After Lenny & Joe’s Fish Tale restaurant in New Haven sued its insurance provider for refusing to pay for business losses related to the coronavirus pandemic shutdown, a federal judge dismissed the case within just six months.
U.S. District Court Judge Michael Shea in December granted AmGUARD Insurance Co.’s motion to dismiss the case, concluding the restaurant’s insurance policy’s virus exclusion meant any losses due to the pandemic weren’t covered.
Like Lenny & Joe’s, an array of businesses, from restaurants to manufacturers and medical providers, have experienced pandemic-related losses in the past year, and several have turned to the courts when their insurance carriers denied coverage.
Business owners paid for insurance, imagining that future catastrophes would be covered.
However, the insurance industry has prevailed in most cases, successfully arguing that pandemic-related losses aren’t covered under most policies.
Out of the 244 business interruption cases ruled on in federal court as of late April, 201 cases, or 82%, had been dismissed with prejudice, according to a COVID coverage litigation tracker run by the University of Pennsylvania Carey Law School.
According to legal experts, many businesses face an uphill battle when trying to get insurance companies to cover pandemic-related losses, as standard business interruption coverage typically doesn’t cover a virus or pandemic.
Gov. Ned Lamont in March 2020 ordered non-essential businesses, including restaurants, to close due to the virus. Lamont recently announced the state will lift all pandemic-related restrictions as of May 19.
Businesses globally have suffered due to the pandemic. The former Lenny & Joe’s restaurant in New Haven, whose owner LJ New Haven LLC filed the lawsuit, shuttered in October. The owners at the time cited an expiring lease and continued fallout from COVID-19. Two other Lenny & Joe’s restaurants, which have different owners, are still in business in Madison and Westbrook.
Attorney Christopher M. Barrett with the West Hartford law firm of Izard Kindall & Raabe, who represented the New Haven restaurant, described the pandemic’s impact as “catastrophic.” The lawsuit asserted that any virus exclusion shouldn’t have applied, because their losses weren’t caused directly by COVID-19, but by government officials’ precautionary measures.
Attorney Michael Menapace of Wiggin and Dana in Hartford, who also teaches at the Quinnipiac University School of Law, represented AmGUARD in the Lenny & Joe’s litigation.
While Menapace declined to comment specifically on the case, he said, “The overwhelming majority of courts have dismissed these claims because businesses have not experienced physical loss to their property.”
“Most policies also contain a virus exclusion,” Menapace added.
Menapace noted there are insurance companies selling coverage for viruses and pandemics.
“The standard property insurance policy was never intended to cover these types of losses,” Menapace said.
Jimi Grande, senior vice president of government affairs for the National Association of Mutual Insurance Companies (NAMIC), said the insurance industry couldn’t have survived if it had to cover all business interruption claims for the pandemic.
“The trillions of dollars spent by the federal government to keep some semblance of the economy afloat through the past year, with many businesses still unable to survive, has shown that the costs of a pandemic cannot be borne by property/casualty insurers or any other single industry,” Grande said. “Insurers have long excluded virus-related losses from standard business interruption policies for exactly that reason, and courts across the country have recognized that.”
Physical loss
The Connecticut Insurance Department started getting complaints early in the pandemic from policyholders about their business interruption policy claims not being paid, according to agency spokesman Jim Carson.
As of late April, the department had received 30 pandemic-related business interruption complaints.
Carson said some insurers specifically excluded epidemics and pandemics from policies following the SARS outbreak of 2003.
The department has been advising consumers that business interruption policies are governed by contract law and vary between insurance companies and individual businesses, so business owners should review policies and consult with their brokers and carriers.
According to the department, losses not listed in a policy are typically not covered for risks that “are too great to be underwritten at an affordable price,” such as war, nuclear attack, radiation or a global pandemic. Having to cover claims at such a large scale could cause insurance carriers to go out of business.
Attorney Ann Rubin of the law firm Carmody Torrance Sandak & Hennessey in Waterbury, has evaluated several potential claims for the business community.
“In virtually every case, it was clear the policies didn’t cover pandemic-related losses unless there was some physical loss or damage suffered by the insured,” Rubin said.
She noted that most policies require physical loss or damage, such as if a hurricane blows off your roof, and then you aren’t able to operate your business for a specific period of time.
“That’s the classic scenario,” Rubin said. “With COVID, there is no physical loss because the business isn’t damaged. They were prevented from operating by the governor’s orders, but not physical loss.”
According to Rubin, the Lenny & Joe’s decision has been precedent-setting.
“We have all learned many lessons,” Rubin said. “It has been a real eye-opener for the business community, which has dutifully paid premiums for years. Many were shocked and surprised they didn’t have coverage [for a pandemic].”
After the ongoing COVID-19 ordeal, insurance coverage that does include pandemics will likely be cost-prohibitive for small businesses, Rubin noted.
‘All risks’ insurance
Some state lawmakers around the country have pushed for legislation that would mandate that COVID-19 business interruption claims be covered. However, no state has actually passed a mandate, according to Insurance Journal.
Rubin doesn’t foresee such a proposal ever gaining traction in Connecticut.
“Connecticut for many years has been the insurance capital, and the industry is incredibly strong,” Rubin said.
Lawsuits over pandemic-related business interruptions are continuing, with organizations and companies asserting that their broader, “all-risks” policies do cover pandemics.
Rubin’s colleague, attorney Marc J. Kurzman of Carmody Torrance Sandak & Hennessey in Stamford, is representing Wallingford-based manufacturer Amphenol Corp. in a business interruption claim.
Amphenol in January sued its “all risks” insurance carrier, Factory Mutual Insurance Co., claiming breach of contract and seeking damages for failure to indemnify the company for its pandemic-related losses.
“All risk policies contain different provisions, which would provide coverage where a standard business interruption policy would not,” Rubin said.
The Amphenol lawsuit claims the company’s pandemic-related losses are “believed to exceed $100 million.” According to the lawsuit, Amphenol “had the foresight to purchase broad insurance protection against the potentially catastrophic risks posed by events such as a pandemic.” It paid a premium of more than $7.2 million for “all risks” coverage that includes losses related to pandemic-related lockdowns and facility closures, the lawsuit states.
Factory Mutual, meanwhile, has asserted that Amphenol’s claim under the policy is barred because it “did not suffer physical loss or damage” to its property.
The case, also assigned to Judge Michael Shea, was still pending as of late-April.
Connecticut Children’s Medical Center in March 2021 filed a lawsuit against insurer Continental Casualty Co. and its parent company CNA Financial, for its failure to pay its pandemic business interruption claims.
It also asserts its “all risks” policy should cover these losses.
