This article was first published in Law360.
Colleges and universities impacted by losses as a result of the COVID-19 state and local government shutdown orders and other restrictions would be well advised to review available property insurance policies for potential business interruption coverage and monitor the progress of two recently filed proposed class actions seeking relief for these types of losses.
Hundreds of lawsuits have been filed across the country, in state and federal courts alike, alleging that insurers have failed to cover various policyholder plaintiffs' losses in the face of the COVID-19 pandemic and state and local government shutdown orders and other restrictions.
Many of these existing lawsuits have been filed by restaurants, hospitality services, salons and other public-facing businesses that were forced to close or to operate at limited capacities with severe restrictions and reconfigurations when state and local governments issued shutdown orders.
Now, though, there are new policyholder plaintiffs -- colleges and universities -- joining the ranks of others suing their insurers in the face of continuing business interruption losses. And to date, the insurance companies' responses have remained the same: coverage denied.
Institutions of higher education have been hit particularly hard by the pandemic and have taken extensive action to protect those on their campuses. More than 1,100 colleges and universities have cancelled in-person classes and taken all classes online. Student activities of all kinds, including competitive sports, have been cancelled at many colleges and universities.
Some campuses have entirely closed and remain closed. All of this has come at a huge financial cost for colleges and universities as they face refund requests for room and board costs and the potential impact to other sources of revenue such as on-campus events and competitive sports seasons. The impact to many colleges and universities began in the spring and is still continuing today.
On July 23, a group of colleges and universities in the Midwest hit insurers Zurich American Insurance Company and Factory Mutual Insurance Company with proposed class actions over the insurers' respective denials of any coverage for the educational institutions' business interruption losses.
The two complaints filed in federal court seek, first, a declaratory judgment that the all-risk property insurance policies insuring their campuses and operations should cover the millions of dollars in financial losses the colleges and universities have faced amid the pandemic and, second, a judgment that their insurers have breached their contractual duties on account of the coverage denials.
Rockhurst University v. Factory Mutual Insurance Company
Filed in the U.S. District Court for the Western District of Missouri on July 23, Rockhurst University et al v. Factory Mutual Insurance Co. is led by Rockhurst University, a private Jesuit school in Kansas City, Missouri, and Maryville University, located in St. Louis, Missouri.
Their complaint alleges that Rockhurst and Maryville ceased normal operations and effectively closed their respective campuses beginning on March 16. Both Rockhurst and Maryville's campuses remain closed as of the filing date of the complaint.
According to Rockhurst and Maryville, their "insured property was rendered unsuitable for its intended use and was subject to a variety of limitation, restrictions, and prohibits, including by orders of applicable government entities" and the associated business interruption losses should be covered under their property insurance policies. These impacts to Rockhurst and Maryville allegedly continued at least through the filing date of the complaint.
Rockhurst and Maryville allege that they promptly made a claim for coverage under their all-risk property insurance policies, but were refused by their insurer, Factory Mutual Insurance Company. Rockhurst and Maryville even go as far as to claim that they were actively discouraged by insurance representatives from filing claims for coverage at all.
According to the complaint, Factory Mutual has not paid any funds to date and has indicated that any coverage, if provided at all, will be limited to the significantly sublimited communicable disease coverage in the relevant policies -- which Rockhurst and Maryville allege will fall far short of covering expected business interruption losses.
The policies' coverage for interruption by communicable disease applies when an insured location "has the actual not suspected presence of communicable disease and access to such location is limited, restricted or prohibited by: (1) an order of an authorized governmental agency regulating the actual not suspected presence of communicable disease; or (2) a decision of an Officer of the Insured as a result of the actual not suspected presence of communicable disease."
As cited in the complaint, the relevant policies define "communicable disease" as disease "transmissible from human to human by direct or indirect contact with an affected individual or the individual's discharges."
Rockhurst and Maryville allege that while Factory Mutual has acknowledged that COVID-19 is a communicable disease under the policies, Factory Mutual has also argued that Rockhurst and Maryville must establish the presence of the virus on their campuses and that the confirmed presence of the virus was the reason for a shutdown order or other restriction in order for this contamination coverage to apply. Rockhurst and Maryville assert that Factory Mutual's position is contrary to the policy language.
The action for declaratory judgment and breach of contract relies not only on the policies' interruption by communicable disease coverage, but also on the policies' business interruption time element coverage, decontamination costs coverage, civil or military authority coverage, and ingress and egress coverage as follows:
- The business interruption time element coverage includes lost earnings or lost profits "directly resulting from physical loss or damage of the type insured." The time element coverage also includes extra expense, which are "expenses to temporarily continue as nearly normal as practicable the conduct of the Insured's business."
- Decontamination costs include "the increased cost of decontamination and/or removal of ... contaminated insured property" if "insured property is contaminated as a direct result of insured physical damage and there is in force at the time of the loss any law or ordinance regulating contamination due to the actual not suspected presence of contaminants."
- An interruption to business caused by an order from a civil or military authority is included in the civil or military authority coverage. Specifically, the "the Actual Loss Sustained and [extra expense] incurred by the insured during the [period of liability] if an order of civil or military authority limits, restricts or prohibits partial or total access to an insured location provided such order is the direct result of physical damage of the type insured at the insured location or within five statute miles/eight kilometers of it."
- The ingress and egress coverage requires Factory Mutual to pay for "the Actual Loss Sustained and [extra expense] incurred by the Insured ... due to the necessary interruption of the Insured's business due to partial or total physical prevention of ingress to or egress from an insured location" provided that "such prevention is a direct result of physical damage of the type insured to property of the type insured."
In its request for relief, the complaint seeks judgment that (1) Rockhurst and Maryville and the class have suffered loss that is covered under their policies; (2) Factory Mutual is obligated to pay; and (3) Factory Mutual has so far failed to pay for those losses and, therefore, Factory Mutual has breached its contractual duties to the plaintiffs.
This suit further seeks to represent a nationwide class for all institutions of higher education that are covered by one of Factory Mutual's policies in effect during the pandemic, as well as a Missouri subclass for all institutions of higher education that purchased one of Factory Mutual's policies in Missouri.
Benedictine College v. Zurich American Insurance Company
Also filed on July 23 in the U.S. District Court for the District of Kansas was another complaint led by Benedictine College, a private liberal arts college located in Atchison, Kansas. According to the docket, Benedictine is represented by Stueve Siegel Hanson LLP, Miller Schirger LLC Shaffer Lombardo Shurin PC and Langdon & Emison -- Lexington, the same firms that filed the Rockhurst action.
Additionally, Benedictine's allegations in the complaint are nearly identical to those in the Rockhurst action.
Benedictine ceased normal operations and closed its campus in mid-March. Residence halls were closed, students were required to vacate campus, and room and board refunds have been issued. Like Rockhurst and Maryville, Benedictine alleges that it has suffered the effective loss of the use of its campus and property for its intended purpose and that it has experienced associated business interruption losses at least through the filing date of the complaint.
Benedictine also made a timely claim for coverage under its all-risk property insurance policy, but that claim was similarly denied by its insurer, Zurich American Insurance Company. The Zurich policy at issue contains business interruption time element coverage, civil or military authority coverage, ingress and egress coverage, and decontamination costs coverage, as follows:
- The business interruption time element coverage includes the actual loss sustained due to the necessary suspension of operations caused by direct physical loss of or damage to the insured property. The actual loss sustained corresponds to the gross earnings loss, which is income derived from the Insured's business activities.
- The time element coverage also includes extra expense, which are expenses incurred "to resume and continue as nearly as practicable the Insured's normal business activities that otherwise would be necessarily suspended" due to direct physical loss of or damage to property.
- The civil or military authority coverage includes interruption to business as a result of an order from a civil or military authority. Specifically, "the actual Time Element loss sustained by the Insured ... resulting from the necessary Suspension of the Insured's business activities at an Insured Location if the Suspension is caused by order of civil or military authority that prohibits access to the Location." The governmental order must result from a response to "direct physical loss of or damage caused by" a cause of loss covered by the policy.
- The ingress and egress coverage includes "the actual Time Element loss sustained by the Insured ... resulting from the necessary suspension of the Insured's business activities at an Insured Location if ingress or egress to that Insured Location by the Insured's suppliers, customers, or employees is prevented by physical obstruction due to direct physical loss of or damage caused by" a cause of loss covered by the policy.
- Decontamination costs include "the increased cost of decontamination and/or removal of ... Contaminated Covered Property" if "Covered Property is contaminated from direct physical loss of or damage caused by" a cause of loss covered by the policy.
According to the complaint, however, the Zurich policy also purports to exclude coverage for "contamination, and any cost due to Contamination, including the inability to use or occupy property or any cost of making property safe or suitable for use or occupancy."
Notably, while the policy's original definition of "contamination" included the term "virus," an amendatory endorsement to the policy expressly removed the term "virus" from both the definitions of both "contamination" and "contaminant."
Per the amendatory endorsement, "contamination" now includes "any condition of property due to the actual presence of any Contaminant(s)" and "Contaminant(s)" is now defined as "[a]ny solid, liquid, gaseous, thermal or other irritant, including but not limited to smoke, vapor, soot, fumes, acids alkalis, chemicals, waste (including material to be recycled, reconditioned or reclaimed), other hazardous substances, Fungus or Spore."
According to the complaint, the Zurich policy allegedly does not contain "an exclusion for 'pandemics,' 'communicable disease,' or anything similar."
The Benedictine action is styled as a proposed class action, like the Rockhurst action. If approved, Benedictine would become the class representative for a nationwide class for all institutions of higher education that are covered by one of Zurich's policies in effect during the pandemic. The proposal also seeks a Kansas subclass for all institutions of higher education that purchased one of Zurich's policies in Kansas.
With these lawsuits filed and the initial arguments laid out, it is likely that other colleges and universities may file suit, especially as it is still unclear whether any students will return to campus in the fall for inperson classes and how the pandemic will affect international enrollments in particular. Many have recently made the decision to continue online instruction into the fall semester.
Their success, like the other business interruption lawsuits that have been streaming into courts since late March, will depend on the specific policy language and circumstances in each case. Battles will likely ensue over the proper interpretation of physical loss or physical damage provisions, as well as any exclusions that insurers may point to in order to try to defeat coverage.
Independent of the ongoing business interruption lawsuits, colleges and universities may wish to reexamine their risk management and insurance programs going forward with an eye toward unique insurance solutions specific to outbreaks and pandemics.
For example, the University of Illinois at Urbana-Champaign reportedly previously purchased insurance to protect against revenue loss due to a drop in international student enrollment from certain countries.
According to the policy, the university can seek coverage if it can demonstrate an 18.5% loss in tuition revenue brought in by the relevant students compared to the year prior and that the drop in enrollment can be attributed to one of a predetermined list of causes, one of which is a pandemic.
In the wake of COVID-19 state and local government shutdown orders and other restrictions, colleges and universities should review available property insurance policies for potential business interruption coverage and monitor developments in the recently filed proposed class action lawsuits in weighing whether or not to seek relief in court.
In addition, creative insurance solutions like those employed by the University of Illinois may be something for an increased number of higher education institutions to consider as colleges and universities across the country contemplate their options in managing the risk of any future outbreaks and pandemics.