Why Travelers is confident it does not have to cover many COVID-19 business interruption losses

The Travelers Companies Inc. will have to spend money defending itself in business interruption coverage lawsuits arising from the pandemic, but officials with the New York City-based insurer do not expect it will actually have to pay out on many of those claims.

“Our commercial insurance property policies that include business interruption, including as a result of civil authority, require losses to be caused by direct physical damage to property from a covered cause of loss,” Travelers CEO Alan Schnitzer said during a recent conference call. “In addition, our standard policy forms specifically exclude loss or damage caused by or resulting from a virus.”

Since COVID-19 was declared a pandemic this past March, many jurisdictions (including some Canadian provinces) have brought in temporary laws requiring entire classes of business either to close their premises or limit their activity.

Commercial property policies often include business interruption endorsements but wording varies.

Some policies only kick in when the properties are affected by property perils or are damaged. Other policies appear broader, covering closures ordered by civil authorities – sometimes arising from outbreak of contagious disease within a certain radius.

During an earnings call July 23, Schnitzer was asked whether Travelers has seen BI claims; and if so, whether the insurer told the clients they were not insured, given the policy language.

“We have certainly seen submissions,” replied Schnitzer. “There is claims activity around (BI arising from COVID-19) and even litigation around it.  We have provisions in our policies that we think make that coverage inapplicable and so we don’t expect many of those claims to actually pay out.”

“Even where we don’t expect ultimately to pay in indemnity on the loss, we have acknowledged in our reserves that we will spend some money defending against claims that come in for business interruption,” Travelers CFO Dan Fry said. (Travelers reported July 23 that company-wide, claims and claims adjustment expense reserves increased from US$51.8 billion at beginning of 2020 to US$53.1 billion as of June 30. This applies to all lines in both property and casualty and life).

“The few court decisions we have seen so far – one in New York and one in Michigan – have both upheld the physical damage requirement [for business interruption coverage] in the context of COVID-19,” said Schnitzer.

Schnitzer was not referring to decisions involving Travelers.

He was alluding to a Michigan court ruling in Gavrilides Management Company et al. vs. Michigan Insurance Co. and a U.S. District Court for the Southern District of New York ruling in Social Life Magazine v. Sentinel Ins. Co., a Travelers spokesperson told Canadian Underwriter Monday.

In Sentinel, New York Judge Valerie Caproni ruled against a magazine publisher that sought business interruption coverage when it had to close during the pandemic, wrote Andrew Daechsel, a Miami-based litigation lawyer for Carlton Fields, in a blog post on the JD Supra website. When the client’s lawyer argued that the virus had caused “onsite property damage,” Judge Caproni responded, “It damages lungs. It doesn’t damage printing presses,” Daechsel reported, adding the court was applying New York state law.

In a Michigan court, Gavrilides Management argued that government orders (and not the virus itself) caused a direct physical loss of use/access. However, Judge Joyce Draganchuk ruled that in order to get coverage, there would have to be some tangible alteration or damage that impacts the physical integrity of the premises, reported law firm Hurwitz & Fine P.C. in a commentary on the case.

Generally, business interruption coverage disputes arising from the pandemic can be grouped into two types of policy wording, said Eric Charleston, a Toronto-based associate with Miller Thomson LLP, in an earlier interview with Canadian Underwriter.

One type requires damage to property. The other relates to coverage grants that are tied to decisions by civil or government or public authority related to business closure. Charleston was not commenting about Travelers or any other insurer but was interviewed in the context of a test case currently before the High Court of England and Wales.

The test case, launched this past spring by Britain’s Financial Conduct Authority, involves 17 business interruption policy wordings from various insurers providing commercial coverage in Britain. A trial started July 20.

One of the disputed policy wordings in the FCA test case provides BI coverage in a case where “access to or use of the premises”  is “prevented or hindered by” the government, police or authorities to “to an emergency which could endanger human life or neighbouring property.”

Another provides coverage where there is “interruption of or interference with the business arising from  … any human infectious or human contagious disease .. an outbreak of which the local authority has stipulated shall be notified to them manifested by any person whilst in the premises or within a twenty five (25) mile radius of it.” That clause excludes AIDS.

Feature image via iStock.com/isayildiz