How Can Declaratory Judgment Actions Help Resolve Insurance-Coverage Disputes Arising from Coronavirus-Related Business Closures?

As businesses large and small grapple with how to survive the COVID-19 pandemic, many are looking to their insurance policies’ business-interruption coverage as a way to stay afloat.  That type of insurance coverage protects against the loss of income suffered during and after a disaster.  It typically provides coverage after a fire or a storm causes physical damage to a business’s property, preventing it from staying open for business.

Many companies are now submitting business-interruption claims for lost income caused by government-ordered business closures related to COVID-19.  Some insurance companies, however, have stated that they do not believe business-interruption insurance covers coronavirus-related closures.  Many businesses thus face a lot of uncertainty about whether any claims will be paid. 

One avenue businesses are pursuing to resolve this uncertainty is declaratory judgment actions.  A declaratory judgment action is a type of lawsuit that allows businesses and individuals to seek a court’s conclusive ruling on an uncertain legal issue.  In a declaratory judgment action, the court adjudicates the rights and obligations of the parties rather than awarding a coercive remedy, like damages or an injunction. 

One scenario in which declaratory judgments are typically requested is when a party believes there is a conflict over how to interpret a contract between the parties.  A declaratory judgment action can be filed before one party or the other breaches the contract.  To avoid courts providing advisory opinions, they have authority to grant declaratory relief only when the parties’ conflict over the contract is concrete and definite, demonstrating that the parties have truly adverse legal interests.

Declaratory judgments are frequently sought in the insurance context, either before or after a claim has been denied.  Unlike an injunction, which orders a party to take certain actions, a declaratory judgment simply defines the legal relationship between the two parties under the insurance contract.  This type of action thus permits insurance disputes to be settled by a court before one party or the other has actually breached the contract.  For example, declaratory judgment actions were initiated after Hurricane Katrina, requesting courts to interpret flood exclusions in insurance policies.

There are several litigation advantages to initiating a declaratory judgment action.  The party initiating the action can tell the court its side of the story first, framing the issues in a way that is favorable for that party.  And if there are multiple jurisdictions that could hear the dispute, the party initiating the action also gets to select the forum. 

In declaratory judgment actions arising from the COVID-19 crisis, parties have requested that courts declare the rights and obligations of the parties under a business-interruption policy.  The parties seek confirmation on whether the insurance company is obligated to provide business-interruption coverage under the policy.  Both policyholders and insurance companies can use declaratory judgment actions to settle their disputes over coverage. 

In Travelers Casualty Insurance Co. of America v. Geragos & Geragos, for example, an insurance company filed a declaratory judgment action in the Central District of California against a law firm who had an insurance policy that provided business-interruption coverage.  The law firm sought coverage after the mayor of Los Angeles issued an order closing all non-essential businesses because of the COVID-19 pandemic. 

The insurance company has argued that claims arising from coronavirus-related closures fall under the policy’s exclusion for virus-related damage.  These types of exclusions, which were added to many policies after the 2002-2003 SARS epidemic, state that losses from a virus or bacteria are not covered.  The law firm policyholder has argued in response that the insurance company is obligated to provide coverage because the closure order, not the coronavirus, is what has prevented it from accessing its offices and operating its business.

Businesses ranging from restaurants and movie theaters to retail stores and dental offices have also filed declaratory judgment actions seeking confirmation that insurance companies should cover coronavirus-related business losses.

Because there is so much uncertainty over the scope of business-interruption coverage for coronavirus-related closures, these types of lawsuits will undoubtedly continue for many years.  A declaratory judgment action may not be appropriate in all circumstances, such as where a concrete dispute does not exist yet.  But it is a powerful litigation tool to consider when trying to clarify an insurer’s coverage obligations.

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