(Bloomberg Opinion) -- Remember last year’s kerfuffle over whether providers of business interruption insurance would have to pay when local Covid-19 rules forced proprietors to close? The verdict is now in ... and it hasn’t gone well for business owners. In fact, according to the University of Pennsylvania Law School, which has developed a tool to track Covid-related litigation, the insurers have overwhelmingly won.
The controversy arose after most state governments responded to the pandemic with shut-down orders. Many business owners demanded that their insurers compensate them for lost income, but the claims were routinely denied. Business owners sued, and I predicted in this space that they would mostly lose. Most business interruption insurance policies simply don’t cover pandemics.
The number of Covid-related insurance lawsuits is in the four figures, and Penn’s database covers only those where the defendant’s motion to dismiss (or for summary judgment) has been ruled on. Nonetheless, the pattern is clear. Out of 187 cases in federal court where the judge has ruled on the insurer’s motion to dismiss with prejudice (meaning that the plaintiff can’t refile the suit), insurers have won 76% of the time. In several more cases, the court has decreed a narrower dismissal. In only 8% of cases has the insurer’s motion to dismiss been denied.
This pattern holds whether or not the insurance policy in question contains an express exclusion for harm caused by viruses. Plaintiffs have done somewhat better in state courts, but some 70% of claims have been filed in, or “removed” to, federal court. (Why any plaintiff would prefer federal court is unclear, given that state courts have long been friendlier.)
The easiest cases to dismiss have been those where the policy excludes coverage for closures caused by viruses. The business owners nevertheless argue that the state’s emergency mandates, not the novel coronavirus itself, forced the business to shutter. That argument keeps losing. As one federal judge put the point in mid-March, if the shutdown orders stemmed from the virus, the virus was “the predominant cause that produced the loss.”
Even when the policy includes no virus exclusion the suits tend to be dismissed, because courts adhere to the traditional interpretation that business interruption insurance covers losses of income only when there has been physical damage — such as from fire — but not when the premises remain unharmed.
Why then so many lawsuits? Since the 1980s, legal scholars have generally accepted that in a world of perfect information, few if any civil cases would arise, because everyone would be able to predict the winner. Thus plaintiffs would file few lawsuits, and those they did bring would be settled.
But the theory doesn’t always work. Why not? One answer, known as the divergent expectations model, predicts that early plaintiffs might file cases optimistically, but if they lose more often than they win, later parties who could sue on the same issue choose not to waste the resources. The University of Pennsylvania Law School data tell us that this is exactly what has occurred with business interruption suits. Filings peaked in late April of 2020, remained high through early summer, then tailed off rapidly. Volume during the last week of February 2021 was about one-fifth of the level at the height of the pandemic.
This is consistent with the divergent expectations model. Potential plaintiffs now have more information: They know their odds of victory are slim.
I’m not unsympathetic to business owners whose losses will go uncompensated, but the results were predictable. Nobody truly imagines that insurers intended to cover pandemic losses. Pandemic risk is “highly correlated” — meaning that diversification is difficult because the event affects so many of the insured at the same time, while simultaneously harming the insurer’s hedging investments. Hedging pandemic risk through a properly selected portfolio is theoretically possible, but in practice would likely prove difficult. That’s why few companies offer pandemic riders, and those who want to insure against pandemics are often forced into the lightly regulated “excess and surplus lines” market.
True, if it were possible to circumvent these obstacles, a private market in pandemic insurance would be welcome. Insurance has become, in the words of the sociologist Carol Heimer, “one of the main regulatory institutions of contemporary societies.” We tend to think of insurance as promoting moral hazard, but recent literature suggests that by providing incentives to take precautions, insurance can actually minimize risk and enhance enterprise value.
But even as the current emergency wanes, a private market seems unlikely to evolve in the absence of a government backstop. At least that seems to be the view of industry executives, who remain skeptical that pandemic loss insurance, if made available, would be widely purchased — particularly if the Covid-19 shutdown is seen by businesses as a once-in-a-lifetime event.
The government could step in. But public insurance on the model of the government’s anti-terrorism or flood hazard programs seems unlikely for the same reason the private companies are hesitant: the near impossibility of spreading the highly correlated risk. And so instead, we deal with economic losses by way of significant spending bills, even though the spending hasn’t quite followed the contours of the losses.
So, let’s see: We have business income losses due to government-ordered shutdowns, and nobody’s to foot the bill unless the industry in question has powerful friends in politics. Lawsuits are useless because insurance policies don’t offer coverage, and there’s not going to be a public option anytime soon.
Is the answer just "Life is tough"? Let's hope not. In a perfect world, businesses would direct their lawsuits against the entity that caused the losses — in this case, arguably the government. Alas, those lawsuits would likely be barred by sovereign immunity. That's too bad. I'd dearly love to see the government's claim of "necessity" fully ventilated in court.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Stephen L. Carter is a Bloomberg Opinion columnist. He is a professor of law at Yale University and was a clerk to U.S. Supreme Court Justice Thurgood Marshall. His novels include “The Emperor of Ocean Park,” and his latest nonfiction book is “Invisible: The Forgotten Story of the Black Woman Lawyer Who Took Down America's Most Powerful Mobster.”
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