Initial Legal Responses to Coronavirus
During a virtual happy hour recently, my friends asked if a bunch of crows is called a murder, what do you call a big group of lawyers? I instinctively quipped, “a catastrophe.”
The next day, I saw a lawsuit in which a restaurant sued its insurer for denying a “business interruption” claim and refusing payment for losses caused by a mandatory coronavirus-related closure. Over the next week, I read several more cases against insurance companies, as well as lawsuits arising from other aspects of COVID-19.
Unquestionably, this virus is a global catastrophe. Although social distancing slows the legal process, the search for justice continues. As I write this on April 12, 2020, several lawsuits have been filed over the last couple of weeks which have implications for the rights and responsibilities of most event professionals. With the goal of applying the lessons of these lawsuits to your own circumstances, let’s survey the landscape as it exists today.
(I am specifically noting the date because within a few weeks, this could all be different, if not irrelevant or completely wrong. I’m a lawyer, not a soothsayer.)
INSURANCE CASES: WHAT IS “DIRECT PHYSICAL LOSS?”
For me, the wave of lawsuits began with an insurance coverage case called Big Onion Tavern Group, LLC v. Society Insurance, Inc., filed on March 27, 2020 in federal court in Illinois. Big Onion and the other named plaintiffs operate restaurants and bars in and around Chicago. They were all shut down by Executive Orders issued by Illinois’ governor on March 15 and March 20. Within days, the restaurant owners filed claims under their respective business interruption policies, which were all issued by Society Insurance. Society denied coverage. The restaurants were not happy. They sued on March 27, 2020 for a declaration that Society Insurance owed them coverage for their lost business.
According to the Complaint, Society based its denial of coverage on a typical interpretation of business interruption policies – in order to be a covered claim, there must be some “direct physical loss” causally related to the closure.
In this instance, Big Onion offered at least three arguments to address the physical loss requirement. First, the plaintiffs cited an Illinois asbestos case for the proposition that a dangerous substance in a property could constitute a physical loss. Personally, I think Society could distinguish that situation fairly easily – the presence of asbestos was the direct cause of the closure, and it had to be physically removed as a condition of reopening, neither of which seems quite true for the restaurants here. Next, Big Onion noted that the insurance policies did not expressly exclude coverage for losses caused by a virus, arguably giving the insured restaurants a reasonable expectation that their policies would cover losses caused by COVID-19. This might be a compelling claim, but only if there is coverage for a virus notwithstanding the absence of an asbestos-style physical loss in the first place. Later in the Complaint, Big Onion notes that “emerging research on the virus and recent reports from the CDC” suggest that this virus can stay alive on surfaces as long as 17 days, rendering that property potentially unsafe.
I don’t know the merits of Big Onion’s claim, but I know that addressing it in court would require both sides to pay their own scientists, who would offer conflicting testimony regarding the epidemiological evidence of coronavirus’ effect on physical objects. My first impression was that this does not seem like the path to a quick or inexpensive resolution.
Nonetheless, this may become a well-traveled path for disappointed business operators and their insurers. On April 2, 2020, a restaurant called Prime Time Sports Grill, Inc. raised essentially the same claims as Big Onion, suing the insurance syndicate Lloyd’s of London in federal court in Tampa, FL to compel coverage for losses sustained when Florida’s governor finally ordered all bars and restaurants to close for thirty days.
SHOW ME THE CONTRACT
That same day, a different kind of case arising from economic losses caused by coronavirus was filed in federal court in Wisconsin. McMillan v. StubHub, Inc. is a class action filed by purchasers of tickets on the secondary market web site who were denied refunds they claim to be entitled to under StubHub’s FanProtect policy. Lead plaintiff Matthew McMillan bought tickets on StubHub to see the NHL Minnesota Wild play on March 20, 2020. On March 12, 2020, the hockey season was suspended. McMillan contacted StubHub for a refund pursuant to the company’s FanProtect policy, which StubHub denied. The Complaint argues that “[u]ntil March 25, 2020, the FanProtect guarantee promised that if a StubHub user purchased tickets to any event through StubHub, and the event was cancelled, the user would receive a full, money-back refund for their purchase.” StubHub then changed its policy so “if the event is canceled and not rescheduled, you will get a refund or credit for use on a future purchase, as determined in StubHub’s sole discretion (unless a refund is required by law).” [Emphasis added.]
In their Complaint, McMillan argues that the policy was part of the ticket purchase contract which StubHub cannot unilaterally change. In other words, plaintiffs say StubHub breached its contract and defrauded every ticket purchaser to whom it offered a 120% credit towards a future show in the next year while denying them a refund. This lawsuit has potentially enormous implications for the way the secondary ticket market is currently financed, and therefore the economic viability of the current model.
The next day, on April 3, 2020, a group of theaters in Houston sued their Lloyd’s insurer in Texas federal court, alleging that they were effectively denied coverage despite having paid for a “Pandemic Event Endorsement” in their insurance contract. According to its Complaint, plaintiff SCGM had purchased a business interruption policy through Lloyd’s, and it paid to add a separate endorsement to cover financial damage from business interruptions during pandemics. On March 17, 2020, a local judge ordered restaurants to provide only carry-out or delivery service, leading SCGM to close its locations. Two days later, the Governor issued a Public Health Disaster Declaration that prohibited Texans from gathering in groups of ten or more. Meanwhile, on March 18, 2020, a Lloyd’s agent sent SCGM’s insurance broker the following message:
As a reminder, there is no coverage under the base TNR policy given Coronavirus COVID-19 is not a food borne illness, it’s a respiratory illness. Additionally, it is not covered under the Pandemic Event Endorsement as it is not a named disease on that endorsement.
The Complaint proceeds to quote the Lloyd’s endorsement, however, which specifically listed “Severe Acute Respiratory Syndrome-associate coronavirus (SARS-CoV) disease,” and covered “mutations, or variations” of specifically-listed pathogens.
Unlike the Big Onion and Prime Time restaurant cases that will rely on factually complicated scientific testimony, the McMillan and SCGM courts are relatively well-equipped to determine the meaning of written contracts. Words we can handle.
The same day as the Houston lawsuit, Indiana’s largest non-profit theater company sued its insurer on largely the same grounds. Indiana Repertory Theatre, Inc. had purchased an “all risk” insurance policy from The Cincinnati Casualty Company. Once again, the insurer pre-emptively declared that coronavirus – because it caused no “property damage” as insurance companies interpret that term – was not covered even under a policy that expressly was supposed to cover all risks except those which were specifically excluded. As above, the insured entity seeking coverage referenced studies that “found that SARS-CoV-2 can survive on surfaces for extended periods,” and the Complaint recounted a series of local orders, in this case by the Mayor of Indianapolis, culminating in a stay-at-home order that forced the theater to close its doors and lose the rest of its performance season.
The theater’s policy with Cincinnati Casualty provided coverage for “Building and Personal Property” and “Business Income and Extra Expense.” But the insurance company tentatively denied coverage based on the absence of “direct physical loss.”
At the threshold, there must be direct physical loss or damage to Covered Property caused by a covered cause of loss in order for the claim to be covered…. Direct physical loss or damage generally means a physical effect on Covered Property, such as a deformation, permanent change in physical appearance or other manifestation of a physical effect. Your notice of claim indicates that your claim involves Coronavirus. However, the fact of the pandemic, without more, is not direct physical loss or damage to property at the premises. [Emphasis added.]
In its Complaint, the theater offers three arguments in response: (1) the requirement of “deformation, permanent change in physical appearance or other manifestation of physical effect” appears nowhere in the policy; (2) the theater’s complete loss of use does constitute a “direct physical loss” by any reasonable definition; and (3) if Cincinnati Casualty wanted to exclude coverage for loss due to a virus, it could have included a virus exclusion.
Doubtless there will be many more such cases. I offer this snapshot to show that the battle lines appear already to have been drawn. To people who read insurance policies and are familiar with insurers’ interpretation of their (often difficult) language and organization, the requirement of a “direct physical loss” in order to trigger business interruption coverage is perfectly familiar. Whether it will be upheld as consistent with the bargain struck with its insureds is a question that will simultaneously work its way through multiple court systems, which could easily yield conflicting results and lead to appeals that could last for years.
SOME GOOD NEWS ABOUT COVERED CLAIMS, AT LEAST IN THE U.K.
Not everyone is fighting with their insurer over coverage. The All-England Lawn Tennis Club, which added infectious disease coverage to its policy after the 2002 SARS outbreak, is insured for about half its losses from the cancelled 2020 Wimbledon Tennis Championships. The Club’s $2 million annual premium for pandemic coverage looks like a bargain now that their $34 million investment over the last 17 years will yield an insurance payment of about $141 million. Likewise, the 2020 British Open golf tournament is also covered by pandemic insurance, which eased its decision to cancel.
A CONSIDERATION BEFORE YOU REOPEN
At the risk of ending this legal review on a bleak note, I have one final lawsuit for event professionals to consider as they anticipate the blessed day of reopening. Evans v. Walmart, Inc. was filed in state court in Chicago by the family of a Walmart employee who died from coronavirus-related complications within days after several other workers allegedly showed “signs and symptoms of COVID-19.” The Complaint argues that the retailer violated its duty to provide safe and healthy premises through various acts of both omission and commission. Specifically, plaintiffs say that Walmart …
[K]new or should have known that individuals at the store were at a very high risk of infection and exposure due to the high volume of individuals present at and circulating throughout the store on a daily basis.
I know nothing about the merits of this lawsuit either. But I bet we will see this argument being recycled – once local officials start to lift their bans on public gatherings – on behalf of people who visit newly reopened stores, restaurants, clubs, and other public places and then get sick. The temptation will be to blame the venue for being unreasonably unsanitary, for allowing too many people to stand too close, failing to reasonably screen people for symptoms of the virus before being allowed to enter. The causal connection will be hard to prove – viruses don’t leave footprints, and privacy concerns still keep us from using existing technology to track people – but you can count on the willingness of desperate people to sue anyway.
I hope you weren’t expecting a big ray of sunshine from a review of recently filed lawsuits. Coronavirus, and most nations’ response to it, is the real catastrophe, not the lawyers who are trying to hold people to their promises. Time will tell who is on the right side of the promises in these cases. As with coronavirus itself, the one certainty is that we will never do business the same way again.
Be safe out there.