What’s the Outlook for Insurance Producers’ Liability if Their Clients’ COVID-19 Business Interruption Claims are Denied?
Not long after governors and mayors issued orders shutting down non-essential businesses as a safeguard against the spread of COVID-19, we read countless emails and blog posts about how those entities’ business interruption coverages might apply to businesses shut down by the pandemic. Most writers conclude the ISO forms almost certainly will not indemnify the insured for those costs, and while there undoubtedly will be exceptions, I won’t muck about trying to add to that consensus here.
Instead, I’m curious about what happens next, when the owner of a restaurant or plastics manufacturer looks for that indemnity from the company’s insurance producer. It’s hardly unusual for a company with an uncovered loss to look to its insurance agent as some sort of a fallback umbrella policy. What happens when a client asks, “If my policy doesn’t cover this shutdown, why didn’t you get me a policy that would? And why didn’t you tell me about this gap in coverage?”
For starters, I’ve read more than one errors and omissions carrier’s admonition to its policy-holding producers that the best response to a client’s inquiry about business interruption coverage for a COVID-19 shutdown is to: (1) file the claim if requested; and (2) offer no advice on whether the claim will be covered. This frankly is sound advice for every producer no matter what the claim. Let the carrier make the coverage decisions. Same for advocating for clients in the event of a denial; often that effort gets turned on the producer when it (almost inevitably) fails.
So what will the circumstance be when a client pursues a failure-to-procure action against the producer should a COVID-19 business interruption claim be denied? Each lawsuit’s allegations will vary, but certain rules should apply to allow a robust legal defense against the claim.
There might be a statute of limitations defense right off the bat. Many policies contain the ISO “Exclusion for Loss Due To Virus or Bacteria,” a form developed some 15 years ago following the SARS pandemic. If the current policy is a renewal that includes the virus exclusion, the insured will likely be held to have sufficient knowledge of its presence. That knowledge will commence the two-year statute of limitations on any action alleging the producer negligently procured coverage at the time of the first procurement, not just the most recent. In many instances this argument may end the case.
See, American Fam. Mut. Ins. Co. v. Krop, 2018 IL 122556, holding that because insurance customers can read and understand their insurance policies, the discovery rule will typically not delay the two-year statute of limitations for the negligent failure to procure insurance; RVP, LLC v. Advantage Ins. Services, Inc., 2017 IL App (3d) 160276, holding that the statute of limitations began running upon receipt of prior policy, when renewed coverage was the same.
Duty defenses are available on several fronts. It will be difficult for the insured to establish a duty to have procured coverage that would respond to the COVID-19 business shutdowns. Even aside from the virus exclusion’s presence, the insured faces the difficult task of establishing “direct physical loss of or damage to” its property, a condition to coverage in essentially every commercially available policy. The issue for a producer will be whether the procured policy should have avoided that “direct physical loss” requirement.
Fortunately, Illinois law does not require an insurance producer to procure policies that cover every risk possible for the insured. The statute defining duty only requires “ordinary care and skill in procuring … the coverage requested by the insured or proposed insured.” 735 ILCS 5/2-2201(a). And the Illinois Supreme Court further explains that the “request” required in the statute must be specific, not merely a generic request that the producer ensure his client is adequately covered. “Section 2–2201 does not require an agent to obtain the best possible coverage for a customer, but only requires the agent to exercise ordinary care and skill in obtaining the coverage requested by the insured or proposed insured. … [S]ection 2–2201 does not obligate an insurance producer to procure a policy that is not specifically requested by the insured.” Skaperdas v. Country Casualty. Ins. Co., 2015 IL 117021, ¶¶39, 40.
See also, Friederich v. Bd. Of Edu. of Comm. School Dist. No. 304, 59 Ill.App.3d 79 (1978), holding that the term “adequate insurance” is too vague to be enforced; Furtak v. Moffett, 284 Ill.App.3d 255 (1996), holding a promise that the policy would “fully cover” the home is “simply too vague to be enforceable;” Shults v. Griffin-Rahn Ins. Agency, Inc., 193 Ill.App.3d 453, 458 (1990), refusing on vagueness grounds to impose a duty to procure coverage limits which were “reasonable” or “the best policy;” Plumb v. Fluid Pump Service, Inc., 124 F.3d 849 (7th Cir. 1997), holding, “… brokers are not required to sell only full coverage to insureds. Such a policy would overrule the clear law that insureds have the primary responsibility to determine their own insurance needs.”
In the absence of extraordinary procurement circumstances, wherein the insured proves it made a “specific request” for coverage designed to be triggered by a virus-created business shutdown, the duty defense to an insured’s negligent-procurement allegations should prove successful. Even if that unusual sort of request had been made, any producer who simply notified the client that the requested coverage was reasonably unavailable met the duty required by Illinois law. Skaperdas, ¶¶39, 40.
Finally, a client may not successfully assert a breach of duty for the producer’s failure to explain a policy’s terms and conditions. The producer thus had no duty to explain how the “direct physical loss of or damage to” property requirement or the virus exclusion might affect business interruption coverage caused by a pandemic.
See, I.E.C. v. Glenview Ins. Agency, Inc., 379 Ill.App.3d 434 (2008), holding no duty to advise client “of the import and meaning of the provisions of the insurance policies which have previously been faithfully procured according to the customer’s requirement;” Pittway Corp. v. American Motorists Ins. Co., 56 Ill.App.3d 338 (1977), holding that an insurance producer has no duty “to advise plaintiff as to the future course of judicial precedent.”
Substantively, insurance producers appear well-positioned to defend a client’s pursuit of alternative relief against them should a COVID-19 business interruption claim be denied.