marketplace.
“We have reason to believe that Lloyd’s took premiums without the intention of providing the indemnity paid for,” he said.
The lawsuit seeks court affirmation that the insurer must cover Oceana Grill’s lost revenue because the restaurant paid for a policy that covers risks from all pathogens except those introduced through “terrorism or malicious use.” It also argues that the coronavirus contaminates surfaces that can be difficult to clean in New Orleans’s hot, muggy climate, causing “real physical loss and damage.” The city’s mayor, LaToya Cantrell, cited the virus’s propensity to cause such property damage in an emergency proclamation the day the lawsuit was filed.
Lloyd’s has argued that Oceana Grill’s claims are premature and hypothetical. A spokesman declined to comment beyond the court filings. A hearing on whether to dismiss the lawsuit is scheduled for Aug. 20.
Mr. Houghtaling, along with big-name restaurateurs such as Daniel Boulud, Thomas Keller, Wolfgang Puck and Jean-Georges Vongerichten, formed the Business Interruption Group in April to push the insurance industry to pay claims. To draw attention to the matter, the group has advertised on billboards in Times Square and is supporting legislation that would allow insurers that paid business-interruption claims, regardless of policy language to the contrary, to receive reimbursements from the federal government.
But so far, it’s not looking good for the plaintiffs.
On July 1, a county circuit judge threw out Mr. Gavrilides’s case, one of the first to be decided anywhere. Judge Joyce Draganchuk, ruling from the bench in a Zoom hearing, said that for coverage, there had to be tangible damage, something “that alters the physical integrity of the property.”
Both the Soup Spoon Cafe and the Bistro, another restaurant Mr. Gavrilides owns in Ingham County, Mich., were in mint condition, so they didn’t qualify. The judge left little ambiguity, repeating the basis of her decision several times, and said there was no point in filing an amended complaint.
Mr. Gavrilides’s lawyer, Matthew J. Heos, said he has filed an appeal. In the meantime, Mr. Gavrilides, who pays an annual premium of $12,002 for his policy, is staying afloat with a loan from the federal government’s Paycheck Protection Program.
Dozens of minor-league baseball teams have sued Philadelphia Indemnity Insurance Company and others, saying the cancellation of their season qualifies them for business-interruption payments. Minor-league teams normally get their players from Major League Baseball, but none materialized this year. Some lease their stadiums from the cities they play in, and, with no revenue, they can’t make their lease payments. That, in turn, could threaten municipal bond payments and even the urban renewal plans that rely on minor-league baseball in some places.
A spokesman for Philadelphia Indemnity, Bill Procopio, said the company could not comment on pending litigation. The lawsuits are now pending in three federal courts.
The N.B.A.’s Houston Rockets have sued Affiliated FM Insurance Company in a state court in Rhode Island, where the insurer’s parent, FM Global Group, is based. The N.B.A. cut short its season this year, but the Rockets were hit especially hard when Houston emerged as a Covid-19 hot spot. The Toyota Center, where the Rockets play, is a co-plaintiff, having had to cancel rodeos, concerts, a barbecue cook-off and other events as well as basketball. The lawsuit said the loss of the arena was itself a form of “physical damage.”
“The property has been impaired,” it said. “The loss of functionality is no less physical than the impact of a property having lost its roof to a tornado or hurricane.” A spokesman for FM Global, Steven Zenofsky, said the company could not comment on the legal dispute, which remains pending.
Many insurance executives argue that pandemics are uninsurable. At its most basic, insurance involves the efficient pooling of risks, so that everybody in a pool pays premiums but only a few have claims. That way, the many who have no losses can subsidize the few who do. That principle can’t work in a sweeping pandemic shutdown, where virtually everybody has a loss.
The American Property Casualty Insurance Association has estimated that if insurers were required to cover all U.S. business interruption losses tied to the shutdowns, regardless of policy exclusions — something proposed by lawmakers in some states — it would cost $1 trillion a month.
The insurance industry could buckle under the strain of having to pay for even a portion of that amount, said Sean Kevelighan of the Insurance Information Institute, a nonprofit industry group. “Only the government has the capacity to provide relief to businesses” in a pandemic, Mr. Kevelighan added.
There are already proposals for federal involvement in future pandemics. Representative Carolyn B. Maloney, a Democrat of New York, has introduced legislation that would create a federal pandemic reinsurance program, modeled after the Terrorism Risk Insurance Act, which she sponsored after the terrorist attacks of 2001.
Reinsurance is widely used by insurers to keep their exposure to risks from growing too large or concentrated; the insurers pay reinsurers to take over the payment of some of their expected claims. But losses from terrorism or pandemics are too big for existing reinsurance companies to take on, which is why Congress is considering a federal version.
Ms. Maloney’s bill would bar insurers from excluding viral epidemics from coverage. In future epidemics, they and the government would each pay a portion of the claims upfront. After that, the insurers would reimburse the government for its outlays over many years.
Evan G. Greenberg, the chief executive of the insurance giant Chubb Limited, has put forward another proposal. His plan would divide the market into two segments, one for small businesses and the other for medium-to-large businesses.
Small businesses would get a simple program that would replace a portion of each company’s payroll quickly. Buying coverage would be mandatory, unless a company opted out in writing. For larger companies the government would create a reinsurer, Pandemic Re. Insurance companies would write pandemic insurance, charging market-based premiums, then transferring most of the risk and the premiums to Pandemic Re.
“It’s a total free-market program,” Mr. Greenberg said. Companies could decide whether or not to participate. “But if you don’t,” he said, “don’t come to the government asking for a handout.”