Attorney Robin Cohen’s Take on Baylor University’s COVID Business Interruption Coverage Win
Baylor College of Medicine secured a victory late this month when a Texas jury handed the college a $12 million verdict, finding Baylor’s losses due to the COVID-19 pandemic are covered by its commercial property insurance policies.
Baylor filed a lawsuit in September 2020 against several Lloyd’s of London syndicates seeking coverage for the losses and the jury awarded Baylor roughly one fourth of the $48.5 million damage incurred.
This was likely the first jury trial in the United States on the issue of whether a commercial property insurance policy covered business interruption losses due to the pandemic and the first to result in a plaintiff’s verdict.
Risk & Insurance® spoke with Robin Cohen, chair of Cohen Ziffer Frenchman & McKenna LLP, to find out more about this groundbreaking case and the implications of the verdict for insurers and policyholders alike.
Risk & Insurance: What is the background story to the case?
Robin Cohen: Baylor College of Medicine is a health sciences university in Texas that earns income through providing medical services, professional education and research laboratories.
Like many businesses, Baylor had a property and business interruption (BI) insurance policy during 2020 that covered “all risks” of loss, including “loss resulting from [the] necessary interruption of business … caused by direct physical loss, damage, or destruction … to real or personal property.”
As opposed to named perils policies, the express purpose of “all risks” policies is to cover all risks of loss unless specifically excluded by the policy.
Baylor paid more than $1.2 million in premiums for up to $100 million in such coverage during 2020.
When the college filed a claim against its insurers, though, for its massive property and BI losses due to the presence of SARS-CoV-2 or people infected with the disease COVID-19 on its properties, Baylor’s insurers denied coverage, so Baylor filed the lawsuit.
R&I: What were the arguments presented by both sides?
RC: Baylor argued that the virus physically infected the surfaces and air of its real property and medical and research equipment, causing both property loss or damage and BI losses that are covered by its “all risks” policy.
Baylor also alleged that on March 24, 2020 Harris County Judge Lina Hidalgo stated that “the COVID-19 virus causes property loss or damage due to its ability to attach to surfaces for prolonged periods of time” and issued an order directing all individuals living in the county to stay at home except to provide or receive certain essential services or engage in certain essential activities.
In an amended complaint in January 2021, Baylor alleged that state and county orders designed to slow the pandemic’s spread had forced it to “dramatically reduce” operations at its clinics, implement telehealth services, and significantly curtail its laboratory research and teaching programs, at a cost of $70 million and counting.
And since the clinics remained open, Baylor said that the virus was continuously present on the property.
The insurers moved for summary judgment, arguing that: (1) COVID-19 does not cause “direct physical loss of or damage to property”; and (2) exclusions for pollutants and contamination and microorganisms that pose an actual or potential threat to human health preclude coverage.
The court: (1) denied summary judgment to the insurers because a fact question existed as to whether COVID-19, if present, caused direct physical loss of or damage to Baylor’s premises; (2) granted summary judgment to the insurers based on the pollution and contamination exclusion; and (3) did not rule on the microorganisms exclusion. The court allowed the first issue to go to trial and Baylor appealed the second decision.
R&I: On what grounds did the jury decide to award Baylor $12 million?
RC: Ten out of 12 jurors answered “yes” to the question: “Did COVID-19 cause direct physical loss of, or damage to, Baylor’s property?”
Based on that conclusion, the jury then decided that the insurers owed Baylor coverage for certain of Baylor’s lost net profits, extra expenses and research project expenses.
R&I: What has happened in previous COVID-19 affected business insurance cases?
RC: Very few COVID-related BI claims have reached a jury to date.
Unfortunately, many lawsuits against insurers have been prematurely dismissed by trial courts who have held, without the benefit of fact and expert discovery, that the virus did not cause physical loss or damage.
There are cases, however, where trial courts have gotten it right and found that the question of physical loss or damage cannot be resolved at the outset of the case.
We are handling significant cases pending in California, Illinois, Nevada and Pennsylvania (as just a few examples), where the parties have been permitted to proceed through discovery and we believe the policyholder will be able to prove its case.
At the appellate court level, there have been some recent notable wins for policyholders as well:
- The California 2nd Appellate District reversed a ruling by the Los Angeles County Superior Court that dismissed a BI lawsuit filed by Hotel Erwin;
- The Louisiana 4th Court of Appeals found coverage was owed to the Oceana Grille;
- The First Department of the New York Appellate Division ruled in favor of the New York Botanical Garden because of coverage for “communicable diseases.”
R&I: What precedent will this ruling set for similar pending cases?
RC: The trial judge got it right that whether COVID-19 causes direct physical loss of or damage to a specific insured’s property is a fact question for the jury to decide on based on the record evidence and expert testimony presented from both sides.
R&I: Does this mean that going forward all insurers will have to cover policyholder business interruption losses stemming from the pandemic?
RC: No, despite what the insurance industry would have courts and the public believe.
The facts of each case need to be evaluated on their own.
And, in any event, most “all risks” policies (but not Baylor’s) contain a specific “exclusion of loss due to virus or bacteria,” which is a broad, standard-form virus exclusion the insurance industry drafted to apply to pandemic losses following the 2003 SARS outbreak. &