Special Report

Shutdown: The Coronavirus

Lawmakers, Legal Experts Clash Over Much Needed Business Interruption Insurance Coverage for Small Businesses

Photo courtesy of Andy Husbands. Andy Husbands, the owner of The Smoke Shop in Boston, has seen his business turned upside down by COVID-19.

On March 11, as COVID-19 spread across the world, Italy closed all shops and restaurants nationwide.  The next day, as the United States reported more than 1,000 cases, a group of chefs discussed the widening pandemic over dinner in a sprawling Romanesque mansion on New Orleans’ historic St. Charles Avenue.

The elegant dinner party was hosted by John Houghtaling, a partner at Gauthier, Murphy and Houghtaling, who had built a name for himself by representing property owners against insurers following Hurricane Katrina and Superstorm Sandy, securing hundreds of millions of dollars for the victims of those crises.

That afternoon, a Texas-based attorney passed along a memo to Houghtaling describing how some insurance companies planned to reject claims filed by restaurants and other businesses that would be forced to close to stop the spread of the virus. When the chefs arrived, he had to break the bad news. While many of them had insurance policies designed to protect them from unexpected interruptions in their operations,   they shouldn’t expect to see a payout.

The memo outraged Houghtaling, who realized that thousands of small business owners, particularly restaurant owners, would be hit hard by the pandemic and see no relief from insurers. He decided right then that he would take action, and the party quickly became a strategy session.

“Every day I get calls about the restaurant industry failing, so we need a quick solution,”  Houghtaling said.

“They need it,’’ he said of the insurance payouts.  “It’s critical. If they do not get it, they will fail.”

On March 17, Houghtaling filed a lawsuit on behalf of New Orleans Restaurant Oceana Grill against its insurer, demanding payment of the restaurant’s business interruption insurance during the coronavirus pandemic, the first suit of its kind in the nation. The lawsuit highlights a legal strategy embraced by lawyers and restaurant owners hoping to salvage an industry that is reeling from the effects of coronavirus shutdowns.

About 30 percent of small businesses hold business interruption insurance policies, but many have learned that their insurer will not cover shutdowns caused by the coronavirus pandemic. Many business interruption policies have explicit virus exclusions, clauses that bar business interruption coverage caused by viruses, a common addition since the mid-2000s.

In other cases, business owners have learned that they do not technically qualify for coverage without physical damage to their property. Because Oceana Grill does not have a virus exclusion, Houghtaling’s lawsuit argues that the infectious virus does qualify as physical loss.

A handful of similar lawsuits have cropped up across the country, and eight state governments have proposed bills that would force insurers to pay. Notably, the Chikasee and Choctaw nations have filed suits against their insurers, and Houghtaling himself filed another suit on behalf of celebrity chef Thomas Keller.

But while the stakes are high for attorneys like Houghtaling, small business owners are fighting for their lives against a ticking clock.

Twenty eight states have mandated that restaurants suspend dine-in services, and many more are impacted by shelter in place orders. By the end of March, the National Restaurant Association estimated that roughly 30,000 of the more than 1 million restaurants in the U.S. had to close permanently as a result, and projected another 110,000 more would shutter in April.

Many restaurant owners fear that legal settlements and new legislation may come too late. Many are already running out of cash and nearly out of time, barely holding on financially as these legal and political squabbles play out around them.

“I’ve been through 9/11, 2008, 10-foot snowstorms, a lot of this stuff,” said Andy Husbands, a Boston restaurateur who has been told that his insurer is unlikely to pay out his business interruption insurance policy.

“We knew we would get past it, we just had to work hard,’’ Husbands said of previous crises. “We knew the snow would melt. We don’t know what the future holds now.”

The insurance industry argues that its reserves, about $820 billion, cannot cover all of the business interruption claims arising as a result of the pandemic. Many insurers are calling for more government relief.

“There are certain issues that just cannot be 100 percent supported by the insurance industry,” said Tyler Bartosh, Vice President of Sales at Top o’ Michigan Insurance Solutions.

Bartosh suggested the creation of a partnership in which the federal government would share risk with the insurers. Without such collaboration, he warned, the insurance industry could be overwhelmed by the business interruption claims.

“I definitely think there’s a position for the industry and federal government to work together to figure out how we can protect against any future pandemic,”he said.

In the meantime, the lawsuits filed by Houghtaling and others are winding their way through the courts. For the insurance industry, this boils down to simple contract law and interpretation.

Generally speaking, for an interruption policy to kick in, some form of physical damage or the threat of it must be the cause of the business shutdown. Despite the fact that the coronavirus can contaminate surfaces and create unsafe environments, it may not qualify as physical damage.

“The key issues will be whether coronavirus constitutes physical loss or damage under the policy, because those are the triggering words,” said Steven Badger, a Texas-based attorney who represents a number of insurers, and shared the memo with Houghtaling that night in March.

Recognizing the importance of the restaurant industry, and how quickly it could collapse, Houghtaling began working quickly to turn up the heat on insurers and get relief to restaurants.

What followed was a flurry of legal and political actions. Houghtaling and seven celebrity chefs founded the Business Interruption Group, a non-profit organization designed to pressure insurers and get information to the public and Washington. Although the results remain to be seen, Houghtaling, whose firm played a leading role in the $246 billion class action suit against tobacco companies in 1998, said that this legal fight would “dwarf tobacco in terms of its significance.”

“We are demanding the insurance industry pay the policies they owe,” Houghtaling said. “Certain [business interruption insurance] policies have exclusions for viruses, but many do not. They need to pay the ones that do not.”

Houghtaling dismissed concerns raised by insurers who argue that their reserves can’t cover all of the payouts sought by shuttered businesses.

“My argument is, when the Titanic was sinking, and they didn’t have enough lifeboats for everyone, the captain didn’t say ‘well, we don’t have enough so we aren’t going to lower any,’ he lowered the ones that he had,” Houghtaling said. “We need to lower the lifeboats that we have and that we paid for, and then we need a solution to save the rest.”

James Duffy is an NYU undergraduate journalism student in Prof. Rachel Swarns’ Advanced Reporting: Law & Order


Tags


Other Stories in Special Report: Shutdown: The Coronavirus

Life returns to the East Village

Quincy Walter May 5, 2021

Reopening for Ramadan

Hassan Abbas May 4, 2021

And the band played on

Xavier Bartaburu May 2, 2021

Queens residents mourn at Covid vigil

Annie Burky May 2, 2021

Floating for Free: COVID and the Staten Island Ferry

Trish Rooney May 2, 2021

COVID-19 has left many Black and Hispanic landlords in serious debt

Norah Hogan April 24, 2021

Village East movie theater reopens to the public

Inga Parkel April 13, 2021

Chinese adoptions halted by COVID

Inga Parkel March 24, 2021

Remote is the new workplace normal

Courtney Guarino March 24, 2021

One year of COVID-19 in New York City

Michelle Diaz March 16, 2021

COVID long haulers deal with lingering symptoms and doubt

Kaity Assaf March 5, 2021

Pandemic Weddings

Chuyan Jiang March 2, 2021

Pandemic fatigue 101

Chuyan Jiang February 28, 2021

Yankee Stadium becomes COVID-19 vaccine site for Bronx residents only

Michelle Diaz February 24, 2021

The queer community rallies behind their sacred spaces closed because of COVID-19

Inga Parkel February 23, 2021

Street vendors struggle as New Yorkers and tourists stay home

Norah Hogan February 13, 2021

Keeping the faith in COVID-19

Courtney Guarino February 3, 2021

Little Italy’s restaurants need indoor dining to survive pandemic

Michelle Diaz February 2, 2021

Stray pets find homes and love during pandemic

Inga Parkel February 1, 2021

No Actors, But the Show Goes On

James Pothen December 5, 2020

New York City, a place of refuge 

Edith Rousselot December 4, 2020

Commuting in a pandemic world

Michelle Diaz December 3, 2020

Battling food insecurities during a pandemic

Courtney Guarino December 3, 2020

Adaptation

Justin McGown December 3, 2020

Honk!: Cars earn a special spot in 2020

Luana Harumi December 3, 2020

Working out looks very different during a pandemic

Chuyan Jiang December 2, 2020

One kitchen’s transformation in the age of isolation

Isabel Beer December 2, 2020

Nursing homes are filled with sadness and loss during pandemic shut down

Inga Parkel December 1, 2020

The show goes on

Norah Hogan December 1, 2020

Loyal members help keep independent cinemas afloat

Courtney Guarino December 1, 2020

Musicians deal with the reality of no live shows as covid takes center stage

Paola Michelle Ortiz December 1, 2020

 Black Friday’s Aftermath

Sughnen Yongo-Okochi November 30, 2020

The Spirit of Little Haiti

Savannah Daniels October 14, 2020

Small business owners hope for future relief

Courtney Guarino October 2, 2020

Brooklyn Book Festival held virtually

Chuyan Jiang September 28, 2020

NYC Restaurant owners worry about maintaining business during winter 

Isabel Beer September 27, 2020

The pandemic is causing mental health struggles for many Latinos

Paola Michelle Ortiz September 24, 2020

Politically divided family can agree on one thing, rallies are bad during a pandemic

Michelle Diaz September 23, 2020

New Yorkers are vulnerable to mental issues due to pandemic

Sughnen Yongo-Okochi September 23, 2020

Healthcare professionals struggle with Trump’s decisions during pandemic

Tori Luecking September 23, 2020

Some Americans Say “Not So Fast” on Operation Warp Speed

James Pothen September 23, 2020

Trump voters unfazed by morality of Trump’s Covid response

Norah Hogan September 22, 2020

Trump rallies continue, despite the rising Covid-19 death toll

Isabel Beer September 22, 2020

Latinos weigh in on President Trump’s management of the pandemic

Paola Michelle Ortiz September 21, 2020

Fast track vaccine causes fear

Kaity Assaf September 21, 2020

It’s business as usual at McSorley’s Old Ale House

Tori Luecking September 20, 2020

Trump defiance to hold indoor rallies amidst COVID-19 sparks polarized responses 

Courtney Guarino September 20, 2020

NYC Cafes and restaurants try and survive the pandemic

Isabel Beer September 19, 2020

A typical afternoon at Shade Bar NYC

Kaity Assaf September 19, 2020

West Village staple, Caffe Reggio, remains open for outdoor dining in the wake of coronavirus restrictions 

Norah Hogan September 19, 2020