Will the Aftermath of COVID-19 Lead to a Spike in Court Cases?

When it comes down to it, WHO is really responsible for a pandemic? Tenants, landlords and insurers are now battling over who is responsible for covering losses incurred during temporary closures.

As they continue to grapple with the economic fallout from the coronavirus pandemic—and wait for further federal relief—commercial real estate tenants may increasingly sue insurers to seek damages under business interruption insurance coverage. However, attorneys caution that tenants may find little success with this legal avenue.

Business interruption coverage in commercial real estate came to the forefront on Oct. 13, when New York City-based Jemb Realty Corp., owner of the 10-story, 250,000-sq.-ft. Herald Center in Manhattan, filed a federal lawsuit against Stamford, Conn.-based Greenwich Insurance Co.

In the suit, Jemb said it sustained more than $3.8 million in losses after tenants stopped paying rent—most notably the flagship location of clothing retailer H&M. Jemb claimed the mall’s losses arose from tenants’ exposure to COVID-19, which it maintains is a pollutant, as well as from government-mandated shutdowns this spring. The suit maintained that the COVID-19 business interruption claim fell under its environmental policy from Greenwich Insurance. It sought a $3 million judgment from Greenwich Insurance. That amount equals the maximum coverage limit under Jemb’s environmental coverage.

The dispute won’t be settled in court, though. Without explanation, Jemb dropped the lawsuit on Oct. 26. Representatives of Jemb couldn’t be reached for comment. Nonetheless, the issues raised in the suit shine a light on business interruption coverage in commercial real estate.

Insurance litigator Ken Gorenberg, a partner in the Chicago office of law firm Barnes & Thornburg LLP, says congressional delays in approving more pandemic relief may lead to more court cases being filed over business interruption coverage.

“However, if a business like a restaurant or a fitness center can’t survive financially without additional stimulus, it may be more motivated to sue its insurance company over the denial of its business interruption claim,” Gorenberg says.

Insurers, meanwhile, are rejecting the “vast majority” of business interruption claims connected to the pandemic, he notes.

“The insurance companies are playing hardball and not giving an inch,” says commercial litigator David Wander, a bankruptcy partner at New York City-based law firm Davidhoff Hutcher & Citron LLP.

Thus far, most court rulings about denial of pandemic-era claims under business interruption coverage have favored insurers, but a couple of rulings have sided with tenants, according to Gorenberg.

Oftentimes, the question of whether a tenant has a legitimate claim rests on whether a business interruption policyholder suffered “physical loss or damage” to its property, Gorenberg says. Insurance companies generally focus on the word “damage,” and contend that neither the presence of the coronavirus on a policyholder’s property nor the impact of government-ordered shutdowns meets the definition of damage. “In contrast, policyholders often focus on the word ‘loss’ and argue that there is coverage for loss of use of their property,” he notes.

In many property insurance policies, “business interruption” is actually called “business income,” Gorenberg says. For a landlord, unpaid rent is the typical scenario where the company might try to recover money under the business income section of a property insurance policy. But a landlord wouldn’t grant rent relief simply because it holds an insurance policy containing a business income provision, he says.

From the landlord’s perspective, if the property owner provided rent relief, the insurance company would likely deny a claim for the loss of business income because the loss was essentially voluntary, according to Gorenberg. “Looking at a variation on the issue from another angle, a tenant’s business interruption insurance claim might have interesting ramifications,” he says.

Before the pandemic there were lawsuits. And after it ends, there will still be even more lawsuits.  Disputes are EVERYWHERE!  When those nasty things affect YOU and YOUR business, including landlord-tenant matters, contract issues, nuisance ADA claims and even collections, call in the good guy business litigator, Dean Sperling, to resolve YOUR matter with YOUR best interests in mind! 

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