Author: Chris Boggs
"I think there was an attempt to dissuade the public from filing these claims and to shape the public opinion that this was not property damage," said Steven C. Marks, managing partner at Miami-based Podhurst Orseck PA, who has filed two recent proposed class actions challenging insurers' denials. "But eventually the public catches on. When you look more closely, you can see more clearly which policies have coverage."
With this as the opening, we knew this article was going to take us on an interesting ride. We were not disappointed.
Mr. Marks was not the focus of the Law 360 article, “COVID-19 Insurance Claims May Not Be Such A Lost Cause," he was just the introduction to an article aimed at deriding the insurance industry and creating confusion about the realities of business income coverage. Mark Nation, an insurance specialist with plaintiff firm Morgan & Morgan PA, was the primary player in the article.
Nation stated in a recent presentation to other plaintiff's attorneys that the insurance carriers' assertion that closure due to executive order does not constitute “direct physical loss of or damage to property" is wrong. He believes that the business income claims of businesses forced to close because of stay-at-home orders are covered even if the business has not experienced actual contamination from the new coronavirus.
According to Nation, these claims are based on property loss, not alleged damage, so they should be covered. His reasoning, if a policyholder has lost the use of their property for its intended purpose, that constitutes direct physical loss.
"The insurance company intended to insure a restaurant operating as a restaurant. It's right on the application. They intended to insure a pilates studio as a pilates studio. If you've lost the use of function of your building to operate for its intended purpose, that is direct physical loss. The insurance companies are ignoring that," Nation said.
Beyond the fact that the application is not part of the policy, and the operation is a basis for the rate and premium structure but not coverage, he is correct (yes, that is facetious). I would very much like to say I understand this logic, but it's lost on me. Maybe because I understand cause an effect, direct and indirect loss. But let's try to give attorneys who hold to this belief the benefit of the doubt and that there is something reasonable about this conclusion and ultimate attempt to find coverage.
Let's start with the actual Insurance Services Office (ISO) policy language:
We will pay for the actual loss of Business Income you sustain due to the necessary "suspension" of your "operations" during the "period of restoration". The "suspension" must be caused by direct physical loss of or damage to property at premises which are described in the Declarations….
Obviously, the key phrase in these lawyers' arguments surrounds the meaning and application of, “direct physical loss of or damage to property…." Nations says, “In the policy, every word matters."
We agree, every word in the insurance policy matters, so let's look at the words “direct," “physical," “loss" and “damage":
- Direct: “Characterized by close logical, causal, or consequential relationship." Synonyms: firsthand, immediate, primary, unmediated. Antonym: indirect;
- Physical: “Having material existence; perceptible especially through the senses and subject to the laws of nature." Black's Law: “Pertaining to real, tangible objects." Synonym: material. Antonym: nonmaterial, nonphysical;
- Loss: Black's Law: “The financial detriment…caused by an insured property's damage…." “The amount of an insured's financial detriment by…damage that the insurer is liable for;"
- Damage: Black's Law: “Loss…to…property especially physical harm that is done to something. By extension, any bad effect on something." “Loss or harm resulting from injury to person, property, or reputation."
Is the governmental order the “direct" or causal connection for the insured's loss of income? Yes, it is.
Does the governmental order cause a “loss"? Yes, it does.
Can the governmental order be considered “damage"? Maybe, but only if you widely construe the second part of the definition found in Black's Law, “any bad effect on something." But that is a stretch.
This leaves “physical." Is a governmental order “physical"? The paper on which the order is written is physical, but the order itself is not physical. An edict does not have physical properties. The effect of the order is not something that has physical properties.
Because there is not “physical" loss or damage, there is no coverage. But even if, by some weird incantation, a court concludes that an order constitutes “physical" damage, Nations still missed one key fact – the business income policy is subject to the attached Cause of Loss form.
The CP 10 30 contains two exclusions that foil his argument. The first reads:
2. We will not pay for loss or damage caused by or resulting from any of the following:
b. Delay, loss of use or loss of market.
In addition, the following exclusion applies:
3. We will not pay for loss or damage caused by or resulting from any of the following, 3.a. through 3.c. But if an excluded cause of loss that is listed in 3.a. through 3.c. results in a Covered Cause of Loss, we will pay for the loss or damage caused by that Covered Cause of Loss.
b. Acts or decisions, including the failure to act or decide, of any person, group, organization or governmental body.
Actions of a governmental body are specifically excluded. Any closure order is excluded. But more importantly, and directly to Mr. Nation's assertion, loss of use (or indirect loss) is specifically excluded. Because loss of use is excluded, the only way to garner business income coverage is to have “direct physical loss of or damage to property" that results in a loss of income.
Business income coverage is written as part of a property package, it is not a stand-alone coverage. To have a business income loss, the insured must first have a covered property loss necessitating a suspension of operation.
A governmental order does not cause a covered property loss which means it does not trigger a business income loss. And loss of use as a result of governmental order is specifically excluded. I appreciate Mr. Nation's attempt, but it falls short like assertions of other plaintiff attorneys.
The “Virus" Exclusion
Attorneys know law, but they don't know insurance. Attorneys know contract law, but they don't know insurance. Are you sensing a pattern? What attorneys do know about insurance is that if they can confuse the situation enough, then they can convince a judge or jury that their argument is correct.
One example these statements are true is found in Nation's statements regarding “the virus exclusion." Nation said of the virus exclusion, “It does not apply to direct physical loss…. They (the insurance carriers) don't tell their insured that it only applies to property damage to buildings."
His assertion is correct, right up to the point where paragraph A. of the CP 01 40 endorsement is reviewed:
A. The exclusion set forth in Paragraph B. applies to all coverage under all forms and endorsements that comprise this Coverage Part or Policy, including but not limited to forms or endorsements that cover property damage to buildings or personal property and forms or endorsements that cover business income, extra expense or action of civil authority.
Apparently, the endorsement applies to ALL coverage under ALL forms and endorsement, including business income. “All" is rather broad. To say the endorsement applies only to property damage to buildings seems rather nonsensical after even a cursory review of the endorsement. Evidently, the phrase, “…including but not limited to…" and the conjunction “and" was missed: “…and forms or endorsements that cover business income…."
Another incorrect assertion made by another lawyer attempting to create coverage where none exists.
We Can't Blame Them
Plaintiff attorneys are exploring every possible opportunity to find coverage for their clients, this is to be expected. But they have also undertaken to destroy the insurance industry in the minds of consumers by misconstruing coverage and painting the big, bad carriers as the enemy. This is reprehensible.
From a coverage perspective, every independent agent wants the same outcome - we expect the insurance carrier to pay every dime owed when the loss is covered by the policy. But when the contract does not provide coverage for an event, no payment is owed.
For more information on why the lawyers are spitting in the wind on business income, check out the articles linked below. Civil authority and why there is no coverage for those claims is also addressed in several of these articles:
Last Updated: May 5, 2020