U.S. Businesses Are Fighting Insurers in the Biggest Legal Battle of the Pandemic

(Bloomberg Businessweek) -- John Houghtaling was working in the second-floor den of his mansion near the Garden District in New Orleans when a legal memo arrived in his email inbox. It was mid-March, not long before the pandemic shut down much of the U.S., and cooks in white aprons were downstairs preparing an extravagant dinner: lobster casserole, veal chops, seared foie gras. The celebrity chef Jérôme Bocuse, a close friend, would be attending that evening, along with two dozen other guests.

Seated on a velvet couch beneath an 18th century painting of Louis XV, Houghtaling, a plaintiffs’ lawyer who’s long specialized in suing the insurance industry, scanned the memo on his screen, growing increasingly agitated. The 10-page document, compiled by a law firm that represents major insurance carriers, was circulating among industry insiders who were anticipating that local governments would soon begin shutting down commerce because of the novel coronavirus. The memo outlined a series of arguments the providers planned to make to avoid paying virus-related claims from business-interruption coverage—policies companies purchase to hedge against fires and other catastrophes.

The chefs downstairs might soon lose their livelihoods, Houghtaling realized, and the insurance industry would refuse to help. His next thought was, he admits, a selfish one: “This party is gonna f---ing suck.”

Sure enough, early in the evening, Chef Bocuse got a call: His two restaurants at Walt Disney World were being shut down. When he hung up, however, he was sanguine. “We checked the policy,” he assured Houghtaling. “We’re good.”

Houghtaling was skeptical. “They’re not going to pay,” he said.

“Yeah, yeah,” Bocuse replied. “You always say they’re not gonna pay.”

The next few days passed in a series of frantic phone calls. Other celebrity chefs, including Daniel Boulud, another friend of Houghtaling’s, vowed to examine their policies and discuss the issue with colleagues. On March 16, less than a week after the dinner party, Houghtaling filed a petition in state court in Louisiana on behalf of the New Orleans restaurant Oceana Grill, asking a judge to declare preemptively that its insurance policy would cover damage caused by the virus.

The suit represented the opening salvo in what has become the single biggest legal battle to emerge from the pandemic. Faced with the worst business interruption in living memory, the insurance giants have, by and large, refused to pay business-interruption claims. U.S. plaintiffs’ lawyers have filed more than 1,100 complaints against insurers, according to a tally by Tom Baker, a law professor at the University of Pennsylvania.

The stakes are enormous. Business owners from small restaurants to major retailers say they could go bankrupt unless they’re paid. Insurance companies say the payouts could cripple them—one industry estimate looking at just U.S. small businesses with fewer than 100 employees places the total monthly cost of reimbursing their pandemic losses at between $52 billion and $223 billion. The dispute is also playing out in Congress and state legislatures, where bills have been introduced requiring insurers to pay for pandemic-related losses.

“The word ‘unprecedented’ is probably overused in this, but I don’t think I have another word for it,” says Henry Daar, an executive vice president who oversees property claims for insurance broker Willis Towers Watson. “There have been huge insurable events in the past, with billions of dollars at issue. All of those involved situations that affected a discrete area and a discrete number of companies. This pandemic has affected everybody.”

Houghtaling has spearheaded the legal offensive from his mansion. Since March he’s challenged three major companies in court and formed a lobbying coalition called the Business Interruption Group, which is pressing lawmakers in Congress to pass a bill requiring insurers to pay certain virus-related claims. His Oceana Grill case is scheduled to go to trial on Nov. 16, in one of the first major tests of Covid insurance law.

A bow-tie-wearing 49-year-old bon vivant with slicked-back hair, Houghtaling has a taste for luxury and a penchant for grandiosity. He often toggles between metaphors to describe his fights with the insurance industry, as if groping for an appropriately epic comparison. Sometimes he’s David, valiantly challenging Goliath. Other times he’s Batman, battling villains in Gotham City.

The night of the party, he says, he felt more like a passenger on the Titanic. He sat next to Bocuse at a long mahogany table, a candlelit chandelier hanging overhead. There were towering flower arrangements and a cake shaped like a go-kart helmet in honor of Bocuse’s son, a professional racer. A band marched through the house, singing and dancing.

Houghtaling could already tell it was the last party he’d host for a long time. “The whole thing is sinking,” he thought.

About a decade before Covid-19 upended daily life, Doug and Gayle Mellin moved into a condominium in the small town of Epping, N.H. They soon encountered a problem: the pervasive stench of cat urine. The smell originated in a downstairs unit and rose through the plumbing system, drifting into the Mellins’ apartment from behind a set of kitchen cabinets. The couple sold the condo at a loss and went to court to force their insurer, Northern Security Insurance Co., to cover the difference, arguing that the odor constituted “direct physical loss to the property.”

For years, insurance companies and policyholders have debated the meaning of the phrases “physical loss” and “physical damage,” the standard formulations governing which types of harm are covered. In 2015 the Supreme Court of New Hampshire found that the Mellins’ property had suffered physical loss, ruling that such harm can exist even “in the absence of structural damage.” But in other states, courts have adopted much narrower interpretations, arguing that “intangible harms” like a stench don’t amount to physical contaminants.

Arcane contractual disputes such as this could now determine the survival of thousands of American businesses. If courts rule that the presence of a virus inside a building entails physical loss or damage, then business-interruption policyholders might have valid insurance claims. In the memo Houghtaling received in March, Shannon O’Malley, a lawyer for the law firm Zelle, predicted that “creative policyholders and their attorneys may try to link the virus and physical property damage.” She argued that because the virus “may be cleaned without essentially altering the property is evidence that there is no initial damage.”

In the Oceana Grill case, Houghtaling did exactly as O’Malley had envisioned, casting the coronavirus as a physical threat—a web of microscopic particles that comes to rest on surfaces, rendering property unusable. And anticipating the industry’s legal strategy, he and other advocates successfully lobbied public officials in New York City and elsewhere to include phrases such as “physical loss” and “physical damage” in shutdown orders requiring businesses to close.

To Houghtaling, there’s no question the industry’s position is self-serving. “If you ask them, ‘Is contamination physical?’ they start getting into arcane things like cat piss,” he says. “Do you need to? Something that is small, that can go through the air and contaminate and get into your nose and get you very sick or kill your mother and father … it’s physical.”

Since March scores of lawyers have made similar arguments, demanding payouts for restaurants, studios, tattoo parlors, salons, casinos, theaters, retailers, and sports franchises. But not all business-interruption policies are the same, and many of the lawsuits face considerable obstacles. John Ellison, an insurance litigator who represents policyholders, estimates that from half to two-thirds of business-interruption policies contain “virus exclusions”—contract language stipulating that losses caused by viruses aren’t covered. On their face, the exclusions appear to rule out insurance payments for businesses that close because of a pandemic. But in a lawsuit filed in California, Ellison is arguing that such exclusions should be unenforceable.

This type of language dates to the SARS outbreak in the early 2000s, when some insurers were forced to make expensive payouts to businesses in Asia that closed, such as the $16 million paid to the Mandarin Oriental hotel chain. Afterward, representatives for the insurance industry got permission from state regulators to add policy language explicitly excluding viruses and other “disease-causing agents” from insurance plans. They assured the regulators that the new language would not limit the scope of coverage but merely clarify its original intent.

Ellison calls that request deliberately misleading—a ruse to trick regulators into approving downgraded insurance plans without requiring providers to lower prices accordingly. “You didn’t reduce the premium, you didn’t provide the coverage that you should have, by virtue of the misrepresentation,” he says. “So we’re asking one court already, and we’re going to be asking other courts, to not allow the insurers to rely on exclusions that they obtained through a misrepresentation.”

The industry has responded aggressively to Ellison and other litigators, hiring expensive law firms and deploying its lobbyists to urge state legislators to abandon efforts to force payouts. The Insurance Information Institute, a trade group, introduced a website arguing that it would violate contract law to force insurers to pay pandemic claims. “The plaintiffs’ bar is always looking to expand coverage beyond what’s covered in the policy language,” says David Sampson, chief executive officer of the American Property Casualty Insurance Association, another trade group.

In April, Evan Greenberg, CEO of Chubb Ltd., one of the world’s largest insurers, published an op-ed in the Wall Street Journal arguing that lawsuits “won’t cure corona.” Houghtaling was outraged. “He called us beggars,” he says, his voice rising. “That was too much for us.”

Greenberg, who declined to comment, had actually written something much milder—that the litigation would repeat the “beggar-thy-neighbor mistakes of the Great Depression.” Still, in pursuit of vengeance, Houghtaling strategized with the Simon Wiesenthal Center, a Holocaust research and advocacy organization with an insurance policy from Chubb. The group’s mission has a personal connection for Greenberg, whose father, former American International Group Chairman Maurice Greenberg, helped liberate the Dachau concentration camp during World War II.

On behalf of the center, Houghtaling sued Chubb in federal court in California on April 29, the 75th anniversary of Dachau’s liberation. “We found it very ironic,” he says. “That was really a message we wanted to send to Evan Greenberg personally.”

While attending law school at Loyola University New Orleans, Houghtaling worked as an assistant at Gauthier & Murphy, the local firm that spearheaded the tobacco litigation of the 1990s. One of the partners, Bob Murphy, remembers asking Houghtaling to spruce up a 55-gallon chemical drum Murphy planned to present at trial. It was menial work, but Houghtaling managed to inject it with glamour. Leaving the office one evening, Murphy ran into Houghtaling in the parking lot, where he was spray-painting the drum, his suit jacket draped over the door of a bright red Mercedes. “He definitely got my attention,” Murphy says.

Houghtaling ultimately became one of the most successful trial lawyers at the firm, raking in tens of millions of dollars from wrongful death and personal injury cases. He represented a police officer disfigured by a fireworks explosion on New Year’s Eve and handled the litigation stemming from a deadly boat accident on the Mississippi River. By 2005, Houghtaling was wealthy enough that he was able to purchase Gauthier & Murphy outright.

He didn’t start to focus on property-damage lawsuits until Hurricane Katrina, six months after he bought the firm. In the wake of the storm, he worked with Louisiana’s attorney general to represent policyholders who were being undercut by the insurance industry. Houghtaling played a similar role after Superstorm Sandy ripped into New York and New Jersey in 2012, uncovering evidence of forged storm-damage reports that the carriers were using to lowball homeowners. The storm cases turned him into one of the country’s most prominent property-damage litigators.

Houghtaling has since parlayed his national profile into other business pursuits. Six years ago he started an oil and gas company called American Ethane, investing in an industry he’d explored as a possible litigation target during the cleanup of the BP Plc oil spill in the Gulf of Mexico. In 2017, American Ethane secured a multibillion-dollar contract to export liquid ethane to China, finalized in a signing ceremony attended by President Trump and Chinese President Xi Jinping. Houghtaling says he started the company partly because he wanted to become a billionaire—a goal he has yet to reach. When a group of his business partners flew into New Orleans on an extravagant Gulfstream G650, he worried that his own private jet would seem shabby in comparison: “I called my pilot, and I said, ‘You want to help them land, but don’t point out my jet, because it’ll be embarrassing,’ ” he says.

In 2010 he bought the nine-bedroom, 22,000-square-foot mansion on St. Charles Avenue, which is furnished with paintings, tapestries, and a bed once owned by Marie Antoinette. He was single when he moved in, but in 2012 he married the Russian model and pop star Yulia Timonina, with whom he now has two children.

Houghtaling has also amassed a collection of luxury cars. For years he’d saved a dog-eared Lamborghini catalog he enjoyed reading as a child, and in the mid-2000s he decided to buy one of the models. Then he bought a second. “I kept making more money,” he recalls. “And I said, ‘OK, I’ll buy another one.’ Another one. Another one. And then I thought, ‘OK, I’ll buy every Lamborghini in that book.’ ” That was 17 Lamborghinis.

Nevertheless, Houghtaling is sensitive about being seen as the stereotypical plaintiffs’ lawyer, who exploits catastrophe to finance a lavish lifestyle. His role in the Covid litigation isn’t primarily about money, he says. He’s fronting more than $1 million a month for the legal battle and the associated lobbying campaign. Because he’s paid on contingency, he’ll make money only if he wins in court. It’s worth the risk, Houghtaling says, because the fight feels personal. Some of his closest friends are chefs who’ve had to shut down their restaurants. And he’s always appalled when insurers refuse to pay claims for disasters. After Sandy, he says, lawyers for the industry “personally had a hand in destroying people’s lives.”

Since 2018, Houghtaling has appeared at a series of trade shows sponsored by the contracting industry, debating Steven Badger, a partner at Zelle who’s represented insurance companies since the early 1990s. Over the years, Badger’s ferocious advocacy has earned him the nickname Darth Vader, and he leans into the moniker. At the trade shows, costumed Stormtroopers sometimes escort him around, and he keeps a Vader helmet on a shelf in his law office—a gift from Houghtaling, who owns a collection of vintage Star Wars memorabilia.

Their debates tend to follow a pattern. As the crowd cheers him on, Houghtaling grows increasingly theatrical, prowling the stage or bellowing into his microphone. He compares elements of property-insurance law to the gravest injustices in human history, from the slave trade to the Holocaust. “I let him rant and rave,” Badger says. “I’ll jump in when I have a point to make.” Before the pandemic, Houghtaling held tutorials for lawyers and contractors, teaching them how to avoid what he terms “Badger traps”—clever maneuvers Badger and other industry lawyers use to win cases. But the pair have also become friends, and these days they speak sometimes multiple times a week, discussing the business-interruption dispute.

The litigation has been a boon for Zelle. In the early weeks of the pandemic, Houghtaling spread the word to reporters and government officials about the memo describing the insurance industry’s plans to fight business-interruption claims. “It was great marketing for us,” Badger says. “People called us up wanting the paper.” In the spring and summer, the firm went on a hiring spree, adding eight attorneys to its 75-person legal staff.

Houghtaling says he’s unhappy about the thousand-plus surge of cases. Many of them, in his view, make flimsy arguments centered on policies with virus exclusions, giving the industry a chance to notch wins that could influence judges in future cases or discourage policyholders from filing claims. When he sees a flawed suit, he calls the lawyers who filed it, urging them to reconsider. This rarely goes well. “Some of them are making arguments that are completely stupid,” Houghtaling says. “I don’t have control, as much as I’ve tried to.”

Over the summer, a group of plaintiffs’ attorneys, including some from well-established firms, sought to consolidate hundreds of the suits in one federal court. The tactic is often used by plaintiffs’ lawyers, with the aim of limiting costs and pressuring defendants. Unsurprisingly, the industry fought the consolidation. But it had some strange bedfellows: Houghtaling and other veteran coverage litigators, some of whom argued in court that variations in how business-interruption policies are written made it unfeasible to consolidate so many disparate cases.

“It was very weird,” says Amy Bach, executive director of United Policyholders, an advocacy group that usually battles insurers. “We were on the same side as the insurance companies. We’re surgeons on my team. We knew that there’s no way it’s going to benefit policyholders to have everything consolidated.” A panel of judges rejected the consolidation effort, though they ultimately approved a much narrower grouping of some of the lawsuits.

Houghtaling says litigation is only one piece of his broader strategy. He even withdrew the suit against Chubb (which had filed a motion to dismiss) after the Simon Wiesenthal Center decided to wait and see whether the company would make a payment. In recent months, he’s been trying to persuade Badger to work with him on a compromise—what he calls “my grand scheme.” He’d like the insurance industry to support legislation proposed by U.S. Representative Mike Thompson, a Democrat from California, calling for the federal government to reimburse insurers for business-interruption payouts. “I want to convince Steve that HR7412 is good for him and his clients—and good for everybody,” Houghtaling says.

Passing such legislation would be an uphill battle under a Congress that hasn’t even been able to agree on a new pandemic relief package. In any case, Badger isn’t interested in the compromise. “I applaud John’s efforts to try to look for some broader solution, but that solution cannot involve the insurance industry agreeing to pay clients that are not otherwise covered,” he says. “Every plaintiffs’ lawyer works on a contingency fee, so if there is a program where the insurance industry is paying claims that are not covered and they’re getting reimbursed, there’s no doubt a percentage of that would go to plaintiffs’ lawyers. Is that good policy?”

Houghtaling suspects the industry’s reluctance to compromise stems from its early success in some of the litigation. Over the past few months, federal judges in California, Texas, and several other states have dismissed business-interruption lawsuits, albeit mostly ones involving virus-exclusion clauses. He’s ebullient, though, about one recent success: In August a federal judge in Missouri rejected an effort by Cincinnati Insurance Co. to dismiss a business-interruption case, ruling that a group of plaintiffs led by the Studio 417 hair salon in Springfield had “adequately stated a claim for direct physical loss.” When he saw the ruling, Houghtaling texted Badger the iconic “Show me the money” clip from Jerry Maguire.

Badger and Houghtaling agree that it will be a few more months before it’s truly clear which side has the upper hand, as more judges reach decisions in the first wave of cases. “If the insurance industry wins most of them, I think that’ll take the wind out of the sails of the plaintiffs’ lawyers, and it’ll probably go away fairly quickly,” Badger says. “If the plaintiffs’ lawyers start to get traction with victories, it could drag on for years.”

A yearslong legal battle might not be much help to struggling businesses. In September, the New York retail chain Century 21 Stores filed for bankruptcy, citing its insurance provider’s refusal to pay $175 million in business-interruption claims. And almost 20,000 restaurants have already closed permanently because of the pandemic, according to data compiled by Yelp. “It saddens me to death,” says Thomas Keller, a renowned chef in California who’s sued his insurer over business-interruption coverage. “It’s an enormous amount of employees in businesses in dire need of some type of protection.”

The pandemic has also taken a toll on some major insurance companies. Chubb, for example, reported $1.2 billion in second-quarter losses stemming from the crisis. Others are faring better. Travelers Cos. said in October that its pandemic-related losses were being offset by favorable trends linked to lockdowns, as people stayed at home and got into fewer car accidents. And Cincinnati Financial Corp., the parent company of Cincinnati Insurance, announced profits of $484 million for the third quarter, almost double what it earned over the same period last year.

For all his personal wealth, Houghtaling considers himself the underdog in this fight. “If I hit them 1%—enough to buy a fleet of Ferraris and a private jet and houses all over and a humongous mansion with tens of millions in antiques in it—they don’t care. It’s a drop in the bucket,” he says. “I’m a nobody. I’m not a microscopic something on a gnat. I’m nothing.” —With Katherine Chiglinsky

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