Tuesday, November 10, 2020

Insurance: Epic Battle Over Covid-19 Coverage

 From Bloomberg Businessweek, November 2:

U.S. Businesses Are Fighting Insurers in the Biggest Legal Battle of the Pandemic
Plaintiffs lawyer John Houghtaling is leading the charge against insurance companies that say they don’t have to pay up for shutdowns.

John Houghtaling was working in the second-floor den of his mansion near the Garden District in New Orleans when a legal memo arrived in his email inbox. It was mid-March, not long before the pandemic shut down much of the U.S., and cooks in white aprons were downstairs preparing an extravagant dinner: lobster casserole, veal chops, seared foie gras. The celebrity chef Jérôme Bocuse, a close friend, would be attending that evening, along with two dozen other guests.

Seated on a velvet couch beneath an 18th century painting of Louis XV, Houghtaling, a plaintiffs’ lawyer who’s long specialized in suing the insurance industry, scanned the memo on his screen, growing increasingly agitated. The 10-page document, compiled by a law firm that represents major insurance carriers, was circulating among industry insiders who were anticipating that local governments would soon begin shutting down commerce because of the novel coronavirus. The memo outlined a series of arguments the providers planned to make to avoid paying virus-related claims from business-interruption coverage—policies companies purchase to hedge against fires and other catastrophes.

The chefs downstairs might soon lose their livelihoods, Houghtaling realized, and the insurance industry would refuse to help. His next thought was, he admits, a selfish one: “This party is gonna f---ing suck.”

Sure enough, early in the evening, Chef Bocuse got a call: His two restaurants at Walt Disney World were being shut down. When he hung up, however, he was sanguine. “We checked the policy,” he assured Houghtaling. “We’re good.”
Houghtaling was skeptical. “They’re not going to pay,” he said.
“Yeah, yeah,” Bocuse replied. “You always say they’re not gonna pay.”

The next few days passed in a series of frantic phone calls. Other celebrity chefs, including Daniel Boulud, another friend of Houghtaling’s, vowed to examine their policies and discuss the issue with colleagues. On March 16, less than a week after the dinner party, Houghtaling filed a petition in state court in Louisiana on behalf of the New Orleans restaurant Oceana Grill, asking a judge to declare preemptively that its insurance policy would cover damage caused by the virus.

“The word ‘unprecedented’ is probably overused in this, but I don’t think I have another word for it”

The suit represented the opening salvo in what has become the single biggest legal battle to emerge from the pandemic. Faced with the worst business interruption in living memory, the insurance giants have, by and large, refused to pay business-interruption claims. U.S. plaintiffs’ lawyers have filed more than 1,100 complaints against insurers, according to a tally by Tom Baker, a law professor at the University of Pennsylvania.

The stakes are enormous. Business owners from small restaurants to major retailers say they could go bankrupt unless they’re paid. Insurance companies say the payouts could cripple them—one industry estimate looking at just U.S. small businesses with fewer than 100 employees places the total monthly cost of reimbursing their pandemic losses at between $52 billion and $223 billion. The dispute is also playing out in Congress and state legislatures, where bills have been introduced requiring insurers to pay for pandemic-related losses.

“The word ‘unprecedented’ is probably overused in this, but I don’t think I have another word for it,” says Henry Daar, an executive vice president who oversees property claims for insurance broker Willis Towers Watson. “There have been huge insurable events in the past, with billions of dollars at issue. All of those involved situations that affected a discrete area and a discrete number of companies. This pandemic has affected everybody.”

Houghtaling has spearheaded the legal offensive from his mansion. Since March he’s challenged three major companies in court and formed a lobbying coalition called the Business Interruption Group, which is pressing lawmakers in Congress to pass a bill requiring insurers to pay certain virus-related claims. His Oceana Grill case is scheduled to go to trial on Nov. 16, in one of the first major tests of Covid insurance law.

A bow-tie-wearing 49-year-old bon vivant with slicked-back hair, Houghtaling has a taste for luxury and a penchant for grandiosity. He often toggles between metaphors to describe his fights with the insurance industry, as if groping for an appropriately epic comparison. Sometimes he’s David, valiantly challenging Goliath. Other times he’s Batman, battling villains in Gotham City.

The night of the party, he says, he felt more like a passenger on the Titanic. He sat next to Bocuse at a long mahogany table, a candlelit chandelier hanging overhead. There were towering flower arrangements and a cake shaped like a go-kart helmet in honor of Bocuse’s son, a professional racer. A band marched through the house, singing and dancing.
Houghtaling could already tell it was the last party he’d host for a long time. “The whole thing is sinking,” he thought.

About a decade before Covid-19 upended daily life, Doug and Gayle Mellin moved into a condominium in the small town of Epping, N.H. They soon encountered a problem: the pervasive stench of cat urine. The smell originated in a downstairs unit and rose through the plumbing system, drifting into the Mellins’ apartment from behind a set of kitchen cabinets. The couple sold the condo at a loss and went to court to force their insurer, Northern Security Insurance Co., to cover the difference, arguing that the odor constituted “direct physical loss to the property.”

For years, insurance companies and policyholders have debated the meaning of the phrases “physical loss” and “physical damage,” the standard formulations governing which types of harm are covered. In 2015 the Supreme Court of New Hampshire found that the Mellins’ property had suffered physical loss, ruling that such harm can exist even “in the absence of structural damage.” But in other states, courts have adopted much narrower interpretations, arguing that “intangible harms” like a stench don’t amount to physical contaminants.

“Something that is small, that can go through the air and contaminate and get into
your nose and get you very sick or kill your mother and father … it’s physical”

Arcane contractual disputes such as this could now determine the survival of thousands of American businesses. If courts rule that the presence of a virus inside a building entails physical loss or damage, then business-interruption policyholders might have valid insurance claims. In the memo Houghtaling received in March, Shannon O’Malley, a lawyer for the law firm Zelle, predicted that “creative policyholders and their attorneys may try to link the virus and physical property damage.” She argued that because the virus “may be cleaned without essentially altering the property is evidence that there is no initial damage.”

In the Oceana Grill case, Houghtaling did exactly as O’Malley had envisioned, casting the coronavirus as a physical threat—a web of microscopic particles that comes to rest on surfaces, rendering property unusable. And anticipating the industry’s legal strategy, he and other advocates successfully lobbied public officials in New York City and elsewhere to include phrases such as “physical loss” and “physical damage” in shutdown orders requiring businesses to close....


 Previously on Pandemic Playhouse:

BigLaw on Big Insurance: Covid-19 Business Interruption Claims In The UK

March 2020
P&C: Business Interruption Insurance—Here Come the Lawyers
July 2020
"COVID-19 insured loss reports reach $20.5 Billion"
And that's with insurers doing everything they can, including preemptively suing their own customers,* to keep a lid on business interruption coverage payouts....
*Travelers Insurance Is Suing Its Customers To Preempt Business Interruption Claims (TRV)

July 17
Re/insurance: "U.S. riot losses accelerated & worsened by pandemic..."
June 3
Insurance: AXA cites Business Interruption as “material” in EUR 1.2bn Covid-19 Property/casualty loss estimate
May 24
Insurance Oh-Oh: "French court orders insurer to pay restaurant’s business interruption losses from coronavirus".
April 14
Insurance:"Anticipated Coronavirus Claims Scenarios Across Major Coverage Lines"

If interested see also:
Re/Insurance: "Berkshire Hathaway will write pandemic cover 'at the right price', Buffett says" (BRK)
As with terrorism insurance Warren would rather that governments take the risks,* the downside is just so huge....
Insurance Trade Groups: "Pandemics simply are not insurable risk..."
Whitney Tilson: "Berkshire's Exposure To Business Interruption Insurance" (BRK)
Insurance:"Anticipated Coronavirus Claims Scenarios Across Major Coverage Lines"

Insurance: "Coronavirus to be largest industry loss ever: Chubb’s Greenberg & Lloyd’s Neal"
The last line is:
"Lloyd’s has set aside £15 million to fund research into how pandemics and other big events can be better dealt with in future."
As the kids say: "You had one job..."

Re/Insurance: "Pandemic could inflate hurricane industry losses by up to 20%..." 
Of course the jackpot for risk modelers is to have a volcano go off triggering an earthquake leading to the collapse of an underwater seamount, causing a tsunami as a hurricane roars through a pandemic zone.

Most likely location for this unlikely occasion: the Lesser Antilles.

Unlike Fukushima, no nukes though.
So it would be hard to recreate the typhoon approaching the nuke plant devastated by tsunami caused by the earthquake* but, but volcano and pandemic!

I believe for the remainder of 2020 our motto should be "Hey, it could be worse!""