COVID Coverage: Property Insurance Claims from the Company Perspective

By:  Kevin Stone

How will sports and entertainment organizations earn money during the COVID-19 pandemic? This question is not only ever-present as the pandemic continues to paralyze the sports and entertainment world, but it also remains unanswered as professional leagues and venues have yet to resume operations. One way ownership groups and organizations have looked to capture some of the lost revenue is through filing insurance claims. Either by way of property insurance or business interruption insurance (“BI”), owners and venue operators are combing through their policies to determine how, or if they can recover on a claim.

Wimbledon made headlines when it secured a $141 million payout from its insurance company after it suspended the famous tennis tournament due to the virus. Wimbledon’s policy included a premium on specific coverage for loss of revenue due to communicable diseases, viruses, and pandemics. Wimbledon was paying a steep price for coverage over the last 17 years, yet its payout was more than three times the expense spent on coverage. Unfortunately, many organizations do not have targeted coverage like Wimbledon’s. Wimbledon’s policy included specific event-cancellation coverage, which is unlike a blanket BI policy. Because the event is held within just two weeks and is just a single tournament on the professional tennis tour, it made sense for the organization to insure the specific event. It would not make sense for professional leagues like Major League Baseball, for example, to take out insurance for every single game within the regular season. It would be too expensive and illogical to insure each game in the 162-game-season for 30 teams, which spans from March to August. As a result, legal battles may ensue between the insureds and their insurance companies to determine what types of claims, if any, will be successful under property insurance or business interruption insurance.

Under regular property insurance, claims are legitimate if the insured party can prove that the property suffered “direct physical loss or damage.” Courts have addressed this issue, and the majority have narrowly defined “physical loss.” For example, the courts in Universal Image Prods. v. Chubb Corp. and Mama Jo’s, Inc. v. Sparta Ins. Co. defined physical loss to mean an actual physical alteration to the property, like damage typically caused by flooding or fire. Furthermore, courts that have taken this narrow view, such as the courts in Mastellone v. Lightning Rod Mut. Ins. Co., Great Northern Ins. Co. v. Benjamin Franklin Federal Sav. & Loan Ass’n., and Newman Myers Kreines Gross Harris P.C. v. Great N. Ins. Co., have ruled that economic loss resulting from some physical contamination is not recoverable when there is no physical alteration or damage to the property’s structure. Claimants are unlikely to recover in jurisdictions that adopt this majority view because COVID-19 does not structurally alter the physical appearance or functionality of the property. Even though claimants will likely argue that COVID-19 has a physical component (the CDC has acknowledged the virus can be spread on surfaces), courts following the majority rule will be reluctant to find coverage where structural damage to the property does not occur.

Even if a claimant finds itself in a minority jurisdiction, it may have an uphill battle. In order to recover on a claim in a jurisdiction that has held that physical loss or damage is not limited to actual physical alteration, the claimant must show that the property loses its essential functionality, as the courts required in both Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co. and Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of America. A court’s analysis of an “essential” business function is a subjective interpretation that operates on a sliding scale. It may be difficult to prove that an organization’s property lost essential business function if the organization could still operate executive functions and maintain some capacity at the venue.

Some organizations also pay premiums on BI. Many BI coverage policies include language that grants coverage when there is a loss of significant revenue or some force prohibiting access or essential business functionality. For example, most BI policies provide specific coverage when property access is prohibited by civil authority or government order. This type of coverage may be the best option for an organization looking to recover. However, BI policy language requires that the civil authority prohibition of access must be a direct result of physical loss or damage to the property or surrounding premises. The physical loss or damage requirement circles back to the aforementioned argument herein, thus leaving insureds with a difficult battle when they file claims and bring lawsuits in majority jurisdictions.

Under a BI claim, in addition to proof of physical loss or damage to the property, the insured party must prove complete prohibition from the premises due to the civil authority order. The courts in Kean, Miller, Hawthorne, D’Armond McCowan & Jarman, L.L.P. v. Nat’l Fire Insurance. Co. and Bienville Partners, Inc. v. Assurance Co. of America held that when a civil authority prohibits access, claims are not recoverable if the property is accessible in limited numbers. Thus, in states and counties where prohibition by civil authority was not a complete bar from access and organizations were allowed to work in limited numbers under certain precautions, it may be harder to recover on a BI claim.

Ultimately, the first court cases will set a precedent for those looking to file claims because the COVID-19 issue is new and uncharted. Should policy holders succeed in convincing a court that significant financial losses due to the virus are covered by their policy (barring any specific exclusions), it could create a wave of claims that would seriously financially burden insurance companies. Insurance companies will argue that because the organizations had the ability to specifically foresee and insure against the type of BI resulting from COVID-19, they should not be liable when the organizations failed to bargain for coverage. When crafting the policies, parties could have priced the premium for specific coverage under COVID-like circumstances. In the event where parties fail to contemplate that sort of coverage, the company will argue that they cannot be liable for payouts when the contract language is clear and unambiguous as to what is insured under the policy. Should courts uphold the specific, plain language of the policy, and only grant a remedy for parties that bargained to cover these incidents directly, many organizations will be stuck trying and find new ways to supplement for lost revenue.

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