Can You Sue Your Insurance Company for Denying Your COVID Related Claim?
Introduction. Many business owners learn when they open up a business in California the following: (1) Incorporate; (2) Ask an attorney if you have legal questions; and (3) Buy insurance. But what happens when the insurance you buy fails to cover you for something that you think should be covered? In this case, because of Covid?
This article will discuss the following: (1) What is business interruption insurance; (2) How to interrupt your policy; and (3) What do you do if you believe you are wrongfully denied.
What is Business Interruption Insurance? Business interruption insurance is insurance coverage that replaces business income lost in a disaster. If you buy general liability insurance or a property/casualty policy the business interruption portion will be stated in there. Frequently, your insurance will sell you on a policy by referring to it.
How to Interrupt Your Policy Part 1 The Elements of Bad Faith Breach of Insurance Contract. There are two important parts of the policy that trigger coverage. The first is the requirement of “physical loss or damage” to your property and the second is how to deal with the virus exclusion that your policy may have. This article will only deal with the second portion because we will assume that would not be inquiring about your policy unless you have physical loss or damage.
In summary, the elements to prove your case are the following: 1) the existence of a valid policy of insurance between the parties, 2) the insured’s performance or excuse for non-performance, 3) the insurer’s failure to perform, and 4) damage to the insured caused by the breach. See Lortz v. Connell, 273 Cal. App. 2d 286, 290, 78 Cal. Rptr. 6, 8 (1969); Twaite v. Allstate Ins. Co., 216 Cal. App. 3d 239; 264 Cal. Rptr. 598 (1989); Civ. Code§3300.
Insurance Companies are in a Bind and Rejecting Policies as a Business Decision. Before we continue on how to interrupt an insurance policy, we need to have background. Insurance companies have a legal obligation not to reject claims. Courts are clear: “[T]he essence of the implied covenant of good faith and fair dealing is that [t]he insurer must refrain from doing anything that will injure the right of the insured to receive the benefits of the [insurance] agreement, the terms and conditions of which define the duties and performance to which the insured is entitled.” [Brandwein v. Butler (2013) 218 CA4th 1485, 1514-1515, 161 CR3d 728]. Thus, the implied covenant of good faith and fair dealing in first party cases obligates the insurer: to make a thorough and prompt investigation of the insured's claim for benefits; and not to unreasonably delay or withhold payment of benefits. [See Silberg v. California Life Ins. Co. (1974) 11 C3d 452, 461-462, 113 CR 711, 717; California Shoppers, Inc. v. Royal Globe Ins. Co., supra, 175 CA3d at 54-55, 221 CR at 200-201].
If this is the law, why are the insurance companies rejecting claims? Many insurance agents and brokers are being told that simply put, the insurance companies are making a business decision. If they pay out every claim that is filed, they will go bankrupt. What they are hoping is that a rejected claim will not lead to litigation, or if they do, the amount paid to attorneys and in settlement over a course of 2 or more years of litigation, will lead to a far less payout, then if the amount is paid outright. In other words, it is a business decision.
How to Interpret Your Policy Part 2 Open Peril vs. Stated Peril. Property insurance may be written on an “open peril” (formerly “all risk”) basis, covering all losses not expressly excluded in the policy; or on a “named perils” (or “specified perils”) basis, covering physical loss from certain causes only (e.g., fire, windstorm, hail). [See Garvey v. State Farm Fire & Cas. Co.(1989) 48 C3d 395, 406, 257 CR 292, 298; and Julian v. Hartford Underwriters Ins. Co. (2005) 35 C4th 747, 751, 27 CR3d 648, 650, fn. 2—“open peril” policy analogous to “all risk” policy] Most policies that have business interruption insurance are written as an Open Peril policy.
An Open Peril policy is written that unless something is specifically excluded it will be covered. For purposes of example only, “We insure for accidental direct physical loss to the property described. . . except as provided in Section I." [See Benavides v. State Farm Gen. Ins. Co. (2006) 136 CA4th 1241, 1247, 39 CR3d 650, 653. Under an “all risk” policy, the limits of coverage are defined by the exclusions.[Garvey v. State Farm Fire & Cas. Co., supra, 48 C3d at 406, 257 CR at 298; Nissel v. Certain Underwriters at Lloyd's of London (1998) 62 CA4th 1103, 1114, 73 CR2d 174, 181—jeweler's block policy covering “loss or damage arising from any cause” nevertheless subject to exclusions]
On the other hand, a Stated Peril policy refers to a specific event. And if it occurs, there will be coverage. Here are two examples of State Peril policies:
Example No. 1 of State Peril Policy: “We insure for direct physical loss to the (covered) property caused by a peril listed below, unless the loss is excluded in Section II (Exclusions): (1) fire or lightning; (2) explosion; (3) windstorm or hail …”
Example No. 2 of State Peril Policy: “We will pay for loss of and damage to Covered Property resulting directly from … actual or attempted ‘robbery’ or … actual or attempted ‘safe burglary’ …”
Under a “named perils” policy, the initial focus is on whether the cause of loss was a named peril (e.g., fire); and only if it was, do the exclusions become relevant. [See Garvey v. State Farm Fire & Cas. Co., supra, 48 C3d at 406, 257 CR at 298]
Note that a policy may include both. For example, in most homeowners' policies, coverage for the dwelling and other structures is written on an “all risk” basis, while coverage for contents (personal property) is written on a “named perils” basis.
How to Interpret Your Policy Part 3 California Courts Consider an Insurance Agreement in Favor of the Insured. California law specifically states that coverage is to be interrupted broadly, while exclusions are to be interrupted narrowly against the insurance company. Shade Foods v. Innovative Products (2000) 78 Cal. App. 4th 847. Reserve Insurance Company v. Pisciotta (1982) 30 Cal. 3d 800. Further, if there are two reasonable interruptions then the interruption will be in favor of the insured and not the insurance company! Stamm v. Harford 93 Cal. App. 4th 531. Lastly, the burden to establish an exclusion is always with the insurance company and never with the insured! Clemmer v. Harford (1978) 22 Cal 3d 865, 880.
How to Interpret Your Policy Part 4 The Virus Problem. Some policies have an ISO virus exclusion. In the industry, this is known as of the largest exclusions and will typically bar you from recovery. The ISO exclusion is typically written in this format: “We will not pay for any loss or damage caused by or resulting from any virus, bacterium, or other micro-organism…” The good news? Most do not include this broad exclusion. Instead, the exclusions are very narrow.
How to Interpret Your Policy Part 5 The Government Action Problem. Many policies have an exclusion that states that government actions will permit an insurance company to deny a policy. However, on closer inspection, the definition of government action is for seizures of property. In other words, the words government action is usually limited to government actions that relate to a taking by the government, which in the instance of COVID, is not the case.
What Do You Do if Your Case Has Been Rejected in Addition to Seeing an Attorney? While this article is not a replacement for an attorney, it is meant to provide a layman with enough information to become competent when speaking with an attorney or if needed, to know whether one is necessary. There is a step by step the attorney takes in analyzing a policy, many steps, which can be done on your own. They are the following: (1) Obtain a copy of the entire policy; (2) Read the policy; (3) Read the declarations page of the policy to make sure you are named; (4) Read the exclusions portion; (5) Determine what damages are covered; (6) Whether the insurance policy is a claims-made or an occurrence policy (a good summary is here: Claims-Made vs Occurrence); (7) Determine whether the loss was caused by the insured or a third party; and (8) See if there other insurance policies that also provide coverage.
You should also put everything in writing. Nothing should be by phone. Keep all correspondence, including emails for your attorney to review.
Conclusion. Your business matters. Never take the insurance company's rejection notice true. At least when the rejection is based on COVID. There are many reasons why you can still make a claim against your insurance company.