The owner of the Houston Rockets, Rocket Ball, and Clutch City Sports & Entertainment, LP have filed a 412 million-dollar lawsuit against their insurer for denial of their business interruption claim due to the Coronavirus pandemic. The lawsuit is Cause No. PC-2020-05137, Clutch City Sports & Entertainment LP et al. v. Affiliated FM Insurance Co., in the Providence/Bristol County Superior Court, Rhode Island. The lawsuit alleges that their property and casualty insurer FM Global Group wrongfully denied business interruption claims for losses due to having to cancel multiple Houston Rocket games as well as numerous other live music and entertainment events that were scheduled to take place in the Toyota Center during the COVID 19 shut down.
What is a Business Interruption Claim?
A business interruption claim is an insurance claim made under a commercial property and casualty insurance policy for lost profits due to the business being unexpectedly halted. Business interruption policies are typically tapped into by businesses when an unexpected event such as an accidental fire or a catastrophic event causes a business to be shut down. The business typically pays a high premium for this type of coverage to protect them from loss from events beyond their control. The lawsuit filed by the Houston Rockets alleges that they paid over 700,000 a year in premiums for a policy that included business interruption claim coverage.
Why are Some Insurance Companies Denying These Claims Due to COVID 19 Shutdowns?
Certain policies have exclusions for virus-based claims and global viral pandemics. Global viral pandemics causing business interruptions was not something seriously contemplated by many actuaries in setting insurance prices in the distant past. After the SARS outbreak in 2003, some insurance companies began adopting exclusions in their policies for business interruptions due to viruses and viral pandemics. In 2016 the Zika Virus prompted the adoption of more virus exclusions to business interruption claim policies. These became known as the viral pandemic exclusion.
While viral pandemic exclusions have been around since the early 2000s, their limits have not really been tested. Many of them specifically name known potential vial pandemics like SARS, Zika, Cholera, Asian flu, and the Bubonic Plague are often specifically named in these exclusions. Obviously, new viruses are not specifically named in these exclusions. So the answer may depend upon the policy language.
Neither COVID 19 nor the Coronavirus were specifically named in the Rocket’s business interruption claim policy according to the lawsuit they filed, and thus, they argue that the exclusion does not apply. The insurer will undoubtedly argue that the broader language applies to exclude not just the named but any viral pandemics.
Some States Move to Declare Viral Pandemic Exclusions Void
A number of state legislators have filed bills to try to declare viral pandemic clauses void as a matter of law retroactively. New York has a bill currently pending that would require all insurers to cover business interruption claims caused by COVID 19. However, passing a bill to retroactively make insurers cover a loss that was excluded by agreement is not as simple as it sounds. There are constitutional issues at play.
What is an Ex Post Facto Law?
An Ex Post facto Law is a law that changes the legal status of an action after it has occurred. The United States Constitution (clause 3, Article 1, Section 9) prohibits the imposition of ex post facto laws by the Federal Government. Clause 1, Article 1, Section 10 extends this prohibition to state governments. Changing the law on someone after they have done the act is viewed as inherently unfair. In their defense, the insurance companies entered into a written agreement that they argue excluded pandemics. Had they intended to include pandemics, they would have presumably demanded higher rates. As a result of the concerns over the constitutionality of such a law and the fairness considerations, some states like Louisiana have scrapped the idea of a retroactive business interruption claim coverage law and opted for requiring clarification of the policies going forward.
Conflicting Clauses and Business Interruption
In addition to the above clause, there are other insurance clauses that may come into play in deciding the Rocket’s business interruption claim fate. One such clause is the government shut down clause. Some of these policies actually, specifically cover business interruption due to the government ordering you to alter or cease business. In this situation, there is arguably a conflict between the two clauses. A general rule of contract law is that ambiguities are construed against the drafter.
In both the above policies and policies that are silent (and thus, do not exclude government shutdown as the grounds for a claim), there is another argument for coverage. The argument is that the viral pandemic exclusion should not apply because the virus is not what caused them to shut down, it was the governments ordering businesses to cease or reduce operation that caused the loss. While this argument may seem odd at first blush, many of the businesses would have kept operating had their not been a forced shutdown and there was no documented testing done to showed that the virus was ever any present in their businesses.
The novelty of viral pandemic exclusions and the ambiguity of their meaning as well as the government shut down provisions in many business interruption claim policies has created a problem that state legislatures seem unable to solve. The massive economic loss that has been sustained by businesses in the United States demands that these ambiguities be clarified. It is likely that the Houston Rocket’s case is a pioneer case that will be followed by other teams, sports venues, and businesses that find their own claims being denied.