There will be no reimbursement by insurers for the tens of millions of dollars hotels are losing as a result of the economic downturn caused by the coronavirus pandemic. Some owners are not taking no for an answer and have joined thousands of other businesses in suing their property casualty insurers.

Business Interruption Lawsuits Spread With Virus

Lack of coverage for business lost to the coronavirus pandemic will lead to reform and new public-private solutions, experts say

Like hundreds of other hotel companies, MHG Hotels Inc. in Indianapolis, Indiana, paid for years for business insurance coverage. The policy, said CEO Sanjay Patel, is “all-risk” coverage. That means, he said, the carrier needs to cover the cost of business lost at MHG Hotels properties when the coronavirus pandemic halted travel and governments issued shelter-in-place mandates.

Ascent Hospitality Management in Buford, Georgia, also paid for an “all-risk” policy. It has more than 40 hotels in five states, most of them in Alabama.

Today, both companies are aligned in another way – they’re each suing their insurers for more than $40 million in business interruption caused by the pandemic.

And in these cases, as well as thousands more, the insurers refuse to pay.

MHG has more than 20 properties in Indiana, Florida, Texas, Illinois and Missouri. It has not closed any of its hotels but Patel said occupancy averaged 7 percent to 8 percent across the board in the early days of the slowdown.

Though the hotels remained open, business was interrupted.

“We’ve been paying for this for years and happy that we’ve never had to use it,” said Sanjay Patel. “But this time we need to use it. They’ve collected the money for years and now they don’t want to pay.”

MHG filed suit on April 1 against EMC Risk Services, seeking more than $40 million in damages.

The nationwide dispute that figures in hotels, restaurants, retailers and health care specialists is growing to epic proportions.

An online search of cases throughout district and regional civil courts finds countless cases of unsatisfied business interruption claims. The insurance industry is facing up to $600 billion in business interruption claims – an amount that would bankrupt the entire industry, experts say.

Meantime, state and federal lawmakers are considering several ideas that would ensure businesses are protected from steep losses if another pandemic strikes.

LISTEN: PREMIUM LETDOWN: Episode 280 of Lodging Leaders podcast reports on how the hotel industry is responding to property insurers’ refusal to cover COVID-19 revenue loss.

‘Not Virus Only’

Besides the huge payout requested, insurers-turned-defendants say most business policies like the ones held by MHG and Ascent only cover business lost because of property damage, such as that wielded by a hurricane, fire or flood. COVID-19 does not destroy property.

“Most of the policies claim to exclude virus, but the language is not clear,” Patel said. “You can’t just say ‘virus.’ It’s a pretty broad word.”

And, more specifically, he said, “If people read their insurance policy, you will not find a single word in your policy that refers to a pandemic.” The business loss is not because of a virus, it’s because of a mandatory government shutdown.

“It’s not virus only, it’s a shutdown,” Patel said.

Insurers also note a viral pandemic is not included in most policies unless it is specifically requested and paid for. But the hotel companies say they have all-risk policies that make way for losses caused by a viral outbreak.

Yagnesh Patel, co-founder and CEO of Ascent, declined to be interviewed for this story. Sirote & Permutt in Birmingham, the law firm Ascent enlisted, issued a news release announcing the suit filed on April 17 against Employer’s Insurance and Liberty Mutual.

“Our client paid substantial insurance premiums for decades to protect itself from events that threaten its properties’ survival,” said Sirote litigation attorney Jim Williams in the statement. “Now, like thousands of other businesses, Ascent Hospitality has to grapple with an entirely new aspect of the COVID-19 crisis – the insurance companies’ failure to fulfill their promises and obligations.”

The Birmingham Business Journal in an April 21 article quoted John Tampa, co-founder and president of Ascent Hospitality, pointing out the difference between a viral outbreak in a hotel and global pandemic.

“A pandemic is something way larger than a virus, because you’re dealing with shutdowns, with a state of emergency, with municipality regulation, with social distancing — that’s a little bit different than just a virus.”

Outright Dismissal

One of the points made in each MHG and Ascent suits is that their insurance carriers dismissed their claims within 24 to 48 hours of filing.

Investigating a claim is a reasonable expectation on the part of policy holders, said Robert Zarco, a partner at the law firm Zarco Einhorn Salkowski Brito Attorneys at Law in Miami who specializes in litigating business interruption insurance claims on behalf of business owners. He is not representing anyone featured in this article.

“Insurance companies have an obligation to undertake due diligence and a proper investigation of the claim,” he said. “If you have a situation where an insurance company is undertaking to deny a claim immediately or within 24, 48 hours or even a week of having filed the claim that is a clear indication the insurance company has not properly investigated or undertaken any due diligence with regard to the claim that’s been filed.”

Meantime, state and federal lawmakers are considering legislation that would mandate U.S. insurance companies pay for business losses related to COVID-19.

Such a payout could surpass $600 billion, reported Best’s Insurance in May.

American Property Casualty Insurance Association, a trade group, puts the payouts even higher. In June, the association reportedly estimated payouts to would cost insurers $255 billion to $431 billion a month.

The amounts are not sustainable and would ultimately make many insurers insolvent, say insurance industry experts.

Potential Monthly Business Interruption Losses for Small and Small-to-Medium-Size Enterprises: The report, ‘Uninsurability of Mass Market Business Continuity Risks from Viral Pandemic,’ by The American Property Casualty Insurance Association features this graphic that demonstrates businesses with fewer than 100 employees produce business continuity losses of $255 billion to $431 billion per month while businesses with fewer than 500 employees produce losses of and $393 billion to $668 billion.

Robert Hartwig is a Ph.D. clinical associate professor and director of the finance department at the Center for Risk and Uncertainty Management at University of South Carolina’s Darla Moore School of Business.

He and Robert Gordon of the American Property Casualty Insurance Association co-wrote the report that said pandemic risks are inherently uninsurable.

“Potential losses can easily exceed the industry’s capital, surplus and premium resources, posing a systemic risk to the industry and the overall economy,” they write.

Each of the suits filed by MHG Hotels and Ascent Hospitality Management state their insurance policies do not specifically exclude losses from viral pandemics or government shutdowns.

Hartwig said it’s not typical to sue based on what a policy does not exclude.

“It is unusual to see a lawsuit based on a particular exclusion in a policy but the fact of the matter is the policy language even without the exclusion is very clear that any damages arising from a viral pandemic are not covered,” Hartwig said.

“The reason for that is the basic language in every policy requires for business interruption to be triggered there must be actual physical loss or damage to covered property in a covered peril. That means there needs to be some actual damage, destruction or missing property in these hotels that is a direct result of a covered peril.

“Now there are two problems here so far as these lawsuits go that will demonstrate why they are defective and likely to be rejected by the court: There is no physical loss or damage. None of these hotels can point to one single instance where there is some physical loss or damage or missing property as a direct result of coronavirus.

“This is very distinct from say a hurricane where there’s going to be damage from water or wind or from other events such as fire or smoke or explosion. There’s none of that. The inside of the hotel looks exactly like the day that they closed it.”

The second problem, he said, is in some cases, hotel owners may claim they had to close because the virus settles on surfaces and contamination can occur within 72 hours, Hartwig said. But that’s a non-issue for hotels that have been closed for several months.

“This is the language that’s in place even before you get to the viral exclusions or a bacteria exclusions that exists in many policies. Most policies actually have this exclusion, some do not, but the exclusions were introduced widely somewhere around 2006 or so.

“But the reality of it is these policies have never covered damage related to something along the lines of a hotel that had to close because a number of guests or employees had the flu or they had some other disease.”

Besides the dispute over what a policy intended to cover is the un-insurability of business lost because of the global coronavirus pandemic.

“What we have seen in the United States and around the world is the sharpest most rapid economic downturn since the Great Depression. It also goes without saying that insurers had no intent of insuring all the business interruption losses of all businesses around the world simultaneously,” Hartwig said.

In the second quarter of this year the U.S. GDP decreased by an annual rate of 32.9 percent, a loss of $2.15 trillion.

“In the U.S. alone, each month that businesses are closed, business continuity or interruption losses total about $1 trillion per month,” Hartwig said. “The entire capital base of the entire property casualty insurance industry to pay all claims for all policy holders on their homes, on their vehicles, on their businesses is $800 billion.”

If private insurers were required to pay on these claims, the insurance industry would be broke in about three weeks, he said.

Reform Ahead

Though hotel owners and operators may be wading through these lawsuits for some time to come, the event may usher in a new era of casualty coverage for commercial properties.

A Congressional proposal that would require insurers provide business interruption coverage in the event of a viral pandemic was introduced to the U.S. House of Representatives on April 14. Mike Thompson, a Democratic lawmaker in California, is primary sponsor the Business Interruption Coverage Act of 2020. The measure was referred to the House Committee on Financial Services. The bill has 10 co-sponsors, all Democrats.

Meanwhile, according to National Law Review, at least 10 state legislatures are entertaining proposals that would require insurers to cover business revenue lost because of the pandemic.

While lawmakers debate the issue and health care scientists work to develop a vaccine for COVID-19, viral contagions will remain a threat.

Gregory Riehle, a lawyer and former CEO of the Resort Hotel Association, a group of independent resort hotels that formed more than 30 years ago to leverage their purchasing power to obtain better property insurance coverage at more affordable rates, wonders how the U.S. and the rest of the world will deal with the next pandemic.

Though many of the lawsuits businesses have filed against insurers will most likely be unsuccessful, Riehle said the federal government and the insurance industry might want to consider creating program much like the Terrorism Risk Insurance Act enacted by Congress in November 2002, more than a year after the terrorist attacks of 9-11.

Under TRIA, property casualty insurers must offer terrorism coverage. It is usually a separate policy or a rider to a typical policy. In the event of an attack, both the government and the insurance industry share the losses. This ensures that businesses have the financial resources to recover.

“We’re going to have to do something better” than what’s available now to businesses reeling from the coronavirus pandemic, Riehle said. The Coronavirus Aid, Relief and Economic Security Act included the Paycheck Protection Program, but it’s proven inefficient at best, he said.

Riehle agrees with Hartwig that the property casualty insurance industry is not in a position to underwrite an entire pandemic.

Hartwig said he, too, expects the coronavirus crisis to bring about reform in the insurance industry, including something akin to TRIA.

Another idea being floated around the halls of government and the insurance industry is a federal financial partnership with insurers that would be willing to pay businesses for their business interruption losses of up three months, he said.

“Insurers would quickly pay and be reimbursed by the federal government. The program could be triggered by an official declaration of a pandemic and certain other criteria.”

Hartwig also expects the insurance industry to come up with its own solutions, including creating products that will specifically cover pandemic risks and major economic shocks in general.

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