As shop doors were forced to shutter citywide to help curb the spread of the coronavirus in late March, many owners figured the logical move was to file a “business interruption” insurance claim.
Then their insurers interrupted their plans.
Many of the claims have been denied, advocates and small business owners told THE CITY, with the commercial insurance industry arguing that anyone looking to recoup losses should have paid for special “pandemic insurance.”
“They paid for business interruption insurance for years,” said Olympia Kazi, who works with the NYC Artists Coalition, a group that helps preserve community cultural spaces. “And then they hear that COVID-19 is not covered, it’s like the cherry on top of this whole mess.”
Interruption claims are typically awarded due to direct physical damages to a property, like a fire, which render a business inoperable, experts note. But COVID-19, insurers argue, does not qualify as causing direct physical damage, resulting in a near-universal denial of claims for businesses across the country.
Many insurers introduced specific coverage exemptions for “viruses” following the 2003 SARS outbreak, after payouts like those collected by Hong Kong’s Mandarin Oriental hotels, which got $16 million from insurers for losses.
New York business owners say this type of interruption, due to the action of a civil authority, is exactly the kind of coverage they thought they paid for.
A growing list of advocates and lawmakers agree. So does the city’s “nightlife mayor.”
“Venues pay thousands of dollars a year to cover a crisis such as this,” said Ariel Palitz, senior executive director for the Office of Nightlife at the Mayor’s Office of Media and Entertainment. “They are relying on the insurance industry and the federal government to help make their businesses whole.”
‘Precisely This Kind of Thing’
Critics see the denials as a pattern of behavior among insurers, as evidenced in past disasters like Superstorm Sandy and Hurricane Katrina. Yet insurance can be a faster and more efficient method than federal aid of delivering financial relief to businesses in distress.
When Dhruv Chopra and his partners were looking to open a new, 24,000-square-foot bar and performance venue called Elsewhere in Bushwick in 2017, insurance premiums were costly.
“We’re talking about hundreds of thousands of dollars a year,” said Chopra.
Pricey premiums usually mean comprehensive coverage, he said, “and so we didn’t think anything of a virus exclusion.”
When Gov. Andrew Cuomo ordered the closure of all non-essential businesses in New York, Chopra filed a business interruption claim with his insurer.
“The coverage is large enough that it’s supposed to cover lost sales during a short period of shutdown,” he told THE CITY.
Chopra’s insurer denied his claim.
Businesses in New York City that rely on in-person services, like bars, theaters and nightclubs, face an especially uncertain future. The leisure and hospitality industry alone employed over 468,000 workers citywide, according to a October 2019 comptroller report.
Nearly 318,000 of those positions have been lost in the past four months, making it one of the hardest-hit sectors as 938,000 jobs have been shed citywide since the shutdown began.
Alec Duffy, who runs a community performance space in Clinton Hill called JACK, was awarded money from the federal Payroll Protection Program. But because JACK is a small nonprofit, Duffy received less than $20,000.
“Our budget hole as a result of COVID is projected to be about $160,000,” he told THE CITY. “So yeah, it doesn’t get us very far, but it’s something.”
Like Chopra, Duffy was denied his business interruption claim, too. Liberty Mutual, Duffy’s insurer, did not respond to requests for comment.
“We were seeking relief from a company that we had been paying for many years for precisely this kind of thing,” Duffy said.
Legislative Relief Stalled
Assemblymember Robert Carroll (D-Brooklyn) heard about Duffy’s story and other similar accounts. He introduced a bill in late March that would make insurers pay what he says they owe.
“The only way that we save the small businesses in New York is to get them working capital,” Carroll said.
The bill is currently in committee, with 35 cosponsors. It aims to compel insurers to pay out COVID-19 related interruption claims for shuttered small businesses with fewer than 250 employees. Similar bills are also under consideration in several other states, including New Jersey and Massachusetts.
Carroll, a contracts lawyer, disagrees with insurers flatly denying all interruption claims based on the so-called virus exemption, which was approved over a decade ago by the state’s Department of Financial Services.
Many business policies now carry an industry-standard form, created in 2006 by the Insurance Services Organization, that highlights “exclusion of loss 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,” one paragraph states.
“The regulators in the state — I don’t believe they interpreted this to mean if there was a global pandemic,” said Carroll. “They were not expecting this.”
Insurance regulations are determined by each state and there is little direct federal oversight over what insurers can or cannot do. The state Department of Financial Services did not respond to requests for comment.
Carroll dismissed insurers’ cries that payouts would make the industry insolvent. He estimates insurers are “sitting on somewhere between three quarter of a trillion dollars to a trillion dollars of reserves.”
‘Coverage Was Out There’
The Insurance Information Institute, an industry-funded consumer-information group, does not maintain that coronavirus shutdowns qualify for business interruption coverage, according to spokesperson Michael Barry.
Barry says the insurance industry is clear that “direct, physical damage” must be present to trigger coverage, and without that, “nearly all these claims are going to be denied.”
While insurance contracts cover “civil authority” shutdowns, the virus exemption makes those claims untenable, said Barry.
“Why did the civil authority shut you down?” Barry asked hypothetically in a phone interview. “If the answer is it was the virus and it did not cause direct physical damage, then it is not a covered event.”
He also disagrees with Carroll about the potential cost to insurers. Barry said the mountain of coronavirus claims would bankrupt the industry.
“Pandemic coverage was out there, it was just so expensive that few people bought it,” Barry said.
‘Same Thing With Sandy’
For New Orleans-based insurance-litigation attorney John Houghtaling, the duel with insurers is nothing new.
“They did exactly the same thing with Sandy and exactly the same thing with Katrina,” Houghtaling told THE CITY.
Houghtaling said that words, as far as insurance regulators are concerned, matter. By using the word “virus” next to language regarding bacterial infections, Houghtaling contends, they were trying to quietly take away coverage for pandemics — without having to get direct approval from state insurance commissioners.
“Out of 585 policies, I found two that clearly exclude pandemics,” said Houghtaling.
“There’s decades of case law that says contaminated property is property loss,” he added. He’s already filed a lawsuit on behalf of a New Orleans-based restaurant and others across the country.
Houghtaling worked as special counsel to the Louisiana attorney general during Hurricane Katrina to help award hundreds of millions of dollars in insurance claims to homeowners. He also helped the federal government after Superstorm Sandy fight against fraud from third parties working with FEMA who underpaid homeowners’ flood insurance.
Insurance policies, Houghtaling said, should be the quickest way to distribute funds after a disaster because “there’s already a mechanism for payment.”
Unlike disaster funds, which Houghtaling said are hastily established and prone to fraud, insurance policies can distribute funds to policyholders more equitably, since “policies are actually measured and audited every year for companies.”
“So they get just exactly what they need for their payroll, for their rent, for the things that they need,” he added.
Houghtaling founded the Business Insurance Group, along with celebrity chefs like Thomas Keller and Wolfgang Puck as well as major New York City industry groups like the Times Square Alliance and the NYC Hospitality Alliance. The group is pursuing a political and civil action campaign to push for insurers to pay the money he says they owe businesses across the country.
Houghtaling noted that President Donald Trump agreed with his reasoning two months ago.
“You have people that have never asked for business interruption insurance, and they’ve been paying a lot of money for a lot of years for the privilege of having it,” Trump said at an April 10 coronavirus briefing. “And then when they finally need it, the insurance company says, ‘We’re not going to give it.’ We can’t let that happen.”
Tim Tompkins, president of the Times Square Alliance, joined Houghtaling’s group because of how the COVID-19 shutdown impacted tourist-heavy Times Square, which generates over $105 billion in annual economic activity and 7% of New York City’s employment, according to a 2016 independent study.
Back in May, Tompkins and Houghtaling teamed up to turn off the lights of Times Square to draw attention to the problem.
“This initiative is worth supporting, because this is a real issue — it could be one of the ways in which federal action,” Tompkins said of Houghtaling’s policy idea, “can help prevent massive shutdowns of restaurants and independently owned businesses.”