New Developments Regarding Business Shutdown Insurances

Update: 13 October 2020

By now, most of those affected will know how their insurer handles shutdown insurance claims in the coronavirus crisis. Some insurers are settling the claims while others refuse to accept any liability. In many other cases insurers offer a compromise based on the so-called "Bavarian solution" (see our Blog post of 8 April 2020).

If the policyholder and the insurance company agree on a compromise, a settlement agreement is reached and legal disputes about the insurance cover are avoided. From the insurer's view, the initiative to offer a compromise makes sense because it takes the wind out the sails of law firms pursuing class actions. Any settlement based on the Bavarian model will prevent a possible lawsuit by the policyholder. The wave of lawsuits is likely to be smaller with this policy. Nevertheless, a large number of lawsuits is already pending because the settlement offers of insurers usually cover only a fraction of the loss.

I. The early court rulings

The conflict between insurers on the one hand and the insured using class action law firms on the other has been swiftly brought before the courts. The first rulings were already issued as early as April 2020. All of the early decisions resulted from expedited proceedings (summary proceedings) which is why they should be evaluated with particular care. Furthermore, a cautious approach is necessary because the terms of business shutdown insurance contracts differ considerably and statements made in these rulings may not be easy to generalise.

As regards content, the early court decisions say different things. The Higher Regional Court of Hamm had to deal with insurance terms worded as follows. According to the terms, only diseases and pathogens "listed below (cf. Sections 6 and 7 of the German Infection Protection Act, IfSG)" were covered by the insurance whereas Covid-19 and Sars-Cov-2 were not mentioned. According to the interpretation of the Higher Regional Court of Hamm, the provision does not give rise to a liability of the insurance company. Despite the reference to the German Infection Protection Act in parentheses, there is no dynamic reference which would also include later amendments to the Infection Protection Act.

The Higher Regional Court of Mannheim on the other hand states in its decision that even a de facto shutdown of the business without an administrative act constitutes a shutdown within the meaning of the insurance conditions in individual cases. This statement may be applied to a large number of policies as the terms of the insurance generally refer to an "official measure" without restrictions, and the Coronavirus Regulations of the German federal states constitute official measures. It further argued that the coronavirus is a pathogen covered by insurance because the specific insurance terms did not contain a list of pathogens and merely referred to the Infection Protection Act.

The Regional Court of Bochum (4 O 215/20) had to decide on insurance terms which did not contain any reference to the German Infection Protection Act so that the question of a dynamic or static referral (as in the cases of the Higher Regional Court of Hamm or the Regional Court of Mannheim) did not arise at all. Because the coronavirus was not mentioned in the insurance policy, the Regional Court of Bochum denied an insurance coverage.
While each case is based on differently worded insurance policies, in all of the three cases the court decisions were not issued in normal civil proceedings but in expedited proceedings, i.e. seeking interim relief measures. Interim relief measures to enforce payment claims may only be applied in very exceptional cases - for example, in the case of an acute emergency or threat to the existence of the business (see the decision of the Regional Court of Heilbronn regarding the coronavirus pandemic of 29 April 2020, file ref. I 4 O 82/20).

Policyholders have not been able to prove such an exception in the above proceedings with the result that they lost the proceedings for procedural reasons, irrespective of the scope of the insurance coverage. The application was also rejected in the case negotiated before the Regional Court of Mannheim which in principle assumed that insurance coverage exists.

II. The Judgement by the Munich Regional Court

In contrast to the early rulings, we have now also seen judgements in regular civil proceedings, most notably a judgement by the Regional Court of Munich I. This case has raised public awareness and was prominently covered in the press because the insurer was sentenced to pay the damage for business interruption. The claimant, the leaseholder of a well-known Bavarian restaurant and beer garden, had only concluded the insurance contract in March 2020 after the insurance company had informed its brokers and the claimant that it would consider damages caused by the novel coronavirus as insured.

The court in Munich based its decision on two distinct grounds. The court held that in this case the coverage of damages caused by the coronavirus was individually agreed between the claimant and the insurer. This would already be sufficient to sentence the insurer to pay. However, the court also based the judgement on a separate line of reasoning, arguing that some of the clauses in the insurance contract are not transparent and hence are invalid.

While the first line of reasoning is a rather special circumstance, the second can be applied to a large number of cases because many insurance contracts contain similar clauses. However, it remains unclear whether this second line of reasoning would be upheld if this judgement was appealed. Even if it is, the appeal procedure might not lead to any clarification because the judgement could be upheld only based on the first reason.

III. Interim Conclusion

The cases of business shutdowns will continue to preoccupy those affected and keep the courts engaged for quite some time. Nevertheless, a first interim conclusion can be drawn.

1. It remains unchanged: Whether claims are covered by insurance in the coronavirus crisis must be assessed individually for each case. While in many cases it is possible to make a clear statement, a grey area remains which will keep courts mulling over the issue. Whenever there is such a grey area, a settlement is generally a good solution. Whether a settlement is a good or a bad compromise must also be weighed individually. For this purpose, economic considerations must be taken into account in addition to the prospects of success of legal proceedings.

2. Further court decisions will not be able to eliminate the grey area for business shutdown insurances any time soon. Firstly, courts only make statements for the individual case at hand and the specific terms of insurance. Secondly, different courts may assess the same contract differently.

3. Expedited proceedings are not promising for the enforcement of claims under business shutdown insurance policies in the coronavirus pandemic. An exception to this principle can hardly be justified taking into account the many different emergency aid programmes for shutdowns. As in all other legal disputes, the same applies to cases of business shutdowns in the coronavirus crisis: The best arguments are useless if the procedural enforcement is inadequate.

Dr Philipp Sahm