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

By | June 10, 2020

Good faith coverage disputes over pandemic-related business interruption coverage don’t have to be fought out in courts, and retroactive rewrites of business interruption coverage language are unfair, according to a plaintiffs lawyer who represents restaurants.

John Houghtaling, II, a lawyer for Gauthier Murphy & Houghtaling, in Louisiana who represents the Business Interruption Group, told Carrier Management last week that the idea of a federal subsidy program, which would reimburse insurers that voluntarily pay pandemic-related business interruption claims filed under policies with virus exclusions, is a win-win proposition that he believes will soon be introduced as a draft legislation.

Houghtaling, who also proposed such a program at a House Small Business committee virtual forum back on May 21, agrees that there has been some confusion about what the proposal is all about. “We expect to have bipartisan support in the House and Senate from those that understand it. However, there is a big misunderstanding. We’re hopeful that once it’s introduced, there is an understanding of it,” he said.

During a half-hour phone interview last week, he corrected some misconceptions about the proposal and said that he fully expected a Democratic congressman to introduce a bill based on the idea in the near future. (Carrier Management had not received confirmation of impending introduction from the potential bill sponsor at press time.)

What It Says

In a nutshell, the BIG proposal would allow insurers to opt into a program under which they agree to pay losses under business interruption policies that have some language containing the word virus, and where insureds and insurers have realistic arguments for and against coverage.

In Houghtaling’s mind, battles over ambiguous language shouldn’t enrich plaintiffs lawyers or defense lawyers.

“My proposal is that if an insurance company has put the word virus somewhere into the policy, and is arguing that that’s excluding everything for a pandemic, then that carrier is not compelled to but can voluntarily pay it now and receive reimbursement for the claim amount and the claim expenses,” he said.

“What we’re offering is cheaper for government, for businesses, for employees, and for insurance companies. It will be better for the government to have these companies stay in the economy than to go bust. It will be better for employees not to be on unemployment line, but to have their jobs. It will be better for the insurance companies to have an out—to have some subsidy for this, rather than turning it over to the expensive lawyers. It’ll be better for the businesses to have the limited coverage.”

No one is getting shortchanged or overcompensated with this plan, he said, explaining that a business interruption policy is “exactly measured” to what businesses need. “Your payroll is in there as a line item. Your rent is in there as a line item….You pay dollar premiums for certain amount of coverage, which is just necessary to keep your lights on. So it’s a proper measure,” he said. By contrast, a lot of relief programs fall short “because there’s been windfalls for companies that don’t need it. There’s nothing for companies that do.”

Houghtaling continued: “If all this gets turned over to fighting lawyers, the lawyers make the money. And I’ve got to tell you, it is against my own self-interest because I am one. But in this particular case, I am going to be litigating over the ashes of my best friends in my life who happen to be in the restaurant and hospitality business,” he said.

“Part of the responsibility for the shutdown is the government. Part of the [problem] may be from the insurance companies not being clear on their contracts and not using the word pandemic when they should have. Let’s come with an equitable solution that will be cheaper,” he said.

What It Doesn’t Say

Insurers that have clear language in their policies wouldn’t be included in the proposed federal reimbursement program, Houghtaling said.

“If you clearly excluded pandemics, you excluded pandemics. If you use the word pandemic and you excluded it, it’s obvious. You’re out,” he said, noting that insurers don’t need any assistance for coverage denials in these cases.

“If you don’t have any exclusion for viruses or pandemics or anything, you’re not part of the program either.”

“It’s the ones in the middle where it may be ambiguous, and there’s going to be litigation over,” he said. “As long as the word virus is in the policy that excludes some coverage, we wouldn’t have a debate where it applies or what it applies to.”

“It’s policy specific, not company specific,” he said, when asked about insurers that wrote some policies that contain virus exclusions and other policies where insurers simply contend that language requiring direct physical loss of or damage to property from a covered cause of loss supports claims denials.

“It would not apply to where there’s no mention of pandemic or virus in it whatsoever….The program would not be appropriate to that—this is the way we view it—because that’s not an argument. It’s a baloney argument,” he said, referring to carriers’ contention that COVID-19 doesn’t impact property. “It’s not a true argument. It’s a lie. And it’s not going to go anywhere in the courts. This is going to be decided very quickly. I filed the first declaratory judgment [action] in the world on this issue,” he said.

“My feeling is it’s inappropriate to subsidize an insurance company that has collected policy premiums when they clearly owe [coverage]. It is also inappropriate to subsidize for policies that clearly exclude it,” he said. The program is “for the ones where there’s some ambiguity. It applies where there’s a good faith dispute.”

Still, there is document on BIG’s website that describes the proposal as follows: “Those that opt in must pay B.I. [business interruption] claims on policies without virus exclusions. If they do so, insurers can apply and receive reimbursement on B.I. claims and claims expense that are subject to virus exclusion.” (emphasis added)

Houghtaling explained that the first sentence has been reconsidered in the latest workup of the BIG proposal.

“We were thinking initially about not allowing an insurance company to go into a program unless they paid all the other policies,” he said. The revised thinking says, “Let’s forget about that because it’s too hard to force somebody to do something. Let’s just make it voluntary.”

For the insurers hanging their hats on “direct physical loss of or damage to property” language to say they don’t have to pay claims, “let them hire a lawyer and waste money on lawyers and get their clock cleaned. But the ones where you have an ambiguous situation should be able to opt in.”

Summing up, Houghtaling said: “What the insurance industry should do is to pay the policies that they owe; they should deny the policies they don’t owe.” In between those extremes, “if there are ones that they fight about, that we can have arguments on both sides [about], what we’re suggesting is let’s solve this issue now.” The alternative is spending years in court and billions of dollars on legal fees “after people have been put on unemployment lines, [businesses] have gone bankrupt” with the domino effect of mortgage and lease defaults rippling through the economy.

Not Retroactive; Not Prospective

The lawyer, who has filed cases on behalf of Oceana Grill against Lloyd’s and on behalf of Thomas Keller Restaurant Group against The Hartford, said that lawmakers who had been seeking to retroactively knock out exclusions in existing policies now realize this can’t go backwards.

Other proposals seek to deal with pandemic-related business interruption coverage prospectively, he said, seemingly referring to the Pandemic Risk Insurance Act introduced by Rep. Carolyn Maloney (D-NY) a few weeks ago, and the Business Continuity Protection Program, supported by insurance industry trade groups. Although he did not mention either by name, he said a prospective plan is something “that doesn’t help us now. It’s leaving this problem in the middle of what do we do for people now that have bought these policies that believe that they apply—where they may apply but we’ve got to litigate them?”

“The insurance industry is coming up with arguments. Some may have merit; some have no merit. For example, COVID-19 doesn’t impact property. That is hogwash…. Contamination, where I can’t use something, is a loss to property in all the case law.”

Houghtaling is particularly incensed by situations like the one he says client Keller faces, having bought a policy that “actually has a virus inclusion. Not only does it not exclude pandemics or viruses, but it has affirmative coverage for cleanup, and they’re denying him,” the lawyer contends. “They’re denying policies that not only are all-risk policies that have no exclusion, that have specific civil authority coverage, but they’re actually denying policies that have affirmative coverage.”

For policies that where contamination cleanup is a covered cause of loss, he contends, civil authority coverage is triggered. “It triggers the entirety of the other coverages. You have to look at the words of the contract,” he said.

“The insurance industry keeps saying, ‘Don’t change our policies,’ but they’re misrepresenting what the policies say. That’s the part that I find to be morally reprehensible,” he said.

“I agree with the insurance industry that any legislation to retroactively change the wording of contracts I do not believe is either constitutional or fair, nor do I think it works. I’ve seen these attempts before, and I don’t think that they’re fair.”

John W. Houghtaling, II

Business Interruption Group

Still, Houghtaling said he agrees with a lot of the what the industry has to say, using the testimony of Sean Kevelighan, CEO of Insurance Information Institute, to highlight areas of agreement he had with Kevelighan when both men testified at the Small Business committee virtual forum last month. “We agree that we should not retroactively change policies,” he said, referring to Kevelighan’s assertions that “any efforts to retroactively rewrite business interruption policies are not only unconstitutional, but would imperil the insurance industry’s ability to pay [other] covered insurance claims. “We agree that policyholders and the insurers should live by the terms of them,” he said, noting that Kevelighan also said that some policies, which do not exclude viruses, should be enforced as written.

“The only stark disagreement is one of fact, which is that the insurance industry is denying that the coronavirus contaminates property,” he added.

“What we’re trying to do is to have something that is pro-consumer and pro-insurance company.”

“We’re not against the insurance industry….We’re not asking for policies to be changed,” he said.

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