The BIG Idea for Business Interruption Coverage: What It Is and Isn't

According to a plaintiffs lawyer representing restaurants, good faith coverage disputes regarding pandemic-related business interruption coverage do not need to be prosecuted in court, and retroactive rewrites of business interruption policy language are unjust.

The idea of a federal subsidy program, which would reimburse insurers who voluntarily pay pandemic-related business interruption claims filed under policies with virus exclusions, is a win-win proposition, according to John Houghtaling, II, a lawyer for Gauthier Murphy & Houghtaling in Louisiana who represents the Business Interruption Group.

Houghtaling, who presented a similar initiative at a virtual discussion hosted by the House Small Business Committee on May 21, acknowledges that there has been some misunderstanding regarding the plan. "Those who understand it should expect bipartisan support in the House and Senate." There is, nevertheless, a significant misconception. "We're hoping that people will grasp it once it's out there," he said.

During a half-hour phone interview last week, he clarified some misconceptions about the program and predicted that a Democratic congressman would file a bill based on it soon. (At the time of publication, Carrier Management had not received confirmation from the putative bill sponsor that the bill would be introduced.)

What It Expresses

In a nutshell, the BIG proposal would allow insurers to join a program in which they agree to pay damages under business interruption policies that include the phrase "virus" in some form and where both insureds and insurers can make reasonable arguments for and against coverage.

Battles over unclear wording, in Houghtaling's opinion, should not reward plaintiffs or defense lawyers.

"I propose that if an insurance company has the word virus somewhere in the policy and is arguing that this is excluding everything for a pandemic, then that carrier is not obligated to pay it now but can voluntarily pay it now and be reimbursed for the claim amount and claim expenses," he said.

"We're proposing less expensive for the government, businesses, employees, and insurance providers." It will be better for the government if these businesses stay in business rather than go out of business. It is preferable for employees to not be on the unemployment line and keep their jobs. Rather than turning it over to the pricey lawyers, it will be better for the insurance company to have an out—to have some sort of subsidy for this. It will be beneficial for the businesses if the coverage is limited."

He explained that a business interruption coverage is "perfectly measured" to what businesses require and that no one is being shortchanged or overcompensated under this arrangement. "There's a line item for your payroll." There's a line item for your rent... You pay a set of dollar rates for a specific quantity of coverage that is just required to keep your lights on. As a result, it's a proper measure," he explained. Many relief initiatives, on the other hand, fall short "because there have been windfalls for firms that don't need it." There isn't anything for businesses that do."

"If all of this is turned over to warring lawyers, the lawyers make money," Houghtaling concluded. And I have to tell you, and it's against my self-interest because I'm one of them. But in this situation, I'll be suing over the ashes of two of my closest friends, both of whom work in the restaurant and hospitality industry," he explained.

"The government bears some of the blame for the closure. Part of the [issue] could be caused by insurance companies not being clear in their contracts and not using the word "pandemic" when they should. "Let's come up with a fair and cost-effective answer," he remarked.

What It Doesn't Express

According to Houghtaling, insurers with unambiguous language in their policies would be excluded from the proposed federal compensation program.

"Pandemics were excluded if you omitted pandemics." It's self-evident if you use the phrase pandemic and then exclude it. "You're out," he added, adding that insurers don't need any help with coverage denials in these circumstances.

"You're not part of the program if you don't have any exclusions for viruses, pandemics, or anything."

"It's the ones in the center," he continued, "where it may be confusing, and there will be litigation." "We wouldn't argue over where or what it pertains to as long as the word virus is in the policy that precludes some coverage."

When asked about insurers that drafted some policies with virus exclusions and others where insurers merely argue that language requiring the direct physical loss of or damage to property from a covered cause of loss supports claims denials, he answered, "It's policy particular, not company-specific."

"It wouldn't apply if there was no mention of a pandemic or virus at all...

This is how we see it: the software would not be suited for that because that is not an argument. "It's a nonsense argument," he remarked of carriers' claims that COVID-19 does not affect the property. "It isn't a valid argument." It's a fabrication. It's also not going to be heard in court. This is something that will be decided shortly. "I filed the world's first declaratory judgment [suit] on this matter," he explained.

"In my opinion, subsidizing an insurance firm that has collected policy payments but owes [coverage] is improper." Subsidies for programs that exclude it are also improper," he added. "For those who have some ambiguity," the program says. It applies when a good faith dispute arises."

Nonetheless, the idea is described on BIG's website: "Those who opt-in must pay B.I. [business interruption] claims on insurance without virus exclusions." Insurers can file for and be reimbursed for B.I. claims and claims expenses that are subject to virus exclusion if they do so." (italics added)

In the most recent workup of the BIG plan, Houghtaling noted that the first clause had been reviewed.

"At first, we considered not allowing an insurance firm to participate in a program unless they paid all of the other policies," he explained. "Let's forget about that," the updated thinking argues, "since forcing someone to do something is too difficult." Let's just do it voluntarily."

"Let them hire a lawyer and waste money on lawyers and get their clock cleaned," says the insurer, who relies on the "direct physical loss of or property damage" to avoid paying claims. However, those in an unclear situation should be able to opt-in."

"What the insurance business should do is pay the policies they owe; they should deny the policies they don't owe," Houghtaling said. "If there are any that they dispute over, that we can have discussions on both sides [about], we're asking that we fix this issue now," says the middle. The alternative is to spend years in court, and billions of dollars on legal expenses "after people have been placed on unemployment lines, [companies] have gone bankrupt," with the resulting domino effect of mortgage and lease defaults reverberating across the economy.

Not retroactive; not anticipatory

The lawyer, who has filed cases on behalf of Oceana Grill against Lloyd's and Thomas Keller Restaurant Group against The Hartford, said that politicians who wanted to remove exclusions from existing policies now recognize they can't.

He noted other ideas attempt to deal with pandemic-related business interruption coverage in the future, presumably referring to Rep. Carolyn Maloney's (D-NY) Pandemic Risk Insurance Act and the Business Continuity Protection Program insurance industry trade groups back. Even though he did not name either, he stated that a potential plan "doesn't help us today." It leaves the dilemma of "what do we do for folks who have bought these policies and believe they apply—where they may apply, but we have to litigate them?" in the center.

"The insurance sector is presenting counter-arguments. Some may have value, while others do not. COVID-19, for example, does not affect the property. That is complete nonsense.... Contamination, where I cannot use something, is considered a loss of property in all cases."

Houghtaling is particularly enraged by scenarios such as the one he claims Keller is in after purchasing a policy that "really has a virus inclusion." "Not only does it not exclude pandemics or viruses, but it also contains affirmative cleanup coverage, which they are denying him," the attorney claims. "They're denying policies that aren't only all-risk policies with no exclusions and specific civil authority coverage, but also denying affirmative coverage policies."

He claims that civil authority coverage is triggered for policies when contaminated cleanup is a covered cause of loss. "It activates all of the other coverages." "You have to look at the contract's words," he explained.

"The insurance business continues saying, 'Don't modify our policies,' but they're lying about it. That's the part that I find morally repugnant," he explained.

"I agree with the insurance industry that legislation that changes contract wording retrospectively is not lawful nor fair, nor do I believe it works." I've seen such attempts previously, and I don't believe they're reasonable."

The Business Interruption Group is a non-profit organization dedicated to preventing business.

Despite this, Houghtaling said he agrees with most of what the industry has to say, citing Sean Kevelighan, CEO of Insurance Information Institute, as an example of areas of the agreement he had with Kevelighan when the two men appeared at the Small Business Committee virtual forum last month. "We agree that we should not amend policies retroactively," he stated, responding to Kevelighan's statements that "any efforts to retroactively rewrite business interruption policies would jeopardize the insurance industry's capacity to pay [other] covered insurance claims." "We agree that policyholders and insurers should abide by the wording of the policies," he added, adding that Kevelighan also stated that some contracts that do not exclude viruses should be enforced exactly as worded.

"The only factual difference is that the insurance business denies that the coronavirus contaminates property," he continued.

"We're attempting to create both pro-consumer and pro-insurance business."

"We don't oppose the insurance sector...

"We're not calling for policy changes," he clarified.