How to navigate claims amid the COVID-19 pandemic

COVID-19 pandemic causing hotels to close and lose substantial amounts of income, many will be looking to their insurance policies to cover their losses.

“The big question right now for hotels, casinos and restaurants that have had to shut down either because there is the coronavirus present in their buildings or because of civil stay-at-home orders is whether they can recover lost income,” said Skip Durocher, a partner in the litigation and regulatory practice groups at international law firm Dorsey & Whitney, who represents policyholders against insurance companies. “You look to determine that with the company’s property insurance policy. Typically, business income insurance is connected with and found within an insured’s property insurance policy.”

In typical loss-of-business insurance cases, claimants need to demonstrate to their insurance company that there was physical damage to their property causing them to shut down. “It has to be physical damage to property or physical loss of use of property,” said Durocher. “If you can show that and you can show that you lost income as a result of that…you would be able to recover your lost income during the period it took you to get back up into operations.”

Claimants can also claim loss of business because of a civil order. “Let’s say a huge fire roars through an area of town where your hotel is located and, miraculously, your hotel is not burned down, but all around you for several blocks, fire has ravaged everything,” he said. “The mayor comes in and says the entire area is a disaster, and nobody can go in there until they can clean it up and can make it safe again. By virtue of that civil order, people can’t come into that zone where your hotel is, so you lose income. Even if you don’t have property damage at your facility, because there is property damage all around you that triggers a governmental order, you also can seek coverage under your business income policy for that. It is called a coverage extension for a civil authority.”

Durocher said that there is a difference with COVID-19 that insurance companies may use to deny claims. “Here it is a little bit different because we don’t have a fire, we don’t have a flood or tornado that is causing the physical damage,” he said. “What we have is the presence of the coronavirus. One of the battles we will have in the insurance world is, first, we have to demonstrate that we trigger the coverage under the policy. We have to show that the presence of the coronavirus constitutes property damage or loss of use of physical property.”

He continued, “Insurance companies are going to argue that…you can’t even prove that there was the coronavirus in your hotel. Maybe you can prove that there was a civil order that said your hotel had to shut down or your restaurant had to shut down, but you can’t prove that there was actually the coronavirus present. Even if you can, you can’t prove that that caused physical damage to your property. So that will be the big battle.”

Durocher thinks that insurance companies will point to exclusions in their policies. “[They] will say that even though the coverage is triggered, they exclude this particular loss,” he said. “One exclusion that is out there—not in all policies, but in some—is an actual virus exclusion. Those came about in 2006 as a result of SARS and MERS. Insurance companies started adding these exclusions for viruses. That is probably going to be the most difficult exclusion to deal with from the insured’s standpoint if there is an exclusion that says they don’t cover any loss that’s caused by virus. I don’t know of anyone who disputes that COVID-19 is a virus.”

Some policies will have broader exclusions like contamination. “A lot of those policies don’t define what contamination means,” he said. “There are courts that have held that that phrase is ambiguous if it is not defined. Does it mean pollution? If it doesn’t specifically say that contamination includes viruses, courts could find that the language is ambiguous. The nice thing about ambiguity from an insured’s standpoint is that typically once a court finds that an insurance policy is ambiguous on a certain issue, then the court will rule in favor of the insured and find coverage.”

Durocher predicts that many of these claims will end up in the courts. “That is where the first battle is going to lie—trying to convince courts—because I don’t think insurance companies are going to agree to this at all, so there is going to be litigation,” he said. “We are going to have to convince courts that the presence of the virus constitutes property damage or physical loss of use of the property so as to trigger the policy in the first place.”

No matter what, hoteliers should not wait to submit their claims. “They should submit the claim right away because you don’t need a lawyer to submit the claim,” he said. “Most people who own hotels would have gone through an insurance broker to get their insurance in the first place. They should contact their broker and say, ‘Hey, I’ve had a business income loss, so I need to submit a claim under my policy.’ Brokers should be able to help them submit that claim. Then they can wait to see how that insurance company responds. Maybe they and I will be surprised and there will be some carriers who will step up and fulfill their obligations. I am not confident of that, but maybe they will be. If that happens, great.”

He continued, “If it doesn’t happen, at least they have submitted the claim because some of these policies have tight timelines on how soon you need to submit a claim. If you have submitted a claim, you’ve protected yourself there and maybe we’ll get some good decisions early on from the court that will force insurance companies to step up even without someone having to hire a lawyer to pay some of these claims.”