Thomas Humphreys, CPCU, CLU, ChFC, CIC, director of the Risk Management and Insurance Center at Olivet College, was recently quoted in an article published by the Lansing State Journal, “Owners ‘terrified’ they will lose businesses during pandemic as insurers refuse to pay.” The article was published on Aug. 7, 2020 and written by Megan Banta, enterprise reporter for the Lansing State Journal.
Owners ‘terrified’ they will lose businesses during pandemic as insurers refuse to pay
Megan Banta Lansing State Journal
LANSING – Should insurance companies pay up to help restaurants and other businesses recover money they lost during state-mandated shutdowns because of the pandemic?
Nick Gavrilides says they absolutely should.
The owner of Soup Spoon Cafe on Lansing’s east side and the Bistro in Williamston has taken his insurer, Michigan Insurance Company, to court after the company denied a claim for $650,000 to cover two months of losses.
Ingham County Circuit Court Judge Joyce Draganchuk sided with the insurer early last month, calling some of attorney Matthew Heos’ arguments nonsense.
Draganchuk ruled on July 1 that some tangible change to a property is required to trigger coverage intended to replace lost income during an interruption of business and that a virus exclusion in the policy would have barred coverage even if Gavrilides had alleged physical damage.
Industry leaders have called the ruling a big win for insurers, who estimate they’d have to pay out hundreds of billions in claims if Draganchuk or another judge decides against them.
“It would essentially bankrupt the industry,” said Tom Humphreys, who directs the Risk Management and Insurance Center at Olivet College.
Gavrilides pointed out the alternative is restaurants and other small businesses, which are he called the backbone of communities, going bankrupt. There needs to be a solution for business owners who paid premiums for years expecting a safety net during hard times.
“If the solution can’t come from the coffers of the insurance companies making good on people who kept up with their premiums, then there has to be a solution from someone,” Gavrilides said.
Gavrilides is appealing the ruling. Heos filed a claim of appeal Tuesday, two weeks after Draganchuk issued a written order granting the insurer’s motion for summary disposition, which effectively dismisses the case.
Attorney: Facts, law don’t support claim
Gavrilides sued Michigan Insurance Company in May after the insurer denied his claim for business interruption coverage.
Gavrilides and Heos argue the governor’s order to close dine-in services, though necessary and appropriate under a duty to protect health and welfare, caused a loss through inability to use the property.
Henry Emrich, an attorney for Michigan Insurance Co., said loss of use doesn’t trigger coverage. Only direct physical loss or damage would do that, Emrich argued.
Draganchuk sided with Emrich and the insurer, calling the argument that the claim meets the physical requirement because patrons couldn’t physically dine in “simply nonsense.”
“Whether we’re talking about the cause for the suspension or the cause for the loss or the damage, it is clear from the policy coverage…that only direct physical loss is covered,” Draganchuk said during the July 1 hearing.
The dispute boils down to whether business interruption policies can be applied to instances when there is no physical damage or destruction to a restaurant or store that is being prevented from conducting business as usual.
Humphreys said these kinds of policies exist to cover losses when businesses cannot operate, replacing income for a specified time and dollar amount.
The key in triggering coverage, he said, is what caused the business to shut down. That typically is physical damage to the property, such as a fire or tornado causing damage that takes time to repair.
There’s a provision related to civil authority and governmental actions, but that also must be a covered cause of loss, Humpheys said.
He said if a fire at a neighboring property let off toxic fumes and a business had to evacuate, that would trigger coverage because it causes physical damage. But construction closing the street in front of a business wouldn’t trigger coverage, he said, comparing that to the shutdown as a cause that isn’t covered.
The policy is clear that the damage “has to be something that physically alters the property” in order to trigger coverage, Draganchuk said.
Emrich said he was sympathetic to the plight of Gavrilides and other business owners who have lost income because of the pandemic, though he added it’s harder but “not impossible to operate [a commercial property] in the future under our ‘new normal.’”
Neither the facts nor the law support Michigan Insurance Co. fulfilling the claim, he said.
“We don’t create coverage because somebody thinks they ought to have coverage,” Emrich said.
Humphreys echoed that, saying while “insurance companies and most people feel bad,” the policies simply aren’t meant to cover a loss like this and the language is “pretty solid.”
“Most people think when they buy insurance it covers ‘everything,’” he said.
Insurance policies can’t cover everything, he added, or they would be too expensive.
Expert: Coverage still important
That doesn’t mean people should stop paying premiums, Humphreys said.
Business interruption coverage is important, he said, and “there are a lot of situations where it would pay.”
“People need to really read their policies to understand what they have before loss happens so they know what it will and won’t pay for and to work with their agent to make sure they have appropriate coverage,” Humphreys said.
That’s exactly the difference of opinion, though, because business owners thought they did have appropriate coverage, Heos said.
In this particular case, there is an imminent threat of damage because of the pandemic within a mile, he said. He pointed to Sparrow Hospital and a testing site just down the road, comparing it to a case in Colorado where a hotel had to remain closed because of a precariously perched rock on a nearby mountain.
In an interview at Soup Spoon about a month after the ruling, Heos added there have been physical changes to the café, including new outdoor seating and a patio area.
Business owners ‘terrified’
Gavrilides is going to keep pushing. He knows he isn’t the only one facing a large loss and little to no opportunity to recover money if insurance companies won’t pay out, and he’s heard from other business owners who had similar claims denied.
“Every business owner I know right now is terrified they’re going to lose their business,” he said.
That’s particularly frustrating because no one – including business owners – is at fault for the pandemic, Gavrilides said.
And the potential fallout could permanently cost Lansing many of its restaurants, which Gavrilides described as the “crown jewel of the city.”
Heos added insurance companies have an opportunity here, describing business interruption coverage as “a vehicle that would greatly serve American businesses to get through it if paid out.”
He’s sympathetic that all the claims are coming at the same time but suggested the federal government could buy up the policies like they bought up the subprime mortgages.
Humphreys said that’s likely a moot point – the language in the policies is solid, and it isn’t going to change unless a court rules against the insurance companies.
Like Gavrilides, the insurers aren’t likely to give up, Humphreys said.
While they want to do what is less expensive, they’re more likely to chance spending less money to get a definitive answer in their favor, he said.
“This is, I think, one of those hills that companies are going to die on defending,” Humphreys said.
Contact reporter Megan Banta at email@example.com. Follow her on Twitter @MeganBanta_1.