Court Says Pandemic Losses Not Covered by Business Interruption Insurance

In a ruling sure to send shivers through many New York housing cooperatives and condominiums, a Michigan judge has thrown out a lawsuit by a restaurant owner who sought to recoup income lost during the coronavirus pandemic through his business interruption insurance policy. Judge Joyce Draganchuk, ruling on one of the first such cases in the nation, said that insurers must pay business interruption claims only if tangible physical damage, say from a fire or flood, “alters the physical integrity of the property,” the New York Times reports.

For co-ops and condos with commercial tenants unable to pay their rent during the pandemic, this bad news gets worse. After Severe Acute Respiratory Syndrome, known as SARS, swept through Asia in 2003 and caused widespread economic damage, many insurance carriers began to write language in their policies that excluded claims for lost income caused by any “virus, bacterium, illness or disease.”

More than 400 business interruption lawsuits have been filed against insurance carriers who’ve denied claims, according to insurance lawyers. The plaintiffs range from restaurants to gyms, dental practices and even the Houston Rockets of the N.B.A. Based on the Michigan ruling, their prospects do not look bright.

Insurance carriers insist 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 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, says Sean Kevelighan of the Insurance Information Institute, a nonprofit industry group. In a pandemic, he adds, “Only the government has the capacity to provide relief to businesses.”

There are already proposals for federal involvement in future pandemics. U.S. Rep. Carolyn Maloney, a New York City Democrat, 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. Maloney’s new 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.

Meanwhile, co-ops and condos with commercial spaces are left scrambling to cover the lost rental income from businesses that have suffered or failed during the current pandemic.