Will Businesses Be Engulfed by Lawsuits Blaming Them for Virus Infections?
Will lawsuits from coronavirus victims begin to affect investments? Should the industry be concerned about lawsuits seeking damages from a company for a victim contracting COVID-19? The prospect of a flood of such legal actions has touched off a big conflict in Washington, with the fate of another government aid package hanging in the balance.
At issue is whether companies will be indeed slammed with suits from employees, customers, or others—and, if so, if they will be sufficient to harm their revenue. If the threat is as bad as congressional proponents of a litigation ban say, then investors would ultimately be affected.
Thus far, however, the volume of such suits is small. The largest part of virus-related legal actions is from companies contesting insurance claim denials related to business interruption.
Since the start of the pandemic, US Senate Majority Leader Mitch McConnell has led a group of Republicans who have been sounding the alarm about an onslaught of lawsuits they expect to be filed by workers against employers, as well as suits from other members of the public against companies they blame for their infections. In May, the Kentucky senator said at a press conference that he won’t pass a relief bill without protections for business, saying, “If there’s a red line, it’s on litigation.”
Democrats disagree with the liability protection, saying that workers, students, and patrons who have contracted the coronavirus at restaurants, schools, hospitals, and other businesses should have the right to sue for irresponsible actions during the pandemic. Some high-profile cases have cropped up so far: Class action lawsuits have hit consumer giants such as Amazon, McDonald’s, and Walmart. Some local and state jurisdictions have taken steps to ensure health care operators are protected.
But outside Capitol Hill, not everyone is convinced there will be a wave of coronavirus litigation. “It hasn’t surfaced as top of mind for clients that I have worked with,” said Mark Evans, managing director at Cambridge Associates.
Insurance Perils
The bulk of coronavirus litigation centers on actions brought by businesses over insurers refusing claims stemming from virus-related shutdowns and other curtailments of commercial activity.
More than 4,500 coronavirus related complaints have been filed in the US and about 1,100 lawsuits, or nearly one-quarter of them, were filed by businesses against their insurance companies, according to Hunton Andrews Kurth, the Virginia-based law firm that has been tracking lawsuits since the start of the pandemic. Only about 480 complaints have to do with labor and employment. Fewer than 200 allege injury or death.
A large chunk of the suits argue that property and casualty insurers should pay out business interruption claims, which replace income for companies affected by natural disasters, given that so many employers have had to cease operations during the pandemic. States such as Louisiana, Massachusetts, New Jersey, New York, Ohio, Pennsylvania, and South Carolina have floated or proposed legislation mandating that insurers must honor business insurance claims.
Earlier this month, a group of 42 Chicago businesses sued 18 of their insurers for allegedly withholding business interruption coverage when their businesses were “rendered physically nonfunctional.” The NBA’s Houston Rockets sued their insurer Affiliated FM Insurance for denying a claim to recoup losses from an interrupted season.
Global insurers could be liable for any revenue losses during the pandemic if they failed to specify language in their contracts. If policies cover all perils, that could leave more uncertainty on how losses aggregate versus if the policies covered named perils.
They could also have failed to cap the max losses they can incur from the pandemic. They also might not have specific virus exclusions for property damage, which leaves contracts vulnerable to judicial interpretation, especially in the US, which has a patchwork of states determining who is liable for businesses losses from the coronavirus.
But business interruption provisions in commercial property insurance typically do not include infectious diseases. They’re more likely to include interruption from physical damage, such as fires or storms. Firms have also taken steps to minimize their exposure to pandemics for years. Global insurers started writing language into business interruption policies that excluded epidemics after outbreaks such as SARS hit Asia nearly two decades ago.
Insurers have a big reason they would be reluctant to pay out any claims during the pandemic. It’s exorbitantly expensive. According to an estimate from the American Property Casualty Insurance Association (APCIA), insurers have warned the pandemic could cost them $255 billion to $431 billion a month, which could make the industry insolvent.
But, for the most part, it seems that insurers need not worry. In the United Kingdom, the Financial Conduct Authority (FCA), the regulatory authority for insurers, has indicated that business insurance policies must have a direct connection to physical damage and financial loss, a precedent that states are following in the US.
Other Claims
While the property insurance and reinsurance sectors have the most immediate exposure to coronavirus litigation, other sectors expected to incur losses include event planning, travel insurance, workers’ compensation, and trade credit. But, broadly, explicit losses aren’t expected to be meaningful capital events.
For insurers, the biggest downside is that the pandemic and the recession will act to hold down any premium growth for them this year. The expected result is deterioration in the property/casualty industry’s combined ratio, a measure of profitability, according to a report from the Insurance Information Institute.
But even if coronavirus litigation passes and businesses are shielded from any later suits, the likelihood of an explosion of them now seems small. But anything can change. Much of it depends on how long the pandemic lasts.
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