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New York–based Century 21 department stores, which came back following the 9/11 attacks, will shut down after nearly 60 years in business due to losses resulting from the pandemic.
Tucked into the Seattle suburb of Duvall is Flavour Bistro, a seafood-heavy fine-dining experience with dishes like butter-poached lobster tail, smoked scallops Mornay, and a cut of plant-based meat fashioned into an “Impossible Wellington.” Chef Sean Langan’s restaurant was successful enough that last year, he was able to open a second one next door, an Italian-themed place called, fittingly, Italia.
In March, however, Langan’s run of good fortune slammed directly into the pandemic and Washington state’s stay-at-home order. “We tried to operate to go, but fine dining is an in-person experience,” Langan explains in an interview. The takeout experiment fizzled, and he spent months without much revenue, digging into $100,000 in personal funds to keep bills paid. Even when Washington allowed seating at 50 percent capacity, his restaurants were configured in such a way that maintaining social distancing meant allowing far fewer patrons. Italia is now closed permanently; Langan’s 28 employees have been winnowed down to four.
At Flavour Bistro, business is down 80 percent. But Langan had a backup plan, a hedge against a sudden drop in revenue outside his control, something any sensible business owner would carry. Years earlier, he’d taken out “business interruption insurance,” intended to cover exactly what it sounds like it should cover—a sudden business interruption.
Langan figured a forced shutdown by the state would qualify. He filed his claim the week that the stay-at-home order came down, for both the loss of income and his spoiled food order, rendered useless by the lack of customers. The claim was denied. “In the policy, there’s a clause about a global crisis,” Langan says. “I said, ‘I didn’t have to close down for a global crisis, I closed because my governor told me to close down.’” This did not move the insurance company. It reopened the claim as a courtesy, but for months, Langan has kept calling, explaining himself to different low-level customer service reps, leaving messages. “They have done nothing but ignore me,” he says.
Langan’s troubles are not isolated. Hundreds of thousands of small-business owners have been denied business interruption insurance during the pandemic, despite the claims seemingly being tailor-made for the circumstances. In most cases, obscure language, unknown to the business owners or even the insurance brokers who wrote the policies, has been enough of a fig leaf for insurers to deny claims. In several cases, though there was no exclusion in the policy for a pandemic, virus, or global crisis, the insurance companies denied the claims anyway.
These refusals have kept tens of billions of dollars out of the hands of business owners, for whom the relatively meager and often unsuitable relief from the federal government has often proved insufficient. The government could step in with a policy proposed by several small-business owners and experts I spoke with: a federal reinsurance program that makes insurers whole for paying out these claims.
While some may consider it distasteful to effectively bail out obstinate insurance companies that stiff proprietors with potentially valid claims, a reinsurance scheme could prove more effective than other small-business relief programs at enabling businesses’ survival and maintaining jobs. “These policies could be the lifeline that thousands of small-business owners need,” says John Arensmeyer, founder and CEO of Small Business Majority, an advocacy group based in San Francisco.
THE INDUSTRY-WIDE policy of denying such claims has its origins in the last deadly virus that roiled large populations. The United States never went into lockdown over H1N1 in 2009, but several countries in Asia saw significant disruptions. “Certain countries had to shut down, and the insurance companies paid out,” explains Davis Senseman, an attorney and business consultant in Minneapolis. “They must have thought, ‘We have to make it so that won’t happen again.’” Sometimes this collective denial takes the form of exclusions for pandemics or viruses or global events. In addition, many business interruption policies require physical damage, which leaves forced shutdowns due to a communicable disease out in the cold.
A few organizations were far-sighted enough to recognize the threat of a pandemic specifically. The Wimbledon tennis tournament paid pandemic insurance premiums for 20 years, and when it canceled its event this summer, received a $141 million payout.
Small-business owners in the U.S., by contrast, were blissfully unaware of the language that quietly got appended to their insurance policies, only learning the unwelcome truth when filing claims. “I think there were certainly agents who were just as surprised by this exclusion as the insurance holders were,” says Senseman. “It’s something buried very deep in these policies.”
Food service businesses are the most likely to acquire this type of insurance, because their inventory is perishable, and a business interruption could leave them not just short of revenue, but on the hook for thousands of dollars in food and beer. But payouts have been few and far between.
Hundreds of thousands of small-business owners have been denied business interruption insurance during the pandemic, despite the claims seemingly being tailor-made for the circumstances.
The National Association of Insurance Commissioners (NAIC), the coalition of top state regulators, put out a report in July on business interruption claims. According to the data, 184,546 claims have been filed related to the COVID-induced shutdowns. Only 1,122 have been paid out, with 133,334 closed without payment; the rest are pending. That means that 99.4 percent of all business interruption claims have not been paid, as of July. The average claim payout was $86,000.
To add insult to this injury, Sarah Crozier of the Main Street Alliance, another small-business coalition, reports that in a survey of participating members, 20 percent received notices about insurance premiums for next year that were set to increase. So the insurance companies, having protected themselves from COVID payouts, are also seeking more money from the same denied businesses, now struggling to survive.
By the end of August, there were nearly 1,200 business interruption lawsuits from aggrieved small-business owners, according to the University of Pennsylvania’s COVID Coverage Litigation Tracker. Some argued that the shutdown order from cities and states, not the pandemic, caused the interruption. Others claimed “physical damage” from the virus adhering to surfaces and airflow within the businesses themselves. But insurers have won most of the early rulings.
“Basically, it’s a matter of contract,” says Nonnie Burnes, former insurance commissioner in Massachusetts. “Unless it’s fraudulent or unfair in the sense of consumer protection, the courts say, ‘That was the deal you made.’”
Burnes adds that in some cases, the contract’s fine print hasn’t stopped the insurance company from trying to wriggle out of payment. Legal Sea Foods, a well-known restaurant chain based in Boston, sued its insurer, Strathmore, in May, for denying a business interruption claim that did not exclude a pandemic from coverage. The policy was signed March 1, well after the coronavirus threat was established.
So far, Legal Sea Foods has permanently closed two of its 33 locations, while continuing to fight the lawsuit. Last month, the Cincinnati Insurance Company lost a motion to dismiss a case over business interruption insurance claims filed by four restaurants and hair salons in Missouri, none of which had a pandemic exclusion. An attempt to assemble multi-district litigation against multiple insurers with the same issues was separately denied.
It’s likely that hundreds of thousands of other small-business owners with this insurance never bothered to file a claim or a lawsuit, given the remote possibility of success, and the way word travels among the small-business community. “There’s not a lot of recourse,” says attorney Davis Senseman. “The insurance company’s big, you’re small. It’s no one’s full-time job to fight the insurance claim. I don’t want them to pay me to go on a wild goose chase.”
Industry representatives have called the pandemic an “uninsurable” event, because insurance underwriting relies on occasional payouts to specifically harmed claimants, not all claimants at once. The American Property Casualty Insurance Association (APCIA), a leading trade group, supplied data showing that loss payouts would total between 50 and 150 times monthly premium payments, making coverage impossible. Academic research co-written by the trade group echoed this case.
However, back in March, the APCIA described the industry as “well-prepared” to assist customers. President and CEO David Sampson highlighted an industry surplus of “over $822 billion in the U.S. and $2 trillion globally,” with coverage reserved and reinsured, though even then he was intimating that COVID-19 would not be covered.
Industry representatives have called the pandemic an “uninsurable” event, because insurance underwriting relies on occasional payouts to specifically harmed claimants, not all claimants at once.
But while insurance companies protect their nest egg, small-business owners are bearing all of the cost of the barrier imposed between them and their customers. Small Business Majority highlighted for me the story of Anastasia Mann, who owns a 33-year-old travel company called Corniche Travel out of West Hollywood, California. She was denied on a business interruption claim, and has spent her life savings keeping the business alive. At 72, she says that “bankruptcy is inevitable” without additional aid, and that this has led to stress-induced health issues and a feeling of hopelessness.
Just yesterday, Century 21, a New York–based department store chain, filed for bankruptcy and will liquidate its stores. The reason, the company stated, was that it didn’t receive payment on its $175 million business interruption insurance claim. “Our insurers, to whom we have paid significant premiums every year for protection against unforeseen circumstances like we are experiencing today, have turned their backs on us at this most critical time,” co-CEO Raymond Gindi said in a statement. Nearly two decades earlier, Century 21 was saved through a business interruption insurance claim—after the September 11 attacks.
With patios closing as the weather cools, restaurants in particular face an extremely uncertain path in the coming months. “All I do is restaurants,” Langan told me. “There’s no maneuvering for me.”
IS THERE A REMEDY for this intractable scenario? Small businesses are likely to fail by the millions if the insurance they paid into for years, if not decades, is effectively useless. On the other end, the insurance industry claims it will go broke if it has to pay out for business interruptions caused by the pandemic.
Whomever you sympathize with in this scenario, it’s clear that the status quo, with all of the burden being borne by restaurants and hair salons and dry cleaners, is catastrophic, threatening the very fabric and uniqueness of neighborhoods around the country. Are there any options available to protect small businesses from ruin?
Legislators in several states—among them, California, Massachusetts, New Jersey, and New York, as well as some on the District of Columbia Council—have floated a heavy-handed approach of forcing payment on all COVID-related business interruption claims. None of these proposals ended up getting a final vote, however; they all ran into an industry buzz saw. Even the NAIC opposed retroactive mandates.
Meanwhile, at the federal level, Rep. Mike Thompson (D-CA) introduced the Business Interruption Relief Act in July. This would reimburse insurers who voluntarily paid out business interruption claims.
Thompson’s bill begins to approach a solution favored by several small-business owners I spoke with. “Give the insurance companies the money to pay the businesses,” says Langan. “That would have been a better deal, instead of bailing out the big companies, and the little people have to scrounge for morsels.” A coalition of thousands of small-business owners known as the Business Interruption Group is backing the Thompson bill.
You can see this as a direct pass-through from the government to small-business owners, with more flexibility and targeted relief than the PPP offered, reserved for those who thought ahead to protect their business and expected that foresight to be rewarded. With an average $86,000 payment, it wouldn’t solve all problems, but by satisfying hundreds of thousands of denied claims and the even greater number of policyholders who didn’t bother to sue, it would get tens of billions of dollars into the hands of businesses that need help.
It’s easy to seethe at the thought of insurance companies getting freed from the burden of paying these claims, when business owners paid them premiums for years. But the bill could be structured in a way that requires insurers to purchase a reinsurance policy to facilitate the payments, at least sharing the burden to some degree, in exchange for ending the thousands of lawsuits.
It’s clear that the status quo, with all of the burden being borne by restaurants and hair salons and dry cleaners, is catastrophic.
“It would take an act of government to say, ‘Business owners have taken more of a share of the hit, insurance companies have not,’” said Senseman, who has met with Sen. Tina Smith (D-MN) about this issue, as well as with the Minnesota Department of Commerce, which regulates insurance. Smith’s office did not respond to a request for comment.
John Arensmeyer of Small Business Majority agreed that there should be “financial backing” from the government for business interruption policies, as well as future requirements that “business interruption insurance provides coverage for businesses experiencing losses stemming from any declaration of a national emergency.”
For its part, the insurance industry has unveiled a “federal pandemic solution” that would provide replacement revenue to cover payroll and expenses during a pandemic through an automatic trigger when a viral emergency is declared. Businesses would purchase this protection, but it would be a federally funded program, which could purchase its own reinsurance to limit the budgetary hit. This would take private insurers out of the equation and create a somewhat appealing automatic stabilizer in the event of a global crisis. Unfortunately, it’s also a future-oriented solution when businesses need relief now.
While hoping for a federal solution, Langan is still calling his insurer, though he may know it’s in vain. It’s the latest in a series of unfortunate events in his career. A restaurant he owned in downtown Seattle was burned in a fire; another experienced a septic-system problem. It was these problems that led him to get business interruption insurance to begin with. Yet the pandemic frustrated his thoughtful pre-planning, and that of his colleagues. He told me about other restaurant owners who have closed five or even eight locations.
“Nobody wants to hear any of this,” he says. “Nobody will address it. If things don’t turn around in three months, I’ll have to cut my losses.”
