Businesses facing huge losses from pandemic thought their insurance would cover them. Not really

©The San Diego Union-Tribune

SAN DIEGO — As the frantic queries for financial help came flooding in following the coronavirus shutdown orders, Holly McGlinn speedily assembled a spreadsheet to help her track the now 125 claims — and counting — for coverage of business losses sought by her insurance agency clients.

“I’m filing as fast as I can,” said McGlinn, whose firm, Breakwater Strategic Insurance Solutions that she owns with her husband Ryan, represents a broad swath of local businesses — restaurants and bars, event planners, retailers, pilates studio operators and tech companies.

So far, all the responses have been the same — denial of coverage.

Despite a still rapidly expanding coronavirus pandemic that has financially ravaged businesses locally and across the nation, companies are quickly finding out that their property insurance policies, which include protection against the interruption of business, simply don’t apply in the world of COVID-19.

In many instances, claims are rejected because the policies include a specific exclusion for losses due to “virus or bacteria,” a legacy of the SARS outbreak of the early 2000s. Insurance company adjusters are also citing a more nuanced explanation, namely, that the shuttering of businesses due to coronavirus was not related to nor did it cause actual property damage, as in the case of a fire or hurricane.

The denial letter that longtime event planner Joanne Mera received more than a week ago angered her but didn’t necessarily surprise her.

“The issuing of the orders from the state was not due to physical loss or damage nor did it prohibit access to the described premises,” her insurance company advised her. “It was issued to limit the spread of Coronavirus (COVID-19). The policy specifically excludes losses caused by or resulting from a virus and from contamination.”

Mera’s business, Pacific Event Productions, which produces large scale events for corporate clients, local organizations, and nonprofits, has been completely sidelined by the pandemic. She figures her costs — for such things as rent, utilities, leases, and some payroll — that she had figured would be covered by her policy, amount to about $200,000.

“When the unexpected happens, you count on insurance,” said Mera, who has owned her business for 30 years. “If not now, for God’s sake when will you need your insurance policy to help you. I feel like I’m in a rowboat during a tsunami, praying that when (not if) I capsize and get shredded, I can hold onto whatever is left of my little boat and live.”

Industry fears insolvency from claims

The insurance industry has been quick to point out in online postings and in letters to legislators that insurance companies would be financially crushed by payouts to businesses for their coronavirus-related losses if forced to change their policies retroactively, as some lawmakers have advocated. The American Property Casualty Insurance Association, the primary national trade association for insurers, calculates that such losses for small businesses with 100 or fewer employees could approach a staggering $383 billion per month, while the total surplus for all of U.S. insurers is $800 billion.

“That would create a solvency crisis for the policyholders that rely on us,” association CEO David Sampson said in an interview Thursday. “We’re entering the spring storm system with hurricane season starting June 1, and then there are the wildfires on the West Coast. That would be an untenable situation to mandate retroactive coverage.”

Besides, Sampson says, only a third of business owners even purchase business interruption coverage.

That comes as a shock to McGlinn, of Breakwater, who says that 95% of her clients who carry property insurance have business interruption coverage. It’s difficult, she said, to quantify the cost of the extra coverage because it varies wildly, depending on the nature of a business’ operations, the volume of its sales and even the characteristics of the building it occupies.

“This has been really stressful,” said McGlinn, whose firm still has more than two dozen claims in the queue and continues to get daily requests to file still more claims. “A lot of our clients are really long term, I know them, I know about their families, and it’s horrible to not be able to give some certainty about their coverage. If they have a fire, I have a road map to help them through, knowing their limits right away, and it gives them a little comfort but with this, I can’t give that comfort.

“Just a few weeks ago, these were healthy businesses and now they’re laying off people, figuring out how to pay their bills.”

She noted, however, that there has been some short-term relief offered her clients. Insurance companies, she said, have been willing to work out payment plans for policyholders, as well as make adjustments to policies to help ease premiums like removing coverage for liquor liability and assault and battery for bars.

And the trade association says it is also waiving late fees and suspending personal auto exclusions for restaurant employees who are transitioning to meal delivery services and want to use their own auto policy as coverage.

Bottom line, says Robert Gordon, head of research and policy for the property insurance association, there’s a reason the insurance industry doesn’t provide coverage for a pandemic.

“The basis for insurance is that everyone pays a little bit to compensate for the catastrophic losses that hit the few,” he said. “But with a pandemic, everyone is having catastrophic losses at the same time. It would be like the industry covering auto accidents all happened at the same time.”

Taking it to the courts

Still, the ongoing debate over business interruption coverage is not likely to be quelled anytime soon. It already has moved into the legal arena with the recent filing of multiple lawsuits by restaurateurs in Chicago, New Orleans and Napa Valley. In a preemptive move last month, New Orleans attorney John Houghtaling filed a lawsuit on behalf of acclaimed restaurateur Thomas Keller of French Laundry fame, hoping to secure a ruling declaring that when a governmental entity shuts down businesses because of a “dangerous property condition in the area,” that triggers coverage.

He filed the suit when he began hearing that Keller’s insurance carrier, The Hartford, was denying business interruption claims throughout California.

Houghtaling rejects the insurance industry’s stance that the government orders to effectively shutter businesses had nothing to do with concerns about property damage to businesses. He points to the verbiage of various orders, including San Francisco’s, where it states that its emergency declaration was issued because the virus is “physically causing property loss or damage due to its proclivity to attach to surfaces for prolonged periods of time.”

Said Houghtaling: “The insurance companies don’t want to talk about the danger coronavirus poses to property because then they would owe for the entire time the businesses are shut down. They’re crying, poor us, don’t let us go bankrupt, we only have $822 billion in cash. You’ve got to be kidding. If you hold that money any longer and the economy collapses, that’s $1 trillion to the economy each year for just restaurants.”

Sampson, of the industry trade group, in turn, accused the lawyers who are going after insurance companies of orchestrating creative strategies for making their case, including working closely with local governments to “lay a predicate in their orders that would expand coverage that is not covered in the standard business interruption policy.”

While the industry says it’s unwilling to alter its stance on coverage, the country’s four major insurance associations last week sent a letter to California’s congressional delegation affirming their support of what they’re calling a COVID-19 Business and Employee Continuity and Recovery Fund that would be backed by the federal government and could potentially be part of a subsequent stimulus package.

That won’t be of any immediate help to San Diego restaurant and bar owner Darren Moore, who had to lay off the 80 employees who helped run his two La Jolla restaurants, Shore Rider and Cove House, and his Cordova Bar in Bay Park. Among the first to file a claim through Breakwater Insurance, Moore characterizes the denial explanation by the insurance carriers as “BS.” Moore has transitioned his Shore Rider location into a weekly destination for takeout food and household provisions he’s calling “Taco Tuesday Lives Again.”

“I hope the feds step in and there’s a groundswell of support led by Thomas Keller’s suit,” said Moore. “Am I going to take my resources to sue a monster insurance company? Probably not, other than participating in a class action. If there’s a legal move to be made I’ll wait for that, but right now, you can either curl up in a ball or choose to smile and move on. My job is to get back in business and get my employees hired back.”

Mera, of Pacific Events, said she’d welcome the opportunity to participate in class-action litigation. She’s still reeling from the cancellation last week of a mega biotech convention scheduled for June when her company was to help produce two related events that were to accommodate thousands of guests each.

“Woe to those of us who are fighting this insurance issue,” said Mera, who had to lay off most of her more than 100 employees. “I have formally asked the insurance company to reopen our claim. I’m too concerned right now with keeping my business afloat to read a million-page insurance document, but this was not our fault. It’s a natural disaster so at what point will the government step in and say someone has to help with this?”

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©2020 The San Diego Union-Tribune