In the wake of the ongoing novel coronavirus global pandemic, U.S. companies are facing staggering losses due to the interruption of their business operations. To combat the spread of the virus and minimize the physical loss and property damage caused by the COVID-19, state and local governments implemented a number of social distancing measures that included ordering citizens to shelter in place, shuttering "nonessential" businesses and placing restrictions on business that were allowed to continue to operate, such as allowing only take-out or delivery service for restaurants.  This has resulted in billions of dollars in lost revenue across the country.

Understandably, businesses affected by COVID-19 have turned to their insurance carriers for relief under their business interruption coverage (and related coverage for loss from Orders of Civil Authorities). The response from the insurance industry has been underwhelming, with the industry generally taking the position that there is no coverage for COVID-19-related business interruption losses. One carrier has gone as far as to issue a blanket statement, without any investigation of any individual claims, that none of its policies provide business interruption coverage for COVID-19-related losses.

In response to the insurance industry's stonewalling, policyholders have begun to turn to the courts to protect their rights to coverage. In the ensuing litigation, policyholders will face numerous defenses from their insurance carriers. While many of the defenses insurance companies may allege will be obvious, such as a purported requirement for physical damage as opposed to suffering physical loss to trigger business interruption coverage, or virus exclusions, policyholders should be aware of other, less obvious exclusions such as the exclusion for "loss of market."

The Loss of Market Exclusion

Property insurance policies often contain a "loss of market" exclusion that is typically worded:  "This policy does not insure against loss or damage caused directly or indirectly by loss of market." Policyholders should be aware of the scope of these loss of market exclusions. Insurance companies often attempt to invoke this exclusion in expansive ways to preclude coverage for business losses stemming from covered perils.

For example, some carriers have argued "that losses that resulted from the decrease in the customer base or customer demand which was caused by the catastrophe itself, (and not inherent in the pre-loss experience of the business), should be excluded from coverage as a 'loss of market.'" Others argue that the market for the insured's business has been lost or diminished and since the insured could not sell its products or services because of the post-loss market change, the insured should not recover those income losses." See Henry Daar, "The Misadventures of the Loss of Market Exclusion: The Calculation of 'Actual Loss Sustained' Has No Relationship to the Exclusion," presented at the ABA Section of Litigation Insurance Coverage Litigation Committee CLE Seminar (March 3-5, 2011). Courts addressing this exclusion have rejected these arguments, finding that the "loss of market" exclusion is intended to preclude coverage for damages that result from the operation of market forces, not to preclude coverage for business interruption losses arising from a covered peril.

In Reade v. St. Paul Fire & Marine Insurance, 279 F. Supp. 2d 235 (S.D.N.Y. 2003), for example, the policyholder operated a drug store in the retail concourse under the World Trade Center, and sought business income coverage when its store was destroyed during the 9/11 attacks. The insurance company argued that the loss of market exclusion—excluding coverage for "loss or damage caused by … loss of market"—applied since the terrorist attack destroyed not just the World Trade Center but the entire downtown market." The court held that this argument "lacks substance," both as a factual matter, and because "the loss of market exclusion relates to losses resulting from economic changes occasioned by, e.g., competition, shifts in demand, or the like; it does not bar recovery for loss of ordinary business caused by a physical destruction or other covered peril." Other courts have also provided insight as to the scope of the "loss of market" exclusion. In Boyd Motors v. Employers Insurance of Wausau, 880 F.2d 270, 273 (10th Cir. 1989), the court clarified what it meant for a market to be lost, noting that "a market is lost when, for example, due to delay in distribution, changes in consumer habits, etc., a certain type of product is no longer in demand with its intended purchasers." See also Dietrich v. United States Shipping Board Emergency Fleet, 9 F.2d 733, 744-45 (2d Cir. 1925) (holding that the loss of market exclusion bars recovery for the diminishment in the value of cargo caused by a drop in market prices while a shipment was in transit).

In, U.S. Airways v. Commonwealth Insurance,  64 Va. Cir. 408, 412 (Cir. Ct. 2004), however, the court held that the loss of market exclusion applied to certain "market share" losses claimed by the policyholder under its business interruption policy. The airline claimed coverage under the Interruption by Civil or Military Authority provision of its insurance policy for losses of business income caused by the nationwide ground stop, and closure of Reagan National Airport, after the attacks of Sept. 11, 2001. In its motion for summary judgment, the insurance company argued, inter alia, that the loss of market exclusion barred recovery in part. The court agreed with the insurance company that the"loss of market exclusion barred the policyholder from seeking recovery "for loss of market share as a result of business interruption." The court reasoned that it was clear that the policy only contemplated actual damages sustained by the insured as a result of business interruption and that the policy made "no mention of market share."

Arguably, the U.S. Airways court's denial of that part of the claim seeking losses from lost market share improperly limited the policyholder's recovery since the loss of market share stemmed from the exact catastrophe that had triggered the civil authority coverage in the first place. See, e.g., Citadel Broadcasting v. Axis U.S. Insurance, 162 So. 3d 470, 475 ( La. App. 2015) (affirming jury award of business interruption losses, including lost market share, arising from Hurricane Katrina and its aftermath).

Potential Ambiguities in Construing the Loss of Market Exclusion

Policyholders should also be prepared to address insurance carriers' construction of the term "market," if that term is left undefined in their insurance policies. As a general rule of insurance policy construction, exclusions are construed narrowly. Likewise, ambiguities in the policy are generally construed in favor of finding coverage for the policyholder. The term "market" can be construed in a number ways. For example, dictionary definitions of "market" include: "the geographical area of demand for commodities or services" and "a specified category of potential buyers. See Merriam Webster's Dictionary of Law (1996). If insurance companies suggest multiple or shifting meanings for the term "market," policyholders should be prepared to raise arguments that the exclusion is ambiguous as to what "market" means. Policyholders should note, however, where courts find the terms of the policy clear and unambiguous, the courts will enforce those terms as written. See U.S. Airways, 64 Va. Cir. at 416 (rejecting the policyholder's argument that the loss of market exclusion was ambiguous because it was not defined, finding it clear and applicable to the policyholder's claim of increased loss from loss of market).

Conclusion

In sum, the purpose of the loss of market exclusion is to prevent a policyholder from insuring ordinary business risks; for example, shifts in demand due to changing consumer tastes or improvements in technology. Accordingly, the loss of market exclusion should not be available to insurance companies as a basis to avoid paying for business interruption losses resulting from the very same catastrophe for which the policyholder is seeking insurance coverage.  Likewise, the purpose of business interruption insurance is to put the policyholder in the position it would have been in had no loss occurred, using pre-loss experience as a guide. Thus, the only "market" that is relevant is the pre-loss market. Permitting an insurance company to factor in post-loss market conditions in determining whether there is coverage would eliminate business interruption coverage in any case involving a widespread catastrophe, such as the current COVID-19 pandemic, that allegedly affected surrounding businesses.

The invoking of loss of market exclusions is an issue that will likely lead to significant disputes between policyholders and insurance companies both as to the establishment of and the quantifying of the amount of loss once coverage is established. Policyholders should consider seeking expert support to assist them with their claims preparation and/or trial preparation.

Paul E. Breene is counsel in the insurance recovery group in Reed Smith's New York office. He represents clients seeking insurance coverage under various types of policies against their insurance companies that have disclaimed or delayed providing such coverage. Breene has both extensive trial and appellate experience in the area of insurance coverage. He can be reached at [email protected].

Anthony B. Crawford is an associate in the firm's insurance recovery group in the firm's New York office. He represents a wide array of clients ranging from banking and financial institutions to religious organizations. He provides policy review, coverage analysis, counselling, litigation and dispute resolution services on a variety of insurance policies, with special emphasis on general liability, directors & officers, errors and omissions (professional liability), commercial property, mortgage, and fine arts policies. He can be reached at [email protected]