Companies near Kansas City among first to sue for denials of coverage

A handful of Kansas City-area businesses have filed suit against their insurance companies, alleging their insurers wrongly denied their claims for business interruption stemming from the COVID-19 pandemic.

On April 24, Promotional Headwear International, represented by Kansas City firm Stueve Siegel Hanson and a group of other plaintiffs’ firms, became the first company to file business interruption claims in the U.S. District Court for the District of Kansas.

The following week, on April 27, the law firms joined a group of other plaintiffs’ firms in filing another suit — this time in the U.S. District Court for the Western District of Missouri — brought by Westport Flea Market Bar & Grill against its insurer, Lexington Insurance Co.

The suits are among the first of what lawyers locally and nationally anticipate will be a wave of litigation as businesses try to recover their losses from the pandemic.

Promotional Headwear, which makes promotional materials and is based in Johnson County, Kansas, filed a putative class action against its insurer, The Cincinnati Insurance Co. In its suit, Promotional Headwear said it has been forced to reduce its operations because of the pandemic, leading to a 95 percent loss in sales.

The company holds an all-risk commercial property insurance policy. When it filed a claim for business interruption, it alleged the insurer denied its claim on the basis that it suffered no physical property damage.

A spokeswoman for Cincinnati Insurance Co. declined to comment on the suit. But Patrick Stueve, an attorney for Progressive Headwear, pushed back against the insurer’s denial of his client’s claim.

“The bottom line is that we think that there is coverage. There’s no exclusion for pandemic or for a virus, and so we think that their loss falls squarely within the policy and should be paid,” he said.

Stueve also said his firm has reviewed hundreds of policies for clients, across insurance companies, and discovered similar denials. Stueve Siegel Hanson has teamed up with other Missouri plaintiffs’ firms to handle more business interruption litigation in other jurisdictions.

Those firms include Langdon & Emison, Miller Schirger and Shaffer Lombardo Shurin. Attorneys with those firms all had connections to each other from previous cases, and they saw the need to band together, Stueve said.

“These cases will require experts on the coverage side and damages side, they will be expensive to litigate, and by combining resources, we think we can prosecute them in a way that will be most beneficial to our clients,” he said.

Based on his review of policies, it appears insurers are taking a uniform stance in denying claims for business interruption, Stueve said. He encouraged companies to seek counsel in reviewing their policies.

Attorneys who represent insurers, however, said the companies’ denials of claims are more nuanced than insurers issuing blanket denials.

Bruce Baty, an attorney with Bryan Cave Leighton Paisner in Kansas City, is among them, although he does not represent any of the parties in the cases recently filed in Kansas and Missouri.

Cincinnati Insurance Co. recently announced in a call with analysts that its business interruption policies did not contain the virus exclusion and that it was relying on the damage-to-property condition to trigger coverage, Baty said

“That’s unusual,” he said. “Most property and casualty insurers adopted the 2006 [Insurance Services Office Inc.] exclusion that was very specifically written to address pandemics as a result of viruses.”

Virus exclusions are not new to the market or insurance industry, he said, adding this is something it anticipated more than a decade ago in response to the SARS epidemic.

“To me, it’s not a question of, or an issue of, the insurance companies issuing blanket denials,” he said. “This is a very specific problem that the industry thought it addressed many years ago.”

Legislation introduced in eight states and in Congress to force insurers to pay business interruption claims could have a devastating effect on the industry, as well as make it harder for insurers to pay claims related to disasters such as wind, fires and tornadoes, he said.

“We didn’t sell it, we didn’t collect a premium for it and we didn’t reserve for it,” he said of business interruptions caused by the pandemic. “Now, to flip the table and decide that we’re going to create coverage where coverage never existed — that is a huge problem for the industry.”

The case in the District of Kansas is Promotional Headwear International v. The Cincinnati Insurance Co., 2:20-cv-02211; the case in the Western District of Missouri is Zwillo V Corp. d/b/a Westport Flea Market Bar & Grill v. Lexington Insurance Co., 4:20-cv-00339.