Struggling hospitality companies keep taking the insurance companies to court over denied claims during the pandemic. They're highly unlikely to win.
Caesars Entertainment is the latest hospitality company to wage a legal fight against its insurer to get a business interruption insurance payout due to government-ordered pandemic restrictions.
Based on legal precedent over the last year, the gaming company may not want to waste its time nor its law firm’s billable hours.
“It was an uphill battle to begin with, and the courts have not sided with the policyholders,” said Joshua Bowman, a partner at Boston-based law firm Sherin and Lodgen and chair of the firm’s hospitality practice. “It’s highly unlikely they will side with many policyholders going forward.”
A New Hampshire-based owner of hotels throughout the Northeast, the popular Legal Sea Foods restaurant chain, and now Caesars Entertainment are among the many U.S. businesses suing their insurance providers for denying business interruption insurance claims during the pandemic.
The Caesars case involves several insurers like Allianz and Markel Corp. as well as underwriters at Lloyd’s of London, which serves as a marketplace of independent insurers. The suit accuses them of denying coverage of more than $2 billion in losses during the pandemic. Caesars claims it paid more than $25 million in insurance premiums for a policy with a more than $3.4 billion limit.
Caesars and Lloyd’s of London declined to comment as did representatives with other named defendants like the insurance firm Chubb Ltd.
A representative with Markel declined to comment on the Caesars case but noted, “as always, we handle all COVID-19 related claims, including business interruption, in a fair, consistent manner in accordance with the terms of a policyholder’s specific policy.”
Companies, small and large, take out business interruption insurance to cover for any unexpected loss of income following a disaster. This often means a payout that helps a business rebuild from a fire or natural disasters like a hurricane. While many companies report the financial drag from pandemic lockdowns has been worse than a natural disaster, they were more often than not left empty-handed after filing a claim with their insurance provider.
It often led to court battles that rarely went in favor of the insurance policyholder.
The hotel industry is the fourth-largest source of business interruption insurance lawsuits in the U.S., according to the University of Pennsylvania Law School’s pandemic litigation tracker. Eighty-five percent of the rulings of business interruption insurance lawsuits in the U.S. have gone in favor of the insurers during the pandemic.
“My law firm is not currently involved in any business interruption insurance claims representing the hospitality industry against the insurance industry,” Bowman said. “Our firm made a decision where, if we found a case we thought we could win, we would bring it. We just couldn’t find that case.”
Denied coverage largely comes down to two things: the fact that many policies call for proof of actual physical damage to a property or virus exclusion clauses many insurance companies added to business interruption insurance policies following the SARS epidemic.
Many policies, including the Caesars Entertainment one, have clauses that protection includes coverage for “all risk of physical loss or damage.” Lawyers for Caesars argue government lockdowns and capacity restrictions did result in physical loss or damage, but most U.S. courts think otherwise.
The other legal roadblock involves virus exclusion clauses, a measure many providers started inserting into business interruption insurance policies following a rise in claims from hotels and other businesses after the SARS epidemic of the early 2000s.
“What happened with SARS is the insurance companies saw this as a major liability and the insured didn’t,” said David Sherwyn, a hospitality human resources and law professor at Cornell University’s School of Hotel Administration. “It just wasn’t something that was on anybody’s radar, and so we’re left with a lot of people without business interruption insurance.”
One notable exception was the All England Lawn Tennis Club, host of the Wimbledon tennis championship. The organization received a $141 million payout last year after paying pandemic insurance for years. But the club’s CEO told the Daily Mail last year, due to the insurance market, the policy was no longer available given the ongoing crisis.
Skift reached out to multiple insurance companies and industry organizations like Liberty Mutual, the American Property Casual Insurance Association, and the Insurance Services Office — the organization that issued guidance following the SARS epidemic for companies to enact virus exclusion clauses in new policies — on the rationale behind all the denied claims. Only the APCIA responded.
“These policies are not intended to cover diseases or pandemic related losses,” Stef Zielezienski, executive vice president and chief legal officer for the APCIA, said in a statement. “In the vast majority of cases, insurers did not price policies to include such coverage, and policyholders did not pay for it. Lawsuits to mandate retroactive business interruption coverage to include Covid-19 losses not in contracts would undermine the stability of the insurance industry and its ability to pay claims on all existing insurance policies. Only the federal government can be the financial bridge for a crisis of this scale, proportion, and duration.”
While policyholders suffered catastrophically financially from the pandemic, many insurance companies benefitted from lockdowns. Not only were they not having to pay out business interruption insurance claims, but insurance companies also had fewer claims in general because hotels and restaurants were shut down for part of the year.
“The insurance industry has experienced a major windfall because everybody is still paying their premiums,” Bowman said. “The policyholders are suffering terribly, and the insurance industry is making out like bandits here.”
Allstate’s nearly $5.5 billion 2020 profit was a nearly 17 percent jump from 2019. Travelers’ nearly $2.7 billion profit last year was a 3 percent increase from the year prior.
Allianz and Chubb, both named in the Caesars lawsuit, saw smaller profits last year than in 2019 but still posted strong financials: Allianz netted a nearly $12.9 billion profit, down a little more than 9 percent from 2019, and Chubb posted a $3.53 billion profit, down from $4.45 billion in 2019.
By comparison, Caesars lost $1.8 billion last year. Hotel companies like Accor lost $2.4 billion, and Hilton and Hyatt each lost more than $700 million. Those figures don’t include individual owners who may have filed business interruption claims.
“The insurance industry has walked between the raindrops for this whole crisis,” Bowman said.
Lobbyists for the insurance industry, despite its multibillion-dollar profits last year, cautioned it would be destabilized if forced to pay for all the business interruption insurance claims garnered during the pandemic.
There is some merit to the argument, Sherwyn said. If a hotel goes bust, a new ownership group generally comes in and takes over. Insurance companies bottoming out financially means a wide array of businesses are left without coverage.
“If an insurance company goes bankrupt, that’s when things get really messy,” he added.
There were several state-level bills pursued early in the pandemic calling for mandates to insurance companies to pay out business interruption insurance claims and get reimbursed from state government funds. Bowman worked in drafting one of these bills in Massachusetts, and others were filed in states like New Jersey and Ohio. Many stalled because states were grappling with their own dim financial outlook due to the pandemic.
Travel industry groups like the U.S. Travel Association advocated last year for the Pandemic Risk Insurance Act, a measure modeled after terrorism risk insurance passed following the Sept. 11 terrorist attacks.
Like the 2002 terrorism risk insurance law, PRIA called for the federal government to serve as a financial backstop and stabilize the insurance market with subsidized coverage for policyholders.
But rather than go the subsidized insurance route, the government veered more in the direction of direct aid packages like the Paycheck Protection Program of federally backed, forgivable small business loans through multiple stimulus plans.
Terrorism risk insurance may have been a Sept. 11 crisis legacy for providers and policyholders, but none of those interviewed for this story expect anything similar to emerge from the pandemic — especially given the belt-tightening following SARS.
“I would think the insurance industry is going to be more reticent than ever about covering anything tied to a pandemic,” Bowman said. “They fought every claim for Covid with tooth and nail, and they may tighten up their policies even more; though, I’m not sure they need to because they keep winning in court.”
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Photo credit: Caesars Entertainment is one of many hospitality companies taking their insurance provider to court over denied business interruption claims during the pandemic. Bernard Spragg. NZ / Flickr