California: Developments in COVID-19 Business Interruption Claims

As the shelter-in-place orders continue to impact businesses across California, California’s lawmakers are responding to the growing unrest voiced by the state’s business owners.

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State Bill for Coronavirus BI Coverage Recalls Prior Sandy Efforts

The coronavirus (COVID-19) public health emergency will certainly produce significant financial losses across the economy as businesses shut their doors for prolonged periods to avoid infections and exposures. In response, some state legislatures and regulators have begun exploring options to reduce the financial losses to businesses by attempting to allocate certain uncovered business interruption losses to property insurance carriers.

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Hurricane Michael - Business Interruption Coverage in Florida and Georgia

Hurricane Michael’s devastation of the Florida Panhandle and damage caused as it moved through the South and mid-Atlantic regions of the United States, will undoubtedly result in claims for lost income from the interruption of business. Whether these losses will be covered will depend on the policy wording used and the specific facts of each loss. Nevertheless, in anticipation of these claims, it is prudent to become familiar with the outcome of prior litigation arising out of business interruption and/or suspension of operations coverage disputes, as these cases can be instructive.

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Tropical Storm Gordon - Impact of Area-Wide Economic Conditions on Business Interruption Coverage in Louisiana and Mississippi

As Tropical Storm Gordon made landfall in Louisiana with wind speeds near hurricane strength, its impact will likely be felt across many states. Unlike the traditional business interruption loss, where the focus is on the impacted business and its pre-loss performance, when tropical storms and hurricanes hit, issues surrounding the impact of the storms on the overall economy can come into play. How courts deal with this issue can vary significantly based on the policy language used to define how the business interruption loss is to be calculated. 

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Pardon this interruption… Service Interruption Provisions and Hurricanes

As the urgency to repair immediate physical damage to commercial property subsides, and businesses begin to get back to business as normal in the wake of Hurricanes Harvey, Irma, and Maria, we will undoubtedly see claims to recover lost revenue, or extra expenses incurred as a result of the storm.  These claims arise under a general claim for business interruption coverage. 

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Big Pharma BI, CBI, and Service Interruption Claims Percolating in Puerto Rico

As recovery and rebuilding efforts drag on in Puerto Rico, Hurricane Maria’s impact on Big Pharma is radiating across the U.S., and around the globe as the dozens of drugs manufactured in Puerto Rico become scarce. Maria brought drug manufacturing to a screeching halt in Puerto Rico, where about 10 percent of all drugs prescribed in the U.S. are made. The FDA is focused on about 40 drugs it expects to be in short supply, including 13 that are made only in Puerto Rico. 

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2017 Wildfires Expected to Cause Surge in Insurance Claims

Wildfire season in North America is off to a raging start this year. Fire activity in the western United States increased significantly in June as preexisting dry conditions and record-setting heat events created the perfect conditions for wildfires across portions of the American Southwest, southern Great Basin, and southern California. According to the governmental National Interagency Fire Center (NIFC), from January 1 to July 17, 2017, 34,586 wildfires had burned 4.3 million acres in the U.S., compared to 28,992 fires that burned 2.4 million acres in the same period in 2016.

On July 1, 2017, the NIFC predicted above normal significant fire potential through August. That prediction is proving to be accurate. Just in the past few weeks, wildfires have caused extensive damage in Alaska, California, Montana, Colorado, Arizona, and in Canada. As of July 17, 2017, 42 large fires were burning more than 867,000 acres in 12 states, including Alaska, Arizona, California, Colorado, Idaho, Montana, Nevada, North Dakota, Oregon, Utah, Washington, and Wyoming.

Multiple California wildfires have recently left scenes reminiscent of a “zombie apocalypse.” On Monday, July 18, in California’s Central Valley, residents were forced to flee their homes after authorities ordered evacuations.

Source: www.reuters.com/news/picture/wildfires-rage-across-california-idUSRTX3BHQW

Wildfires have charred more than twice as much land mass in California so far in 2017 than a year earlier, according to a Forestry and Fire Protection spokeswoman. That should come as no surprise, since California is the most wildfire prone state by nearly any measure.

Source: www.iii.org/fact-statistic/wildfires 

In 2016, California ranked second both in terms of the number of fires and number of acres burned.

Source: www.iii.org/fact-statistic/wildfires

Historically, California also tops the list of U.S. states with the costliest wildfires. According to Munich Re, California wildfires are the second most expensive natural hazard after earthquakes.

Source: www.iii.org/fact-statistic/wildfires

But as that chart shows, there’s plenty of costly damage caused by wildfires elsewhere. The damage from the 2016 wildfires in the Tennessee Great Smoky Mountains killed 14 people, led to mandatory evacuations, and caused more than $500 million in damage. The 2012 Waldo Canyon fire in Colorado Springs, Colorado was the costliest wildfire in Colorado with insurance costs of $453.7 million from more than 6,600 claims.

Massive and costly wildfires are also a problem for our northern neighbors. Wildfires that broke out northeast of Vancouver nearly three weeks ago continue to spread rapidly across large areas of British Columbia. In addition to the 3,000 firefighters currently battling the flames, local authorities have asked for Canadian federal military assistance, and Australia sent 50 firefighters to assist. Local officials have declared a state of emergency, and more than 45,000 people have been forced to evacuate, including an entire town with a population of more than 10,000. Not surprisingly, the wildfires have already disrupted industry in the region. Forestry producers have suspended operations, due in part to employees who have been forced to evacuate. Pipeline operator Enbridge Inc. took a natural gas compressor station offline and has no present timeline for restarting it. And the British Columbia Cattlemen’s Association says 30,000 cattle are threatened by the fire. Authorities anticipate that the wildfires will get stronger before they are contained. From the start of wildfire season on April 1 through July 12, British Columbia has seen 604 fires, with damage estimated at US $41 million. In 2016, wildfires in the oil-rich area of Fort McMurray, Alberta displaced nearly 90,000 people and caused more than $3.58 billion in damage, making it the most expensive disaster for insurers in the country’s history.

Thirteen states in the western U.S. that are currently at high or very high risk of wildfire damage represent a combined total property value estimated at more than $237 billion. California, Colorado, and Texas have a combined property value exceeding $188 billion in areas of high or very high risk.

Source: www.iii.org/issue-update/wildfires

Most losses in a wildfire event result from destroyed or partially burned structures and their contents. Of course, damage to real property caused by fire or smoke from a wildfire, and even damage from water used to fight the fire, is usually covered by homeowners, renters, and commercial property insurance policies. The contents are typically covered up to a certain limit, and homeowners’ and renters’ policies commonly cover living expenses incurred by the insured during repair or rebuilding.

A critical coverage for business owners in high wildfire risk areas may be business interruption coverage, which—with some limitations—covers the profits a business would have earned if the wildfire had not occurred.  Business interruption coverage generally covers income loss sustained if operations are suspended because of physical damage to insured property and resulting from a peril insured by the policy. Such coverage may also cover additional operating expenses incurred as a result of the wildfire, including the expense of operating out of a temporary location even if business activities are temporarily halted. Most policies include a “waiting period” so that the loss-of-income coverage does not begin until a specified number of hours/days after the triggering event. 

In Oregon Shakespeare Festival Association v. Great American Insurance Company, No. 1:15-CV-01932-CL, 2016 WL 3267247, at *1 (D. Or. June 7, 2016), vacated by joint request of parties, No. 1:15-CV-01932-CL, 2017 WL 1034203 (D. Or. Mar. 6, 2017), the insured sought coverage for business income losses that it incurred after nearby wildfires caused smoke, ashes, and dust to infiltrate the theater, coating the seating, HVAC, lighting, and electronic systems with dust, ashes, and smoke. The plaintiff insured was forced to suspend operations and cancel performances for several days to perform cleaning, replace air filters, and allow the smoke in the air in the theater to dissipate. The court found that the insured sustained “physical loss of or damage to property” when the wildfire smoke infiltrated the theater and rendered it unusable for its intended purpose, and concluded that the policy covered the insured’s business interruption losses. The case was later vacated by joint stipulated request of the parties, but it remains an excellent example of the type of  wildfire damage that can trigger business interruption coverage.

Coverage may be available for the income a business loses due to a mandatory evacuation order by civil authorities, even if the insured business itself incurs no physical property damage. Civil authority orders commonly lead businesses to suspend operations, either due to the threat of the wildfire itself, or the loss of employees or customers who have been evacuated.  As a general matter, a civil authority clause provides coverage for lost income when access to insured property is prevented or impaired by an order or action of a civil authority because of damage to property other than the insured property. Civil authority coverage varies widely by policy, but generally the insured must demonstrate that (1) a peril covered under the policy (e.g., fire) caused physical damage to some property; (2) that said peril also gave rise to an action or order of a civil authority (e.g., the denial of access to the business), that (3) proximately caused a loss of business income. When a civil authority order alone causes the business interruption loss, without any related property damage caused by a peril covered by the policy, there usually be no coverage.  See e.g., Bamundo, Zwal & Schermerhorn, LLP v. Sentinel Ins. Co., No. 13-CV-6672 RJS, 2015 WL 1408873, at *4 (S.D.N.Y. Mar. 26, 2015) (holding the plaintiff’s business interruption loss arising from New York City’s evacuation order related to Hurricane Sandy was not covered under the policy’s civil authority provision because the evacuation order was issued as a direct result of flooding, which was an excluded peril under the policy). Likewise, if the civil authority order simply makes access more difficult, without actually prohibiting access, there often is no coverage. See, e.g., Southern Hospitality, Inc. v. Zurich Am. Ins., 393 F.3d 1137 (10th Cir. 2004) (finding no coverage under plaintiff hotel’s civil authority policy because FAA order prohibiting airplanes from flying did not prohibit access to hotel operations); Kean, Miller, Hawthorne, D’Armond McCowan & Jarman, LLP v. Nat’l Fire Ins. Co. of Hartford, No. 06-770-C, 2007 WL 2489711 (M.D. La. Aug. 28, 2007) (finding no coverage under plaintiff hotel’s civil authority policy because the recommendations by Baton Rouge officials to stay off the streets did not deny access to business’s premises).

Given the substantial 2017 wildfire activity, we expect a corresponding surge in wildfire-related insurance claims.

Posted by Matt Gollinger and Laura Bartlow

Fracking, Earthquakes and Civil Authority

In last week’s post, we discussed the rapid development of the hydraulic fracturing (“fracking”) industry in the United States, and some of the innate risks presented by those operations. In particular, the post focused on a recent study that has found a causal link between wastewater disposal/injection, a by-product of fracking, and earthquakes occurring around high-fracking areas in the United States. Initially, it was speculated that earthquakes were caused by fracking itself, a process whereby millions of gallons of water, sand and chemicals are injected underground to break apart rocks to release gas.  However, it has now been proven that most of these earthquakes are caused by the underground injection of disposal water (see original post for more detail).

The popularity of fracking as an extraction method has extended beyond the United States, and has been readily adopted in countries like Canada, Argentina and Australia with huge shale oil and gas potential. In Canada, the provinces of British Columbia, Alberta and Saskatchewan have the highest concentrations of (fracking) wells. A group of scientists from the University of Calgary has recently released a study evaluating whether there is a causal connection between fracking in western Canada, and an increase in seismic activity around the well-sites. The study revealed that unlike the United States, where earthquakes are induced by the subsoil disposal of wastewater, a series of earthquakes in Alberta within the last five years has been attributed to fracking, or hydraulic fracturing, in which water, chemicals and sand are injected at high pressure into a well drilled in a shale formation to break up the rock and release oil and gas.

According to the study, the quakes were induced in two ways: by increases in pressure as the fracking occurred, and, for a time after the process was completed, by pressure changes brought on by the lingering presence of fracking fluid. To the east in the fault zone, the earthquakes occurred during the fracking process itself, which continued for up to a month after the fracking process was completed. To the west, most earthquakes occurred intermittently over several months after the fracking ended. While Alberta and other affected areas do not have the infrastructural density that Oklahoma has, several major pipelines and operations are found within the proximity of Fox Creek, where these earthquakes have been occurring.

Last week we discussed earthquake coverage and how it may respond to losses caused by human-induced earthquakes. Another, often-forgotten, coverage that may become relevant in the next few years as the risk of earthquakes increases in these areas is Civil Authority coverage. Civil authority provisions are usually written as additional coverage provisions, not exclusions, and provide coverage for lost business income due to an action taken by a civil authority. So, how do civil authority clauses and earthquakes interact? Generally, civil authority claims arise out of the loss of business income due to mandatory curfews, evacuations, or restrictions of access (e.g. Hurricane Katrina, 9/11, etc.).

Following the occurrence of a MW 3.9 earthquake on 23 January 2015, the Alberta Energy Regulator, introduced new regulations for the notifications and monitoring of earthquakes around well areas.  Included among them, was the implementation of a “traffic light protocol” that requires the immediate shutdown of hydraulic fracturing operations following an earthquake of local magnitude 4.0 or greater within 5km of an affected well. While these shutdowns tend to be temporary, an increase in occurrences or severity may result in a long period of operational shutdown. Failure to comply with these procedures may result in an enforcement action which could include the prolonged shutdown of operations.

Other jurisdictions have implemented similar protocols, and some U S. states, and countries have banned this type of operation altogether.

While it is hard to predict the likelihood of a catastrophic event resulting from a fracking-induced earthquake, several of the areas affected by this peril are pipeline and oil/gas hubs. A large enough earthquake or series of earthquakes could result in a prolonged shutdown of operations by order of the relevant regulatory body, thus causing severe business interruption losses to well and pipeline operators. Traditional civil authority provisions read: we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss. Most often, these clauses are also subject to the BI waiting period, and only offer coverage for limited periods of time.

For coverage under Civil Authority provisions, an insured is usually required to demonstrate that the physical damage to its property is the result of a peril covered under the policy. And, as discussed in our last post, insureds will first have to demonstrate that earthquake is a covered peril under the policy, and the denial of access or “action” must be the proximate cause of a loss of business income.

As the risk of fracking-induced earthquakes increases, regulatory authorities may take a harder stance against widespread fracking in the future. In the short-term, a significant enough earthquake may result in the interruption of operations of wells and pipelines surrounding the quake-affected areas. While most of the coverage issues will have to be sorted out on a case-by-case basis, insurers should be aware of this new, or at least unconventional, risk that may affect their insureds’ business operations.

Posted by Hernán Cipriotti