Unable to secure players from Major League Baseball, the Amarillo Sod Poodles, Columbia Fireflies, Binghamton Rumble Ponies and 157 other minor league teams canceled their 2020 baseball season late last month.
For the first time in history, there will be no cheering fans in their stadiums. No hot dog sales. No beer or baseball caps. For every one of these teams and their vendors, the summer of 2020 will have to be written off as a complete bust, with total losses expected to far exceed $100 million.
But there is one source of income they’re still hoping to collect: business interruption insurance.
Like thousands of other companies across the country, these teams and their vendors believe that because they faithfully paid insurance premiums and could not have foreseen that the coronavirus pandemic would cause the government or MLB to shut them down, they are now entitled to a payout.
The problem is their insurance companies don’t agree.
Not only do insurers say that no physical damage has been done to property – such as would have occurred after a flood of a hurricane – they point to clauses in practically every contract that explicitly state that losses caused by viruses are not covered.
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Unwilling to take these denials as the last word, every kind of company that has been battered by government shutdowns – from bars, restaurants and daycare centers to gyms, hair salons and dental offices – is now suing insurance carriers to collect on claims, and insurers are circling the wagons to defend themselves.
For most of the participants in this battle, the stakes could not be higher.
The American Property Casualty Insurance Association (APCIA) estimates that coronavirus related shutdowns have cost companies with 100 or fewer employees anywhere from $250 billion to $430 billion per month. With the insurance industry’s collective surplus hovering around $800 billion, it would not take long for carriers to get completely wiped out if they started paying on claims, according to a letter circulated in April by the Federal Reserve Bank of Chicago.
“Pandemic outbreaks are uninsured because they are uninsurable,” David A. Sampson, president and CEO of APCIA, is quoted as saying in the Chicago Fed letter. “Insurers benefit from diversifying risk, but diversifying pandemic risk is particularly difficult as a large number of businesses and households are often affected at once, which in turn can create substantial losses.”
The potential downfall of the insurance industry isn’t stopping companies across the country from demanding payment. That’s because their own fates hang in the balance.
Because MLB is not playing ball
A group of 50 minor league baseball teams and their vendors are just the latest to sue. According to their lead attorney, Andrew Sandler, it wasn’t coronavirus that ended their season. It was MLB.
“The teams are unable to play because they’re not getting their players from MLB,” said Sandler, an attorney with Mitchell Sandler LLC in Washington, D.C. “That is classic business interruption.
“This is no different than cases after 9/11, Hurricane Sandy and Hurricane Katrina,” Sandler continued. “The courts view it very dimly when insurers collect premiums then when a major catastrophe hits, they say they can’t pay.”
A spokesman for Philadelphia Indemnity Insurance Co., the lead insurance carrier named in the lawsuit, said his firm does not comment on pending litigation.
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The teams involved in the lawsuit average about 20 employees and more than $2 million in annual expenses, according to Jason Freier, the chief executive of Hardball Capital, an Atlanta company that owns three of the minor league teams. Some of the teams in the league own their own stadiums and all the concessions stands that sell everything from t-shirts and jerseys to hotdogs and hamburgers. Others lease the ballparks from the cities in which they operate and contract out to vendors.
Players are not part of their payrolls. They are paid and managed by MLB, which can withhold players if it chooses to do so, and that’s exactly what happened late last month.
In terms of fans, league attendance has surpassed 40 million for the last 15 years, according to the lawsuit. “These ballparks are among the largest community gathering places in town,” Freier said.
The stadiums are also major employers.
“Large numbers of people cycle through seasonally – ushers, concession workers, cleaning crews,” Freier said. “There are literally hundreds of people that rely on the activity in season for some portion of their income, and now that the season has been canceled, it’s going to be a struggle for them.”
Freier said his company has faithfully paid business interruption insurance for 35 years.
“It’s frustrating when you keep paying your premiums in the hope that you won’t need it and then something comes along and you think this will get you through,” Freier said. “Now we’ve gotta find some other way to mitigate the damage.”
Battle royale: restaurants vs. insurers
Owners of restaurants have been equally frustrated with insurance companies regarding the refusal to pay business interruption insurance. They also have been exceptionally vocal about it.
In April, a group of famous restauranteurs led by Thomas Keller, Wolfgang Puck, Daniel Boulud, Jean-Georges Vongerichten and John W. Houghtaling II formed the Business Interruption Group, and they complained all the way to President Donald Trump about the devastation wrought by the pandemic and the failure of insurance companies to provide relief.
Besides the complaints, these restaurant owners also filed dozens of lawsuits.
In New Orleans, Houghtaling filed one of the first suits against underwriters at Lloyds of London on behalf of his 500-seat Oceana Grill restaurant in the heart of the French Quarter. He argued that he paid for an “all risk policy” that “only excluded losses due to biological materials such as pathogens in connection with terrorism or malicious use.” He, therefore, concluded that his insurance company should provide coverage for the pandemic.
As to whether coronavirus does long-term damage to property, the Houghtaling suit concluded that the virus physically infects and remains on surfaces for up to 28 days, particularly in humid areas of the country like Louisiana.
“It is clear that contamination of the insured premises by the coronavirus would be a direct physical loss needing remediation to clean the surfaces of the establishment.”
Lloyds of London disagreed.
In ensuing lawsuits, such as one filed by the owner of El Novillo restaurants in Miami against Lloyds of London in April, owners expanded on the same themes.
They claimed it was the actions taken by government to stop the spread of coronavirus, and not the pandemic itself, that put them out of business. They insisted that the virus attached itself to property making it unsafe for the general public to enter and required remediation; and they maintained that insurers never intended to honor their commitments.
Attorneys representing Lloyds of London battled back, saying that business losses could only be covered under their policies if there was "physical loss or damage to the insured properties," and that no property was damaged in any way by the coronavirus.
“There is nothing to repair, rebuild or replace,” court documents filed by attorneys representing Lloyds in the El Novillo case state. There isn’t “any mention of what physical damage occurred, how the physical damage occurred and when the physical damage occurred.”
In their motion to dismiss, attorneys also pointed to microorganism and pollution exclusions in the contracts.
The first exclusion voids coverage for any claim arising directly or indirectly out of a microorganism, and "the coronavirus is unquestionably a microorganism,” court documents state. The second exclusion “precludes coverage for any claim related to substances that pose a threat to human health,” and coronavirus is unquestionable a threat to human health.
What's more, attorneys representing Lloyd’s accused restaurant owners of lying in their pleadings by saying that government forced them to close their restaurants.
“Plaintiffs were never required to cease delivery, take-out or pick-up services,” documents filed on behalf of Lloyds state. “No government order prevented plaintiffs themselves, or their employees, from entering the properties, and indeed certain of the orders actually encouraged access.”
Thus far, most cases filed against insurance companies are still pending, with attorneys on both sides expecting to be litigating for some time.
"In terms of business interruption insurance, we're in the top of the first inning of a nine inning game," said Sandler, the lead attorney representing minor league baseball teams in their lawsuit against insurance companies.
Like after 9/11, Hurricane Hurricane Katrina and Hurricane Sandy, insurers worked hard to discourage small businesses from pursuing claims by denying coverage, Sandler said. Then after those businesses sued, insurers tried to get courts to interpret their exclusions as broadly as possible and to dismiss the cases.
That’s where we are now, Sandler said. In the end, however, many of the cases were resolved through settlements, allowing businesses to recover some or all of what they were owed.
Coronavirus business interruption battle pits business lobby against itself
'We will not pay for loss or damage'
The depth and variety of the companies filing lawsuits against insurance companies are hardly limited to restaurants and minor league baseball teams.
On May 18, for example, the company that owns and operates Central Bucks Children’s Academy, a daycare center based in Warrington, Pennsylvania, sued Philadelphia Indemnity Insurance Co., accusing it of refusing to pay benefits under its business interruption policy.
The daycare center says in its lawsuit that it was forced to shut down on March 15 and has remained closed ever since, incurring “a substantial loss of business.”
In a letter to the daycare center, Philadelphia Indemnity’s Property Claims Supervisor Karen Grocott counters that no daycare employee was sickened by the virus and “there have been no reports of physical damage to your property.” She also noted an exclusion in the contract “due to virus or bacteria.”
“We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease,” Grocott wrote. “Further, because physical damage by a covered cause of loss did not occur to property, the coverage provided under the (government shutdown) provision is not triggered.”
Gabriel Gillett, an attorney with Jenner & Block LLP in Chicago who represents clients that have been denied business interruption claims, believes many more lawsuits will be filed before the battles between companies impacted by government shutdowns and their insurers are over.
“One thing we’re finding is that when some people get that denial letter, they think that’s the final word,” Gillett said. “But they need to know that insurers are denying everyone everywhere and that their denial is susceptible to a challenge.
“In their policies, insurers simply did not choose to exclude coverage for the loss or damage caused by the unprecedented government shutdown orders. Restaurants and other businesses who bought insurance for business interruption reasonably believed they would get such coverage.”
The policies do offer coverage in the case of these government shutdown orders, Gillett says. And, in his view, insurers can’t keep client premiums and deny coverage just because they claim they can’t afford to live up to the terms of the contracts.