The now ubiquitous shelter-in-place orders enacted across the United States began in the San Francisco Bay Area, followed days later by California Governor Gavin Newsom’s decision to issue the first statewide shelter-in-place order. It is fitting, then, that Californians are at the forefront of the fallout of these orders, namely, the interruption of myriad businesses and looming uninsured losses.
The California Department of Insurance (“CDI”) website provides a Frequently Asked Questions (“FAQ”) page issuing guidance on business interruption insurance coverage for state businesses impacted by COVID-19. The CDI appropriately points out:
In general, business interruption insurance policies require a direct physical loss or damage to a property caused by a covered peril (i.e. fire, water damage, etc.) in order for business interruption coverage to apply. Most commercial policies have exclusions for loss due to contamination by virus and similar perils, such as pandemics.
In response to the FAQ regarding business closure due to voluntary or mandatory government order, the CDI provides:
While you should consult your policy, in general, coverage resulting from the actions of a civil authority also requires physical damage to the insured premises caused by a covered peril. If this is the case, a government ordered shutdown due to a pandemic may likely not be fully sufficient to trigger business interruption insurance coverage in the absence of physical damage to the insured property caused by a covered peril – whether that order is voluntary or mandatory.
On March 26, 2020, the CDI issued a Business Interruption Survey Notice to all admitted and non-admitted insurance companies requesting certain information relating to business interruption, civil authority, contingent business interruption, and supply chain coverage provided by commercial insurance policies. Per CDI Commissioner Ricardo Lara, “[w]e are currently working with the insurance industry and business groups to find creative solutions during this unprecedented crisis to make sure our businesses survive, and we need this data to define the size of the problem.”
The survey contains four requests:
- “How many policies are covered under each coverage identified above?
- Out of these policies, how many policies fall under businesses with more than 500 employees, or alternatively, meet your definition of large business?
- Out of these policies, how many policies fall under businesses with less than 500 employees, or alternatively, meet your definition of medium size business?
- Out of those with less than 500 employees, how many policies fall under businesses with less than 100 employees, or alternatively, meet your definition of small business?”
Responses to this CDI request, due April 9, 2020, are not mandatory. However, California law authorizes the insurance commissioner to issue subpoenas and subpoenas duces tecum on any subject touching insurance business or aiding the commissioner’s duties.
The CDI’s survey follows the March 10, 2020 call from the New York Department of Financial Services instructing property insurers to provide similar data. The New York instruction, however, was much more onerous than the CDI’s request, directing insurers to provide policyholders with detailed explanations of coverage with respect to COVID-19 “both presently and as the situation could develop to change the policyholder’s status[.]”
In fact, California’s state regulators, by emphasizing the need for data collection and creative solutions, have taken a more measured and effectual approach than regulators in certain other states. For instance, lawmakers in Massachusetts, Ohio and New Jersey introduced bills that purport to rewrite existing insurance policies to cover businesses’ economic losses arising from Covid-19 work stoppages. To date, lawmakers for the state of California have not indicated such an intention.
CDI Commissioner Lara also sent a letter to House Speaker Nancy Pelosi and the rest of California’s congressional delegation “alerting them to the scale of the business interruption crisis and calling on them to take immediate action now to protect these businesses and their workers” with grants and interest-free loans in the stimulus package.
California’s congressional delegation is already playing a central role in the federal response to the business interruption coverage issues stemming from the shelter-in-place orders.
On March 18, 2020, members of the U.S. House sent a letter to the leaders of the American Property Casualty Insurance Association, the Council of Insurance Agents and Brokers, the Independent Insurance Agents & Brokers of America, and the National Association of Mutual Insurance Companies, urging insurers to provide business interruption coverage for losses resulting from COVID-19. Of the eighteen signatories to the letter, three were representatives from California (Grace Napolitano, Scott Peters, and Gilbert Cisneros).
In their joint response the same day, the trade and broker associations stated the U.S. insurance industry is committed to consumers and will ensure prompt payments where coverage exists but noted that “[b]usiness interruption policies do not, and were not, designed to provide coverage against communicable diseases such as COVID-19.”
Congresswoman Maxine Waters, Representative from Los Angeles County and Chairwoman of the House Financial Services Committee, released plans for a Pandemic Risk Insurance Act (“PRIA”). The act would create a reinsurance program similar to the Terrorism Risk Insurance Act, mandating the prospective offer of pandemic business interruption coverage but capping the total losses that insurance companies would face. PRIA could become part of a later installment of the CARES Act.
California’s courts are on course to become a testing ground for Covid-19-related business interruption coverage disputes. Renowned chef Thomas Keller, owner of world-famous Yountville restaurants the French Laundry and Bouchon Bistro, which have been adversely impacted by the shelter-in-place order, filed suit in Napa County Superior Court against Hartford Fire Insurance Company seeking a declaration in favor of coverage for the plaintiffs’ business interruption losses.
It appears Defendant Hartford has not denied coverage; rather, “on information and belief” Plaintiffs anticipate coverage will be denied. In their complaint for declaratory relief, Plaintiffs allege the policy’s civil authority provision applies. Per the complaint, the policy extends coverage for direct physical damage caused by a virus.
Plaintiffs assert the Coronavirus causes direct physical damage by remaining on surfaces for up to twenty-eight days, necessitating cleaning and fumigating to remove microbials, and cite Napa County’s shelter-in-place order, which “specifically states that it is being issued based on evidence of physical damage to property.”
The Plaintiffs are not currently seeking determination of whether the Coronavirus is physically in the insured premises, the amount of damages, or any other remedy other than declaratory relief.
This Napa County lawsuit has garnered significant national attention. Restaurants and other similarly situated businesses across the United States will be watching this lawsuit as well as actions taken by California-based regulators with interest.
 French Laundry Partners, LP dba The French Laundry, a Limited Partnership; KRM, Inc. dba Thomas Keller Restaurant Group, a Corporation; Yountville Food Emporium, LLC dba Bouchon Bistro, a Limited Liability Company v. Hartford Fire Ins. Co., a Corporation; Trumbull Ins. Co., a Corporation, Karen Relucio, an Individual, and; DOES 1 to 25, inclusive; case number not immediately available, in the Superior Court for the State of California, County of Napa; filed March 25, 2020.
 For example, a commercial policy holder with restaurants in Las Vegas and Atlanta told a Nevada news outlet stated he hopes the Keller lawsuit will set a precedent that will aid small businesses. "Thomas Keller files suit over coronavirus insurance coverage,” Al Mancini, Las Vegas Review-Journal, March 27, 2020 (https://www.reviewjournal.com/entertainment/food/thomas-keller-files-suit-over-coronavirus-insurance-coverage-1993112/) (visited March 29, 2020).