COVID-19 Resource Center

Does No Exclusion Equal No Coverage? Bad Faith and Breach of Contract in the Time of COVID-19

May 19, 2020Article

Over the past several weeks, businesses across the country have been forced to drastically alter their daily operations or completely close their doors for the indefinite future due to health and safety concerns related to the COVID-19 pandemic. Confronted with mounting losses, many business owners have turned to their property insurance providers as a means to recover a portion of lost revenues and stay afloat. From the business’ perspective, the purpose of insurance is to provide financial protection against unexpected losses, and losses from a global pandemic that caused entire populations to shelter in their homes for months clearly were unexpected. Not so fast, cautions the insurance industry--insurance policies were not designed to provide coverage against events like a viral pandemic.[1]

Some insurance companies view pandemics as excluded by the virus or bacteria exclusion. Viral outbreaks in the early 2000s led some insurance providers to add pandemic and other communicable disease exclusions to their commercial policies, thus limiting their exposure to numerous claims and large payouts.[2]

Other insurers are taking the position that mere financial loss is not enough to trigger coverage; there must also be some evidence of physical damage to the property to come within the policy.[3] As a result, many business owners are finding their claims denied on the basis that losses caused by COVID-19 are not covered under their policies.[4] In these circumstances, when there is no virus exclusion, the questions arise whether a denial of coverage for a COVID-19 claim constitutes a breach of contract or bad faith on the part of the insurance company. We expect these questions to be at the core of much litigation following the pandemic.[5]

Breach of Contract

An insurance policy is a written contract where the policy holder agrees to pay a premium in exchange for the insurer’s promise to indemnify the named insured against a predefined set of risks. For this reason, interpretation of insurance policies is governed by the same rules of construction as any contract. While contract laws vary from state to state, the cardinal rule of contract construction is to determine the intention of the parties.[6] As such, where the language in the policy is clear and unambiguous, courts will enforce the policy according to its terms. If the policy language is ambiguous, the policy will be construed in favor of coverage or a jury will be asked to decide coverage.[7]

Courts across the country have held that exclusions in insurance policies must be clearly stated to be effective.[8] Thus, if the policy contains no exclusion for loss due to viral or bacterial outbreaks, the argument is that the policy intended COVID-19 losses to be covered.  

Proving breach of contract, however, is not as simple as merely showing the absence of a virus exclusion. Before exclusions even are considered, courts must look at the coverage provisions and determine if coverage is triggered in the circumstances presented. Typical policy language is:

This policy insures against loss resulting directly from necessary interruption of business caused by physical loss or damage by a peril not otherwise excluded herein to insured property of the Insured, all subject to the terms and conditions of this policy.

As noted, many insurers are taking the position that there is no physical loss or damage caused by COVID-19 shut downs. We expect insureds to argue that physical loss can occur without structural or tangible changes to a property.[9] 

The final word on whether insurance companies owe a contractual duty to indemnify their insureds and, thus, breach their contracts by failing to do so, will be answered by the appellate courts in months and years to come.

Bad Faith

Even assuming that a denial is a breach of contract does not, however, prove that the insurer acted in bad faith when it issued the denial. Whether a denial of a COVID-19 claim constitutes “bad faith” on the part of the insurer is dependent on the facts surrounding and the reasons for the denial.

Insurance companies have a duty to act in good faith and to deal fairly with their insureds. This means that insurance companies must act fairly and reasonably in their investigation, evaluation, and payment of all submitted claims. An insurance company’s failure to fulfill these duties is known as “bad faith.”[10] Not all states recognize an independent tort action for bad faith denial of an insurance claim.[11] However, every state offers some protection.

In many states, bad faith is proved if the business owner can show that the insurance company had no reasonable basis for denying the claim.[12] A few states set higher standards. For example, a business owner in Connecticut must establish that the insurer denied the claim with an improper motive or dishonest purpose.[13] In Indiana, the business owner must show that the insurer acted with a dishonest purpose, moral obliquity, furtive design, or ill will.[14] Those in New York must to show that the insurer’s conduct constituted a gross disregard for the insured’s interest.[15] Arkansas business owners will have to show affirmative misconduct which is dishonest, malicious, or oppressive carried out with a state of mind characterized by hatred, ill will, or a spirit of revenge.[16]

Whether the standard is one of reasonableness or ill-will, bad faith cannot be established based on a denial of a COVID-19 claim alone. Nor will a court find bad faith if it determines the insurer was negligent or simply made a mistake in judgment while processing and evaluating the claim.[17] Courts will look at factors such as whether the insurance company withheld benefits without properly investigating the business owner’s claim and whether the insurance company fairly considered the insured’s needs and asserted positions.[18]

But, before a court can determine whether the insurance company denied the COVID-19 claim in bad faith, it must first determine whether the policy provided coverage for the claim.[19] If the policy does not cover the claimed losses, the inquiry stops there and there is no need to evaluate the bad faith claim. If, however, the policy does cover pandemic losses, but the claim was nevertheless denied, an insurance company may have to pay damages beyond those owed to it under the policy, such as consequential and punitive damages, as well as attorneys’ fees and expenses of litigation.[20]

Conclusion

The final outcome of COVID-19 insurance coverage lawsuits will significantly impact the future of both businesses and insurance companies. For the business owner, a win could mean the difference between survival and ruin, but covering the losses could have a devastating impact on the insurance industry. According to the National Association of Insurance Commissioners, “if insurance companies are required to cover such claims, [it] would create substantial solvency risks for the sector, significantly undermine the ability of insurers to pay other types of claims, and potentially exacerbate the negative financial and economic impacts the country is currently experiencing.”[21]

We cannot predict how the courts will rule on this issue, but we can be prepared. For now, both business owners and insurance companies should seek legal counsel to review their insurance policies and determine how to best protect their businesses.


Authors: Kathryn S. Whitlock (Senior Partner, Atlanta), Kelli K. Steele (Associate, Atlanta)

Hawkins Parnell & Young's national litigation team is helping businesses across the United States navigate unprecedented legal challenges arising from the COVID-19 pandemic. Visit our COVID-19 Resource Center for the latest insights and guidance.


[1] National Association of Insurance Commissioners. (March 25, 2020); https://content.naic.org/article/statement_naic_statement_congressional_action_relating_covid_19.html

[2] Todd C. Frankel. “Insurers knew the damage a viral pandemic could wreak on businesses. So they excluded coverage”; https://www.washingtonpost.com/business/2020/04/02/insurers-knew-damage-viral-pandemic-could-wreak-businesses-so-they-excluded-coverage/

[3] Lori Weisberg. Businesses facing huge losses from pandemic thought their insurance would cover them. Not really.”; https://www.sandiegouniontribune.com/business/story/2020-04-05/companies-thought-they-were-covered-for-business-interruption-insurance-not-really

[4] Lori Weisberg. Businesses facing huge losses from pandemic thought their insurance would cover them. Not really.”; https://www.sandiegouniontribune.com/business/story/2020-04-05/companies-thought-they-were-covered-for-business-interruption-insurance-not-really

[5] Amelia Lucas. “Insurers are denying coronavirus claims. Restaurants are fighting back.”; https://www.cnbc.com/2020/04/20/insurers-are-denying-coronavirus-claims-restaurants-are-fighting-back.html

[6] See Lloyd’s Syndicate No. 5820 v. Agco Corp, 293 Ga. 805, 756 S.E.2d 520 (2014); Riverside South Planning Corp. v. CRP/Extell Riverside, 859 N.Y.S.2d 511, 60 A.D.3d 61 (2008); MacKinnon V. Truck Ins. Exchange, 31 Cal.4th 635, 73 P.3d 1205 (2003).

[7] Lloyd’s Syndicate No. 5820 v. Agco Corp, 293 Ga. 805, 756 S.E.2d 520 (2014); Riverside South Planning Corp. v. CRP/Extell Riverside, 859 N.Y.S.2d 511, 60 A.D.3d 61 (2008); MacKinnon V. Truck Ins. Exchange, 31 Cal.4th 635, 73 P.3d 1205 (2003); United Services Automobile Assn. v. Baggett, 209 Cal. App. 3d 1387, 209 Cal. App. 3d 1387, 258 Cal. Rptr. 52 (1989).

[8] See Pac. Indem. Co. v. Linn, 766 F.2d 754, 761 (3d Cir. 1985); Winters v. Charter Oak Fire Ins. Co., 4 F. Supp. 2d 1288, 1290 (D.N.M. 1998); RLI Insurance v. Highlands on Ponce, LLC, 280 Ga. App. 798, 802, 635 S.E.2d 168 (2006); E.M.M.I. Inc. v. Zurich American Ins. Co., 32 Cal. 4th 465, 471 (2004); Associated Wholesale Grocers v. Americold Corp., 261 Kan. 806, 808 (1997).

[9] See, e.g., Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., 2014 U.S. Dist. LEXIS 165232, 2014 WL 6675934 (D.N.J. Nov. 25, 2014) (ammonia); Sentinel Mgmt. Co. v. New Hampshire Ins. Co., 563 N.W.2d 296, 300 (Minn. 1997) (asbestos).

[10] Law.com, Legal Dictionary, “Bad Faith”

[11] Law Regarding Bad Faith in the Fifty States and D.C., International Society of Primerus Law Firms, October 2010

[12] Lawyers Title Ins. Corp. v. Griffin, 302 Ga. App. 726, 691 S.E.2d 633 (2010); Republic Ins. Co. v. Stoker, 903 S.W.2d 338 (Tex. 1995); Gruenberg v. Aetna Ins. Co, 9 Cal.3d 566, 510 P.2d 1032 (1973).

[13] PSE Consulting, Inc. v Mercede & Sons, 267 Conn. 279, 838 A.2d 135 (2004); Lawton v. Great Southwest Fire Ins. Co., 118 N.H. 607, 392 A.2d 576 (1978).

[14] Johnston v. State Farm Mut. Auto. Ins. Co., 667 N.E.2d 802 (Ind. 1996)

[15] Pavia v. State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445, 626 N.E.2d 24 (1993)

[16] State Auto Property and Casualty Ins. v. Swaim, 338 Ark. 49, 991 S.W.2d 555 (1999)

[17] Kemp v. Hudgins, 133 F. Supp. 3d 1271, 1288 (D. KS. 2015); Kooyman v. Farm Bureau Mut. Ins. Co., 315 N.W.2d 30, 35 (Iowa 1982).

[18] Mut. of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc., 161 Wn. 2d 903 (2007); Gold v. State Farm Fire & Cas. Co., 880 F. Supp. 2d 587 (E.D. PA. 2012).

[19] Toledo-Lucas County Port Auth. v. Axa Marine & Aviation Ins. (uk), 220 F. Supp. 2d 868 (N.D. OH 2002).

[20] Weinstein v. Prudential Prop. & Cas. Ins. Co., 149 Idaho 299 (2010); Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal. App. 4th 847 (2000).

[21] National Association of Insurance Commissioners. (March 25, 2020); https://content.naic.org/article/statement_naic_statement_congressional_action_relating_covid_19.htm