Insuring Against the Next Pandemic

Insuring Against the Next Pandemic
Kenneth Krock

Kenneth Krock


In 1905, the philosopher George Santayana posited: “Those who cannot remember the past are condemned to repeat it.” Winston Churchill would later echo those words in a speech to the House of Commons in 1948 following World War II.

There are many legal lessons that businesses learned in 2020 and continue to learn in the wake of the worldwide COVID-19 pandemic.  We have seen countless articles on the application of (and the arguable need to rewrite) previously forgotten “force majeure” clauses in contracts. Business owners have had to explore the intersection of the Americans with Disabilities Act, the Occupational Safety and Health Act, and the Family and Medical Leave Act. Additionally, landlords have had to navigate federal, state and local eviction moratoria, one of which was upheld by the United States Supreme Court just last week.

Last week also saw what has been reported as the first federal appeals court decision on whether government shut down orders triggered “business interruption” insurance.  On July 2, 2021, the Eighth Circuit Court of Appeals in Oral Surgeons, P.C. v. Cincinnati Insurance Company, ruled that, under Iowa law and the language in the insurance policy, “business interruption” insurance would not apply when Iowa’s COVID-related restrictions on dental practices prevented an oral surgery company from using its facilities for non-emergency procedures.   The court of appeals affirmed the trial court’s motion to dismiss and adopted the insurer’s argument that the definition of “loss” in the policy required “physical loss” or “physical damage” of property rather than just a loss of use of a facility. Oral Surgeons, P.C. v. Cincinnati Ins. Co., No. 20-3211, 2021 WL 2753874 (8th Cir. July 2, 2021).

The ruling, while based on Iowa law, is a significant development in the commercial insurance arena.  According to a May 14, 2021 article in the National Law Review, there are more than 50 decisions in which trial courts have ruled in favor of policyholders.  Admittedly some of those decisions turned on a separate endorsement for communicable disease coverage.  In other cases, courts have ruled against policyholders based on express virus exclusions.

At least one Texas federal court had already ruled against a policyholder under similar logic to that in Oral Surgeons case in the Eighth Circuit, but that case also included a virus exclusion.  Diesel Barbershop, LLC v. State Farm Lloyds, No. 5:20-CV-461-DAE, 2020 WL 4724305, 79 F.Supp.3d 353 (W.D. Tex. Aug. 13, 2020)

Late last year, Texas lawmaker Senator Charles Schwertner introduced SB 249, which would require business interruption insurance to cover losses caused by a pandemic including a loss under a civil order made to prevent the spread of a pandemic, regardless of whether there is a direct physical loss to the policyholder’s property. Of course, such a change in the law would only apply to newly written policies and would raise the question of whether carriers would choose to write such policies in Texas and, if so, at what increased premium. The bill apparently died in the Senate Business & Commerce Committee in March 2021.

It will be interesting to see how the continued legal fight over business interruption insurance plays out and whether there is a public demand for either a legislative or commercial remedy. Further, there are other similar products such as Rent Loss Insurance that are often been tied to a similar physical loss standard, so the legal fight may affect more than one product line for insurers.

It may go without saying that no one wants to re-live 2020 and the pandemic. And likely no one wants to consider what the next pandemic would look like. But as Santayana and Churchill espoused at the beginning of the 20th century, we must learn from history or be doomed to repeat it. As businesses review their contracts for appropriate “force majeure” language and their employee policies for compliance with federal and state law in the event of a pandemic, they should also be reviewing their insurance contracts to determine whether they have the coverage they think they have for what may be a real risk to businesses going forward.

ABOUT THE AUTHOR: Kenneth M. Krock is a Shareholder at Rapp & Krock, PC in the Litigation group.


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