By Glenn Jacobson and Mark Binsky

Law360 (May 29, 2020, 6:39 PM EDT )

Glenn Jacobson

Mark Binsky

There are a number of reasons why there should be no coverage under most property insurance policies for business interruption claims arising from COVID-19. There are also various bills pending in some state legislatures which, if passed, would override the wording of the standard business interruption form and a number of applicable policy exclusions in order to mandate coverage by governmental fiat.

If these bills are ever signed into law, insurers will be faced with having to adjust COVID-19 business interruption losses. This article will discuss two unique issues in evaluating such claims.

The U.S. Congress has instituted a number of programs in an attempt to lessen the impact of the economic slowdown caused by the quarantine measures most states have adopted to blunt the spread of the coronavirus.

One such program is the Paycheck Protection Program, which authorized up to $349 billion in loans, many of which may be forgivable, to businesses for payroll and other defined business expenses during the crisis. What impact, if any, will acceptance of a PPP loan have on an insured's business interruption claim?

The standard business interruption coverage form entitles the insured to receive net profits (or losses) before income taxes, together with incurred continuing normal operating expenses, including payroll, during the period of restoration. The first question adjusters would face is whether a PPP loan should be deducted from the carrier's payment for continuing expenses. Surprisingly, insureds' attorneys may have a credible basis on which to oppose such a reduction.

Alexandra Restaurant v. New Hampshire Insurance Co. of Manchester,[1] is an old precedent, but it has been cited with approval in more modern times and is still, technically, good law. Decided by the Appellate Division, First Department, and affirmed by New York State's highest court, the Court of Appeals, it held that property insurance loss proceeds cannot be diminished simply because the insured has a contract with a third party that provides remuneration for the loss.

The plaintiffs bar will no doubt argue that Alexandra Restaurant requires insurers to ignore any PPP money the insured may receive and pay the insured whatever the data and calculations show the insured is entitled to under the policy for lost profits and continuing expenses.

Moreover, plaintiffs attorneys could contend that, since the PPP payment was actually a loan that may have to be repaid unless forgiven under certain enumerated circumstances, the insureds' lawyers may assert that the PPP funds are, in all respects, a liability on the insureds' books that should not serve as an offset to insurance.

Additionally, by the time the government makes a decision as to whether the insured must repay the PPP loan, the insurer will have closed its books on the claim and moved on, further compromising any chance of recouping claim payments, even if it could call the PPP grant an offset.

However, there appears to be a way to meet the challenge posed by the Alexandra Restaurant doctrine based on the express wording of the policy. The standard business interruption form specifies that the insurer "will pay for the actual loss of Business income you sustain due to the necessary 'suspension' of your 'operations' during the 'period of restoration.'"

If the insured obtains a PPP loan that turns into a grant, the actual loss is diminished, dollar for dollar, by the amount of the money paid by the government. Since the insurer is only liable for actual loss under the plain meaning of the policy, then the insurer should, logically, not have to pay the amount the insured received from the PPP program because that amount has reduced the quantum of the actual loss.

There is no indication that the insurance policy in the Alexandra Restaurant case contained the actual loss provision found in the standard business interruption form. On the basis of this distinction, insurers can consider treating PPP payments as offsets when calculating a policyholder's monetary entitlement in connection with a business interruption claim stemming from COVID-19.

A second issue arising from an insured's participation in the PPP program has to do, not with the quantum of the loss, but with whether there is coverage at all. As we know from cases like Broad Street LLC v. Gulf Insurance Co.,[2] business interruption coverage is only triggered when the insured's enterprise is completely shuttered as a result of a covered cause of loss. Coverage is not available if there was only a partial shutdown of the business.

The express purpose of the PPP program is to infuse capital into the insured's business to pay employee salaries and necessary business expenses to help keep it open. If the business does remain open, even partially, there will be no coverage for business interruption regardless of the quantum of the loss.

Insureds' lawyers, on the other hand, might argue that the PPP loan was taken by the insured to mitigate its loss, as the policy requires, and that the insured should not be punished by losing business interruption coverage if all the insured was trying to do was minimize the loss in accordance with its policy obligation.

A fair reading of the insurance policy should result in this approach failing. The case law is clear that partial business interruption is not covered.[3] Mitigation is a completely separate issue and there is no indication in the wording of the standard business interruption form that insureds can avoid a claim denial for lack of coverage by showing that it tried to reduce the scope of that uncovered loss.

While a plain meaning of the standard business interruption form and exclusionary endorsements such as the one removing coverage for virus related losses should provide insurers ample grounds for rejecting claims stemming from the coronavirus pandemic, insurers should be prepared to react to actions by state legislatures to override these contractual provisions.

Additionally, given the extent of losses sustained by businesses as a result of the pandemic, there is little doubt plaintiffs attorneys will be creative and press novel legal theories in an effort to obtain recoveries for their clients. Consequently, prudent claims professionals will have to think outside the box in order to meet these challenges.

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Glenn Jacobson is a partner and Mark Ian Binsky is counsel at Abrams Gorelick Friedman & Jacobson LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Alexandra Restaurant v. New Hampshire Ins. Co. of Manchester , 272 A.D. 346, 71 N.Y.S.2d 515 (1st Dept. 1947), aff'd, 297 N.Y. 858 (1948).

[2] Broad Street, LLC v. Gulf Ins. Co. , 37 A.D.3d 126, 832 N.Y.S.2d 1 (1st Dept. 2006).

[3] Broad Street, LLC v. Gulf Ins. Co. , cited above, and 54th St. Ltd. Partners, L.P. v. Fidelity & Guar. Ins. Co. , 306 A.D.2d 67, 763 N.Y.S.2d 243 (1st Dept. 2003).

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