Barbara Snowden dreamed of opening a wig shop to help women who’d lost their hair during chemotherapy feel better as they battled cancer. In November, she beamed at the grand opening of Hair Goals Club in the Houston suburb of Humble, Texas.
But four months later, her dream died when local officials ordered all non-essential services closed to combat the spread of coronavirus. Snowden had paid for insurance covering unexpected losses, but a quick answer came back on her claim: Nope. Like so many other small business owners in America, she was told her policy didn’t cover disruptions from a pandemic.
“I cried like a baby because I couldn’t believe it,” Snowden said. “That insurance was my last line of defense.”
Now it’s part of a legal fight that may reach every state over who should pay for the steep revenue losses from the deadly Covid-19 virus. Snowden is among a dozen business owners — including celebrity chefs, Native American casino operators, restaurant chains, a scuba-diving shop and a movie theater operator — who sued insurers for refusing to honor policies.
They’re the first of what legal experts predict will be widespread litigation brought by policy holders. Companies big and small have been forced to figure out how to pay bills with no money coming in for weeks or months. While the government pledged help with loans and financial aid, it may not be enough for many businesses to survive.
The stakes also are huge for insurers. They say business-interruption policies, many of which specifically exclude pandemics, were only intended for physical damage and were never priced to cover a virus outbreak. Industry groups also oppose some states trying to require payments to small firms even if virus losses were excluded.
Companies with 100 employees or fewer could see business continuity losses of as much as $431 billion a month, the American Property Casualty Insurance Association estimated without breaking down how much would be insured costs. That’s nine times more than the $47 billion the industry said it paid for covered losses from the 9/11 terrorist attacks, when only a third of claims were for business interruption, according to the Insurance Information Institute.
“They wouldn’t offer some of these contracts if they were required to cover pandemics,” said Benjamin Collier, an assistant professor in the risk, insurance and healthcare management department at Temple University’s Fox School of Business. “They wouldn’t offer business interruption insurance at all, or in cases where they might be willing to, they would charge substantially different rates.”
While business-interruption policies cover the cost of closing due to everything from fires to tornado damage to burst pipes, the industry often has exclusions to avoid massive payouts all at once from a single event like a war or pandemic. After the SARS outbreak in 2003, some insurers added specific exclusions for losses from viruses and communicable diseases.
The legal battle will be fought state by state — each with its own insurance laws — which may mean different outcomes.
The language for business-interruption policies can vary between insurers, even though some virus exclusions are similar. And there are often differences for larger clients whose policies are highly customized. Meyer Shields, an analyst at Keefe, Bruyette & Woods, said in a March 30 note that many insurers he’s spoken to believe a majority of their policies exclude virus-related risks.
But even carefully crafted policies may not be enough to protect the insurers, says Robert Zarco, a Miami-based lawyer who represents thousands of McDonald’s, Burger King and Hilton hotel franchisees gearing up to file business-interruption suits.
Many policies include civil-authority clauses that kick in when governments bring business operations to a screeching halt, Zarco said. “We have plenty of grounds to argue that’s exactly what happened here and they still have to pay,” he said.
Policyholders also can argue shutdowns over bug-contaminated surfaces are a form of physical damage that is a prerequisite for a lawful claim, according to John Houghtaling, a New Orleans lawyer who filed the first Covid-19 business-interruption case on behalf of Oceana Grill, a restaurant in the city’s French Quarter.
“I believe we have a 100% winning position in the case,” said Houghtaling, who filed the suit in state court in New Orleans. He’s asking Judge Ethel Julian to schedule a quick hearing on his suit, which seeks a judgment barring insurers from refusing to pay business-interruption claims.
As the litigation gears up, New Jersey, Ohio and Massachusetts have proposed new laws that would require insurers to pay certain claims related to Covid-19.
New Jersey’s proposed bill, which is on hold, would require business-interruption payments for companies with 100 or fewer full-time employees. Massachusetts’s bill would require reimbursing firms with 150 or fewer employees and would invalidate exclusions for virus losses.
“Pandemic outbreaks are uninsured because they are uninsurable,” David Sampson, chief executive officer of the American Property Casualty Insurance Association, said in an emailed statement. Forcing insurers to pay such claims “threatens solvency and the ability to make good on the actual promises made in existing insurance policies,” he said.
While legislators debate and lawyers wrangle, Snowden says she’s trying to survive until either help arrives from the government or the insurance company admits it erred.
“I’m trying to sell the wigs over the internet, but it isn’t doing much,” she said. “I thought that insurance would carry me through. I don’t know what I’m going to do now.”
The case is Barbara Lane Snowden, DGA Hair Goals Club v. Twin City Fire Insurance Co., No. 2020-19538, Court 113, District Court for Harris County, Texas (Humble)
About the photograph: A pedestrian wearing a protective face mask walks past a boarded up shop in California. Photographer: David Paul Morris/Bloomberg
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