For attorneys pursuing COVID-19-related business interruption claims, one of the chief challenges is the provision in most insurance policies that damages should be caused by a direct physical loss or direct physical damage to the insured property.
In fact, the issue is at the center of much of the insurance litigation between business and insurers in the wake of the pandemic. As the insurance industry publication Risk & Insurance recently wrote, “businesses expected their insurers to provide coverage under their business interruption policies, while insurance carriers claimed that because the pandemic did not inflict physical damage on those businesses, the policy didn’t cover it.”
Although two years have passed since the pandemic began, the article noted, “likely the issue (of business interruption claims) will keep attorneys busy for quite some time.”
Given the hurdles presented by the direct physical loss or damage provisions, how are attorneys moving forward? In this post, we briefly outline a number of alternative theories for physical loss or damage caused by COVID-19 and explore how experienced damages experts can provide critical support to counsel to help strengthen their claims.
Alternative Damages Theories for Business Interruption Claims
An article for the National Association of Certified Valuators and Analysts by attorneys Michael Childress and Marina R. Pacheco from Kabateck LLP, a law firm headquartered in Los Angeles, succinctly lays out the challenges facing attorneys in COVID-19 business interruption cases.
“Although insurance companies will argue that COVID-19 does not trigger coverage, there are several theories that may prove to provide coverage to a multitude of policyholders, thereby ensuring their continued success,” they wrote. Childress and Pacheco offer four potential theories that attorneys may be able to use to achieve a recovery based upon existing case law. The theories include:
1. Physical damages caused by substances not visible to the human eye. While the virus is invisible, it has contaminated the property, thus causing property damage.
2: Loss of use of the property. In some cases, businesses have shown that damages occur from the loss of the use of property even if actual physical damage is not evident.
3: Loss of functionality of the property. If a business loses the use, access, or functionality of a property, this may qualify as physical damage for the purposes of a business interruption claim.
4: Civil authority provision. Some business risk policies include additional coverage for losses that occur when a civil authority prohibits access to an insured property, thus resulting in loss of business income.
As Childress and Pacheco conclude “under most business interruption policies, the actual loss of business income as well as payroll expenses are covered. However, the scope of coverage will always be policy specific and is highly dependent upon the language of each individual policy. A policyholder should not rely on their broker or insurer for the answer.”
Hiring Experienced and Creative Damages Experts
As they build business interruption cases, counsel can benefit from working with experienced Certified Public Accountants who have deep expertise in building damages calculations and the ability to think outside the box regarding theories of damages.
A CPA with damages expertise will be able to analyze financial information and other relevant data to help determine the existence and extent of damages associated with a particular set of facts and circumstances. This analysis can then be used to develop conclusions about the issues and can form the basis of independently calculated economic damages opinions—opinions that are defensible in court or another forum.
Key is the ability of the CPA to calculate damages resulting from a business interruption and to be able to convey the story of those calculations to counsel and triers of fact in a way that is clear, concise and easily understood.
Attorneys would also be well advised to seek credentialed professionals with a strong track record of providing credible opinions, especially in cases where the theories of damages must be defended under intense scrutiny. And they should seek out CPAs who use advanced technology to develop their work product and use this technology to assist in communicating a story to the trier of fact.
For our part, at FSS, our damages experts routinely serve counsel in two capacities:
• as consulting experts whose role is usually never disclosed and whose work is generally not discoverable. In this capacity, attorneys can view us as trusted advisors to provide strategic advantages throughout litigation.
• as testifying experts, who serve as expert witnesses in ongoing litigation. In this role, our work is discoverable and we will advocate for our independent opinion on economic damages.
Forensic Strategic Solutions has substantial experience working with attorneys and clients on economic damages calculations involving business interruption claims. To learn more about our work, contact us for a consultation, or visit our practice area page, Investigative Financial Consulting.