Art institutions across the globe have been particularly hard-hit by governmental shutdowns in the midst of the COVID-19 pandemic.  In the United States, not only have shutdowns deprived numerous for-profit and not-for-profit art institutions of their primary source of revenue, but in many cases these institutions’ classification as “non-essential” have moved them to the back of the line for reopening.  In a letter to Congress in March, the American Alliance of Museums (AAM) reported that museums across the United States are losing at least $33 million per day due to closures resulting from the pandemic.[1]  In light of these unprecedented losses, and with few viable alternative sources of revenue in sight, many art institutions have hoped to find refuge under their “business interruption” insurance policies.[2]  However, business interruption insurers have for the most part denied coverage for COVID-based claims, citing a “physical loss or damage” requirement typical to such policies.  Art institutions faced with such coverage denials have at least two potential paths to relief – litigation and legislation – but face headwinds in both directions.[3]

Business Interruption Policies and the “Physical Loss or Damage” Requirement

Generally speaking, “business interruption” policies replace the lost income of businesses that have been unable to operate due to factors outside their control.[4]  In the archetypal example, a business seeks coverage from such a policy when it is prevented from operating as a result of structural damage to its facilities, or forced closure by a civil authority as a result of damage elsewhere.  Historically, insurance companies designed these policies to protect manufacturers against crippling economic loss in the event their factories were forced to shut down due to broken equipment or other physical damage.[5]  Importantly, these policies typically include policy language specifying that coverage will apply only where the business interruption has been directly caused by “physical loss or damage” to the insured’s property.

The COVID-19 pandemic has spurred a flood of business interruption policy claims.[6]  In the performing and fine arts world, numerous museums, theaters, performance spaces, movie studios and the like have filed business interruption claims in order to make up for lost revenue.[7]  For the most part, however, insurers have denied such claims, predominantly on the theory that the business interruptions at issue have not resulted from any “physical loss or damage.”[8]

As one example, the Simon Wiesenthal Center, the Los Angeles-based human rights organization that operates the Museum of Tolerance, sought coverage from its insurer, a subsidiary of the Chubb Group, after a stay-at-home order issued by Los Angeles Mayor Eric Garcetti shut down its filmmaking and educational arms.[9]  The Center claimed that it met the “direct physical loss or damage”[10] requirement of its insurance policy’s business interruption provision because the coronavirus caused “physical” property loss by “attach[ing] to surfaces for prolonged periods of time.”[11]

Disagreeing that the coronavirus caused any direct loss to property that would qualify as “physical,” the Chubb Group denied coverage.[12]  In a shareholders call in April, Evan Greenberg, CEO of the Chubb Group, stated that the insurance industry plans to fight these types of business interruption claims “tooth and nail.”[13]  Five months after that call, with thousands of businesses facing denials of business interruption claims, insurance companies are living up to those fighting words.[14]

Court Challenges

Various art groups and other businesses in the United States have challenged the denial of their COVID-related business interruption claims in court.[15]   On April 29, 2020, the Simon Wiesenthal Center sued the Chubb Group in the Central District of California, alleging that COVID-19 causes “a physical impact and loss on property as it alters surfaces,” and that Mayor Garcetti had issued the stay-at-home order “in part[] because COVID-19 is physically causing property loss or damage due to its tendency to attach to surfaces for a prolonged period of time.”[16]  The Center argued that “[a]ny effort by [the Chubb Group] to deny the reality that the virus causes physical loss and damage would constitute a false and potentially fraudulent misrepresentation that could endanger policyholders and the public.”  The Chubb Group moved to dismiss the complaint on May 22, 2020, arguing that the Center had not alleged (i) that any property within one mile of the Center’s premises had been physically altered by the pandemic, (ii) that Mayor Garcetti’s stay-at-home order had prohibited “access” to the Center’s premises, or (iii) that the stay-at-home order had been the “direct result” of physical damage (as opposed to, e.g., the result of a desire to “limit the spread of COVID-19”), each of which is a requirement under the “Civil Authority” insuring agreement under which the Center sought coverage.[17]  On June 1, 2020, the Wiesenthal Center voluntarily dismissed its claim, based in part on the fact that the Chubb Group had “yet to conclude its claim investigation.”[18]

Similarly, on August 25, 2020, Jujamcyn Theaters, the operator of five Broadway theaters, sued two subsidiaries of the Chubb Group for their denial of a business interruption claim.[19]  In its Complaint, Jujamcyn argued that the presence of the COVID-19 virus on its property constituted a “direct physical loss or damage” under the “Business Income with Extra Expense” provision of its policy, and that stay-at-home orders issued by the City and State of New York constituted actions “by a civil authority” prohibiting access to Jujamcyn’s premises as a “direct result of direct physical loss or damage” under the “Additional Coverage” provision of its policy.[20]  Jujamcyn also noted that, ten days after New York City Mayor Bill de Blasio issued an Executive Order declaring that the virus caused “property loss and damage,” the Chubb Group published a notice on its website stating that business interruption insurance did not cover losses from viruses.  Jujamcyn pointed to this notice to argue that the Chubb Group had already decided it would not pay Jujamcyn before it conducted any meaningful investigation into Jujamcyn’s claim.[21]  In an Answer filed September 29, 2020, the Chubb Group denied these allegations, maintaining that it denied coverage because Jujamcyn suffered no direct physical loss or damage and because any prohibition on access was not the direct result of a covered peril.[22]

In related contexts, several high-end restaurants[23] and sports teams[24] have also filed lawsuits against their business interruption insurers, claiming that the coronavirus has had a “physical” impact on their businesses.  Some of these plaintiffs have obtained favorable court rulings on this issue.[25]   In April, a group of hair salons and restaurants in Missouri sued their insurer after it denied their claims for business interruption coverage.  The insurer argued that the plaintiffs had not alleged a “direct physical loss or damage,” as required by the business interruption provision, because they did not point to any “actual, tangible, permanent, physical alteration of property.”[26]  The plaintiffs countered that their insurance policies covered physical loss or physical damage, and that even if they and their properties had not suffered any physical damage, their inability to use those properties constituted “physical loss.”  On August 12, 2020, the Western District of Missouri agreed with the plaintiffs, and denied the insurer’s motion to dismiss the complaint on the basis that it had “conflate[d] ‘loss’ and ‘damage.’”[27]   That case continues.

Despite this encouraging outcome in Missouri, courts in several other states have ruled in favor of insurance companies.[28]  In Michigan, when a restaurant group claimed that it suffered “direct physical loss” to its restaurant because a governmental stay-at-home order prevented customers from dining-in, the court dismissed the argument as “simply nonsense” and held that the phrase “accidental direct loss of or damage to property” from the insurance policy at issue required “some physical alteration to or physical damage or tangible damage to the integrity of the building.”[29]  Similarly, in the Western District of Texas, the court noted that, while “some courts [had] found physical loss even without tangible destruction,”[30] “the line of cases requiring tangible injury to property [was] more persuasive.”[31]  Randy Maniloff, an attorney at White & Williams LLP, who represents insurers, recently commented that, if this trend continues, “the decisions will become a strong headwind for policyholders trying to convince judges to see the issues differently.”[32]

As these examples illustrate, the outcomes of coverage disputes are hard to predict, as they may be highly sensitive to variations in policy language, state law and judicial outlook.[33]  Thus, an August 12, 2020 ruling from the federal Judicial Panel on Multidistrict Litigation declined to consolidate business interruption coverage disputes from policyholders in Pennsylvania and Illinois.  The Panel ruled that “the industry-wide centralization requested by movants will not serve the convenience of the parties and witnesses or further the just and efficient conduct of this litigation.”[34]  The Panel noted that the movants’ citation to a consolidated suit in the U.K.[35] was inapt, as the U.K. proceeding would operate under a unitary system “using stipulated facts,” while an “industry-wide MDL, encompassing more than a hundred insurers and the laws of the fifty states, would entail far more differences.”[36]  Accordingly, art institutions seeking to litigate business interruption coverage face both a highly unsettled legal landscape and obstacles to combining forces with other plaintiffs.

Legislative Action

Not all art institutions can bear the substantial expense of prosecuting coverage litigation, particularly under these challenging legal circumstances.  For those that cannot, another potential source of relief is legislation.  After the founder of Jack, a performance venue in Brooklyn, began pushing for legislative action to make it easier for New York businesses to receive insurance payouts during the pandemic,[37] New York State Assemblyman Robert C. Carroll introduced legislation that would retroactively broaden preexisting business interruption insurance policies to cover losses from a pandemic.[38]  Legislators in several other states, including Massachusetts, New Jersey and Ohio, have proposed similar bills.[39]

On the national level, on April 14, 2020, Representative Mike Thompson (D-CA) introduced legislation that would “make available insurance coverage for business interruption losses due to viral pandemics, forced closures of businesses, mandatory evacuations, and public safety power shut-offs, and for other purposes.”[40]  Here too, the legislation would retroactively nullify and preempt existing insurance policy language to the extent that it excludes coverage for losses due to the coronavirus pandemic.[41]

There are several potential legal roadblocks to such legislation, however.[42]  One potential obstacle to such state legislation is the Contract Clause of the United States Constitution, which prohibits states from passing laws that substantially “impair” contracts, unless those laws are “drawn in an appropriate and reasonable way to advance a significant and legitimate public purpose.”[43]  A court could well find that these proposed laws “substantially impair” preexisting insurance contracts by expanding existing policies to cover risks that they would not otherwise have covered.  Further, because the primary purpose of the proposed legislation would appear to be to benefit certain businesses, rather than the public at large, states may have trouble persuading a court that the legislation serves a “legitimate public purpose.”[44]

Another potential challenge to such legislation, on both the state and federal level, is the Fifth Amendment’s Takings Clause, which provides that private property shall not “be taken for public use, without just compensation.”[45]  To determine whether there is a viable Takings Clause claim, courts look to (1) the economic impact of the regulation, (2) the extent to which it “interferes with distinct investment-backed expectations,” and (3) the “character” of the government’s action.[46]  Insurance companies may have a claim under the Takings Clause, as insurance contracts constitute “property,”[47] the “economic impact” on insurers could be enormous,[48] and the legislative expansion of business interruption policies would presumably interfere with insurers’ “investment-backed” expectations.  However, insurers may have a harder time arguing the third prong—that the “character” of the government’s action in supporting struggling businesses during a pandemic does not justify the legislation.[49]

Conclusion

Much like the pandemic itself, small businesses’ disputes with insurers over COVID-related business interruption coverage are widespread and unpredictable.  Litigation of these issues is still in the early stages of working its way through the courts, and while some recent rulings hint that courts may be sympathetic to the insureds’ interpretations of these policies, others indicate that judges are more likely to side with the insurance companies.[50]  Legislation may be a more economically efficient lifeline for struggling arts groups, but the legislative process is slow-moving and the legislation proposed thus far will likely face serious constitutional challenges.  Time will tell whether either avenue will lead to meaningful relief for the nation’s many hard-hit arts institutions and businesses.

 

[1]  American Alliance of Museums, Letter to Speaker Pelosi and Leaders McConnell, McCarthy and Schumer re: Aid for Museums Impacted by Coronavirus, Mar. 18, 2020.  Similarly, in the United Kingdom, art galleries expect to lose an average of 79% of their annual revenue, and approximately one-third of galleries do not expect to survive the crisis. Anna Brady, “Insurers hit by art-world class action lawsuit as coronavirus crisis bites,” The Art Newspaper, June 5, 2020.

[2] Julia Jacobs, “Arts Groups Fight Their Insurers Over Coverage on Virus Losses,” N.Y. Times, May 5, 2020.

[3] Many for-profit and non-profit arts groups have received pandemic-related loans—potentially forgivable—under the Paycheck Protection Program of the U.S. Small Business Administration under the CARES Act or other governmental assistance. That financial assistance is not the subject of this note.

[4] “Do I Need Business Interruption Insurance?,” Insurance Information Institute.

[5] Leslie Scism, “Companies Hit by Covid-19 Want Insurance Payouts. Insurers Say No,” Wall Street Journal, June 30, 2020.

[6] Jim Sams, “Number of Federal COVID-19 Business Interruption Lawsuits at 101 and Rising,” Claims Journal, May 21, 2020.

[7] Jacobs, supra note 2.

[8] Some organizations have circumvented this problem by filing claims under “performance cancellation” insurance, a type of coverage triggered by a broader class of event cancellations than business interruption insurance, but that results in smaller payouts from insurers. At least two theaters in New York filed claims under “performance cancellation” insurance policies: the Chocolate Factory Theater in Queens filed a claim for the cancellation of its annual food festival, and the Dance Theater of Harlem filed for the cancellation of its gala and all performances.  See Jacobs, supra note 2.

[9] Complaint, Simon Wiesenthal Center Inc. and Moriah Films v. Chubb Group of Insurance Companies/Federal Insurance Company and DOES 1-20, No. 2:20-cv-03890-ODW-JEM (C.D. Ca. Apr. 29, 2020).

[10] The relevant portion of the Chubb Group insurance policy reads:

We will pay for the actual:

    • business income loss; or
    • extra expense,

you incur due to the actual impairment of your operations, directly caused by the prohibition of access to:

    • your premises; or
    • a dependent business premises,

by a civil authority.

This prohibition of access by a civil authority must be the direct result of direct physical loss or damage to property away from such premises or such dependent business premises by a covered peril, provided such property is within:

    • one mile; or
    • the applicable miles shown in the Declarations,

from such premises or dependent business premises, whichever is greater.

Exhibit A: Insurance Policy at 80, Defendant’s Motion to Dismiss, Simon Wiesenthal Center Inc. and Moriah Films v. Chubb Group of Insurance Companies/Federal Insurance Company and DOES 1-20, No. 2:20-cv-03890-ODW-JEM (C.D. Ca.).

[11] Complaint ¶ 30, Simon Wiesenthal Center, supra note 9.

[12] In denying coverage for the Simon Wiesenthal Center, in addition to arguing that the Center had suffered no “physical” loss or damage, the Chubb Group argued that the Center’s claim for a loss resulting from a “virus” fell under an exclusionary provision that denied coverage for the clean-up or removal of “pollutants.”  See Complaint ¶ 38–47, Simon Wiesenthal Center, supra note 9.

[13] Complaint ¶ 31, Simon Wiesenthal Center, supra note 9.

[14] Mary Williams Walsh, “Businesses Thought They Were Covered for the Pandemic. Insurers Say No,” N.Y. Times, Aug. 5, 2020.

[15] Art groups have challenged insurance companies in the United Kingdom as well.  In June 2020, a group of over 50 major contemporary art galleries, museums and traders in the U.K. began preparing to file a class action lawsuit against their insurance companies—Axa and Hiscox—with business interruption claims ranging from £50,000 to £35 million.  See Brady, supra note 1. The class action follows on the heels of a lawsuit filed by the U.K.’s Financial Conduct Authority (FCA), which sought to clarify the business-interruption-insurance rights of firms that stopped trading because of the pandemic.  On its website, the FCA described its reasoning behind this lawsuit:  “The issues surrounding [business interruption] policies are complex and have the potential to create ongoing uncertainty for both customers and firms . . . . The test case is not intended to encompass all possible disputes, but to resolve some key contractual uncertainties and ‘causation’ issues to provide clarity for policyholders and insurers.  It will not determine how much is payable under individual policies, but will provide the basis for doing so.”  Business interruption insurance, Financial Conduct Authority, Aug. 8, 2020.  On September 15, 2020, the High Court ruled in favor of the policyholders, holding that most of the clauses containing the word “disease” and “denial of access” covered the circumstances surrounding the COVID-19 pandemic. See The Financial Conduct Authority v. Arch Insurance (UK) Limited & Others [2020] EWHC 2448 (Comm).

Mishcon de Reya, a major UK law firm, also has filed more than 500 additional claims against Hiscox, predominantly on behalf of plaintiffs in the retail and hospitality sector, but also on behalf of some arts centers and museums. See Brady, supra note 1.

[16] Complaint ¶¶ 24, 30, Simon Wiesenthal Center, supra note 9.  Because the Center sought coverage under its policy’s “Civil Authority” insuring agreement, rather than that policy’s “Premises Coverages” insuring agreement, the Center was not required to allege that its own premises had suffered physical loss or damage on account of COVID-19.

[17] Memorandum in Support of Defendant’s Motion to Dismiss at 8–9, Simon Wiesenthal Center Inc. and Moriah Films v. Chubb Group of Insurance Companies/Federal Insurance Company and DOES 1-20, No. 2:20-cv-03890-ODW-JEM (C.D. Ca. May 22, 2020).

[18] Notice of Voluntary Dismissal at 1, Simon Wiesenthal Center Inc. and Moriah Films v. Chubb Group of Insurance Companies/Federal Insurance Company and DOES 1-20, No. 2:20-cv-03890-ODW-JEM (C.D. Ca. June 1, 2020).

[19] Complaint, Jujamcyn Theaters LLC v. Federal Insurance Co.l, No. 1:20-cv-06781-ALC (S.D.N.Y. Aug. 24, 2020).

[20] Id. at ¶¶ 40–52.  Jujamcyn also noted that the lack any exclusionary provision for losses related to viruses indicated that such losses were included under the policy.  Id. at ¶ 44.

[21] Id. at ¶¶ 47–48.

[22] Answer at 6, 19–25, Jujamcyn Theaters LLC v. Federal Insurance Co.l, No. 1:20-cv-06781-ALC (S.D.N.Y. Sept. 29, 2020).

[23] Thomas Keller of the French Laundry restaurant filed a lawsuit against the insurers of his restaurants, noting that the coronavirus “physically infects” and lingers on surfaces.  See Jacobs, supra note 2.

[24] The Houston Rockets sued Affiliated FM Insurance Company, claiming that the loss of the use of their sports arena was a form of “physical damage” for the purposes of business interruption coverage.  Walsh, supra note 14.

[25] In a hearing on a motion to dismiss a business interruption claim, Optical Services argued that New Jersey case law previously found “physical loss” without structural damage, and the court noted that the argument advanced “a novel theory of insurance coverage” that warranted denial of the motion to dismiss. See Hearing on Motion to Dismiss at 29–30, Optical Services USA/JC1 v. Franklin Mutual Ins. Co., No. BER-L-3681-20 (N.J. Super. Ct. Bergen Cty. Aug. 13, 2020).

[26] Studio 417, Inc.. v. Cincinnati Insurance Co., Case No. 6:20-cv-03127-SRB, at *4 (W.D. Mo.).

[27] Id. at *5 (Aug. 12, 2020 order).

[28] Leslie Scism, “Insurance Firms Gain Early Lead in Coronavirus Legal Fight with Businesses,” Wall Street Journal, Sept. 1, 2020.

[29] Gavrilides Management Co. v. Michigan Insurance Co., No. 20-258-CB-C30, at 263, 272 (Mich. Cir. Ct., Ingham Cty.); see also Turek Enterprises Inc., d/b/a Alcona Chiropractic v. State Farm Mutual Automobile Insurance Co., Order Granting Insurer’s Motion to Dismiss, No. 20-11655, at 8 (E.D. Mich., Sept. 3, 2020) (distinguishing Studio 417 to find in favor of insurers because the Studio 417 policy covered losses arising from “accidental physical loss or accidental physical damage,” whereas the policy at issue only covered “direct physical loss”).

[30] The court cited to several cases where there was “a direct physical loss” despite lack of physical damage, including losses related to asbestos (Port Auth. of New York & New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226, 236 (3d Cir. 2002)), data storage (Lambrecht & Assocs., Inc. v. State Farm Lloyds, 119 S.W.3d 16, 24–26 (Tex. App. 2003)), and odor (Essex Ins. Co. v. BloomSouth Flooring Corp., 562 F.3d 399, 406 (1st Cir. 2009)). Diesel Barbershop, LLC v. State Farm Lloyds, No. 5:20-CV-461-DAE, 2020 WL 4724305, at *5 (W.D. Tex. Aug. 13, 2020)).

[31] Id.

[32] See Scism, supra note 28.

[33] For example, some policies expressly exclude from coverage losses caused by “a pandemic” or by “a virus.”  See, e.g., Mauricio Martinez, DMD, P.A. v. Allied Ins. Co. of America, No. 20-00401, Order Granting Insurer’s Motion to Dismiss, at 1 (M.D. Fla., Sept. 2, 2020) (dismissing business interruption claim because the “insurance policy expressly excludes coverage from damages caused by a virus.”).  While the existence of such an exclusion is generally fatal to a COVID-related insurance claim,  the opposite is unfortunately not the case:  Courts have rejected the argument that the absence of such an exclusion weighs in favor of coverage, ruling that plaintiffs still need to show “direct physical loss” to receive coverage.  See, e.g., Rose’s 1, LLC  v. Erie Insurance Exchange, No. 2020 CA 002424 B, at 9 (D.C. Superior Ct. Aug. 6, 2020).

[34] Order Denying Transfer and Directing Issuance of Show Cause Orders at 2, In Re: Covid-19 Business Interruption Protection Insurance Litigation, MDL No. 2942.

[35] See supra note 15.

[36] See supra note 34, at 3 n.6.

[37] See Jacobs, supra note 2; see also Current Campaigns, League of Independent Theater.

[38] 2020 NY Senate-Assembly Bill S8211, A10226B; see also Assemblymember Robert Carroll Legislative Session in Review. 

[39] SD.2655 (Mass. 2020); A3844 (N.J. 2020); H.B. 589 (Ohio 2020).

[40] Business Interruption Insurance Coverage Act of 2020, H.R. 6494, 116th Cong. § 2 (2020).

[41] Id.

[42] Barclay Nicholson and Peyton L. Craig, “INSIGHT: Covid-19 State Legislation Could Shake Up Insurance Contracts,” Bloomberg, May 12, 2020 (predicting Contract Clause challenges to business interruption legislation); Mark A. Packman, “Legislation Enabling Policyholders to Obtain Insurance Coverage for Coronavirus Claims is Constitutional Part 1,” Nat’l Law Review, May 26, 2020 (arguing that business interruption legislation is constitutional under the Contract Clause); William W. Lockyer, “Legislation unfairly burdens insurance companies with COVID-19 losses,” San Francisco Chronicle, July 24, 2020 (noting that some insurance legislation may violate the Takings Clause). 

[43] U.S. Const. art 1., § 10; Sveen v. Melin, 138 S. Ct. 1815, 1821–22 (U.S. 2018). A substantial majority of states have Contract Clause analogues in their state constitutions. See Brian A. Schar, Contract Clause Law under State Constitutions: A Model for Heightened Scrutiny, 1 TEX. REV. L. & POL. 123 (1997).

[44] See Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 248–49 (1978) (finding that a Minnesota law did not “advance a legitimate public purpose” where the law was enacted to protect “a narrow class” of employers, not a “broad societal interest”).

[45] U.S. Const. amend. V.

[46] Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978).

[47] See, e.g., United States Trust Co. v. New Jersey, 431 U.S. 1, 19 n.16 (1977) (“Contract rights are a form of property and as such may be taken . . . provided that just compensation is paid.”).

[48] The American Property Casualty Insurance Association issued a statement regarding the impact of required business interruption coverage on the insurance industry: “For perspective, our industry responded to more than three million claims, the most ever handled by the property casualty industry due to catastrophes during the 2005 hurricane season that included Hurricanes Katrina, Rita, Wilma, and several others. While a significant number, it dwarfs in comparison to the potential for 30 million or more claims from each of the small businesses operating in the United States today.” APCIA: Insurance Perspective on COVID-19, Mar. 26, 2020. 

[49] Commenters have also referenced due process as another potential challenge, which would require insurers to demonstrate that they had a constitutionally protected property interest, and that the deprivation of their property through the legislation was “arbitrary.” See “Can They Do That? Possible Constitutional Limitations on State Efforts to Require Business-Interruption and Loss-of-Use Carriers to Cover Small Businesses’ Losses from COVID-19,” Mayer Brown, April 6, 2020.

[50] See Studio 417, supra note 26.