Businesses are losing their Covid-19 lawsuits

Remember last year’s kerfuffle over whether providers of business interruption insurance would have to pay when local Covid-19 rules forced proprietors to close? The verdict is now in … and it hasn’t gone well for business owners. In fact, according to the University of Pennsylvania Law School, which has developed a tool to track Covid-related litigation, the insurers have overwhelmingly won.
The controversy arose after most state governments responded to the pandemic with shut-down orders. Many business owners demanded that their insurers compensate them for lost income, but the claims were routinely denied. Business owners sued, and I predicted in this space that they would mostly lose. Most business interruption insurance policies simply don’t cover pandemics.
The number of Covid-related insurance lawsuits is in the four figures, and Penn’s database covers only those where the defendant’s motion to dismiss (or for summary judgment) has been ruled on. Nonetheless, the pattern is clear. Out of 187 cases in federal court where the judge has ruled on the insurer’s motion to dismiss with prejudice (meaning that the plaintiff can’t refile the suit), insurers have won 76% of the time. In several more cases, the court has decreed a narrower dismissal. In only 8% of cases has the insurer’s motion to dismiss been denied.
This pattern holds whether or not the insurance policy in question contains an express exclusion for harm caused by viruses. Plaintiffs have done somewhat better in state courts, but some 70% of claims have been filed in, or “removed” to, federal court. (Why any plaintiff would prefer federal court is unclear, given that state courts have long been friendlier.)
The easiest cases to dismiss have been those where the policy excludes coverage for closures caused by viruses. The business owners nevertheless argue that the state’s emergency mandates, not the novel coronavirus itself, forced the business to shutter. That argument keeps losing. As one federal judge put the point in mid-March, if the shutdown orders stemmed from the virus, the virus was “the predominant cause that produced the loss.”
Even when the policy includes no virus exclusion the suits tend to be dismissed, because courts adhere to the traditional interpretation that business interruption insurance covers losses of income only when there has been physical damage — such as from fire — but not when the premises remain unharmed.
Why then so many lawsuits? Since the 1980s, legal scholars have generally accepted that in a world of perfect information, few if any civil cases would arise, because everyone would be able to predict the winner. Thus plaintiffs would file few lawsuits, and those they did bring would be settled.
But the theory doesn’t always work. Why not? One answer, known as the divergent expectations model, predicts that early plaintiffs might file cases optimistically, but if they lose more often than they win, later parties who could sue on the same issue choose not to waste the resources. The University of Pennsylvania Law School data tell us that this is exactly what has occurred with business interruption suits. Filings peaked in late April of 2020, remained high through early summer, then tailed off rapidly. Volume during the last week of February 2021 was about one-fifth of the level at the height of the pandemic.
This is consistent with the divergent expectations model. Potential plaintiffs now have more information: They know their odds of victory are slim.

—Bloomberg