When the coronavirus lockdown started in Michigan, Nick Gavrilides closed the dining room of his Soup Spoon Cafe in Lansing, had some farewell beers with his workers and set to work on an insurance claim.
He had paid for business interruption insurance, a type of coverage that replaces a portion of a firm's lost revenue when a disaster forces it to suspend operations, and was expecting his carrier, Michigan Insurance Company, to cover at least some of his losses. He didn't get a cent.
"At first I thought, 'OK, we're toast. This is it,'" Gavrilides said.
Then he sued.
Since the pandemic hit the United States this year, thousands of business owners like Gavrilides have discovered that the business interruption policies they bought and have been paying thousands of dollars in annual premiums to sustain won't pay them a thing -- just as they are struggling through the biggest business interruption in modern memory.
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Now many of them -- from proprietors of gyms and dental practices to high-profile restaurateurs including Chez Panisse owner Alice Waters, the owner of Cheers in Boston and even an NBA team -- are taking their insurers to court, hoping to force them to cover some of the financial carnage. So far, more than 400 business interruption lawsuits have been filed, according to insurance lawyers.
"I think business interruption claims should be paid when business is interrupted," Gavrilides said.
'DIRECT PHYSICAL DAMAGE'
Insurance companies don't see it that way. Most business interruption policies include highly specific language stating that for a claim to be paid out, there has to be "direct physical damage" -- say, a flood that washes away a building or a fire that burns down inventory, forcing a business closure.
On top of that, after severe acute respiratory syndrome, or SARS, swept through Asia nearly two decades ago and caused widespread economic damage, many insurers began to write in language that excluded business interruption caused by viral epidemics. For instance, Gavrilides' policy states that the insurer "will not pay for loss or damage caused by or resulting from any virus, bacterium, illness or disease."
The industry's position hasn't deterred business owners. Some plaintiffs are arguing that the pandemic calls for new interpretations of what "direct physical damage" means for their business. Others are highlighting the spillover effects of closures on local economies.
When the governor of Louisiana banned gatherings of more than 250 people in March, John Houghtaling, a New Orleans lawyer and veteran of the insurance wars that followed Hurricane Katrina in 2005, didn't wait for his client's insurance claim to be denied before suing. Houghtaling represents Oceana Grill, a 500-seat restaurant that is insured by an underwriting group with Lloyd's of London, the insurance marketplace.
"We have reason to believe that Lloyd's took premiums without the intention of providing the indemnity paid for," he said.
The lawsuit seeks court affirmation that the insurer must cover Oceana Grill's lost revenue because the restaurant paid for a policy that covers risks from all pathogens except those introduced through "terrorism or malicious use." It also argues that the coronavirus contaminates surfaces that can be difficult to clean in New Orleans' hot, muggy climate, causing "real physical loss and damage." The city's mayor, LaToya Cantrell, cited the virus's propensity to cause such property damage in an emergency proclamation the day the lawsuit was filed.
Lloyd's has argued that Oceana Grill's claims are premature and hypothetical. A spokesman declined to comment beyond the court filings. A hearing on whether to dismiss the lawsuit is scheduled for Aug. 20.
Houghtaling, along with big-name restaurateurs such as Daniel Boulud, Thomas Keller, Wolfgang Puck and Jean-Georges Vongerichten, formed the Business Interruption Group in April to push the insurance industry to pay claims.
CASE THROWN OUT
So far, it's not looking good for the plaintiffs.
On July 1, a county circuit judge threw out Gavrilides' case, one of the first to be decided anywhere. Judge Joyce Draganchuk, ruling from the bench in a Zoom hearing, said that for coverage, there had to be tangible damage, something "that alters the physical integrity of the property."
Gavrilides' lawyer, Matthew Heos, said he has filed an appeal. In the meantime, Gavrilides, who pays an annual premium of $12,002 for his policy, is staying afloat with a loan from the federal government's Paycheck Protection Program.
The NBA's Houston Rockets have sued Affiliated FM Insurance Company in a state court in Rhode Island, where the insurer's parent, FM Global Group, is based. The NBA cut short its season this year, but the Rockets were hit especially hard when Houston emerged as a covid-19 hot spot. The Toyota Center, where the Rockets play, is a co-plaintiff, having had to cancel rodeos, concerts, a barbecue cook-off and other events as well as basketball. The lawsuit said the loss of the arena was itself a form of "physical damage."
A spokesman for FM Global, Steven Zenofsky, said the company could not comment on the legal dispute, which remains pending.
Many insurance executives argue that pandemics are uninsurable. At its most basic, insurance involves the efficient pooling of risks so that everybody in a pool pays premiums but only a few have claims. That way, the many who have no losses can subsidize the few who do. That principle can't work in a sweeping pandemic shutdown where virtually everybody has a loss.