Wall Street's New Trade: Covid-19 Insurance Claims

© Roger Kisby/Bloomberg News

The nation’s gambling hub has a new high-stakes wager: Covid-19 insurance claims.

A number of prominent hedge funds have been buying portions of companies’ claims against their insurers for losses suffered in Las Vegas and elsewhere during the pandemic.

In the largest known trade, several funds have acquired a slice of a roughly $2 billion pandemic-related insurance claim belonging to Caesars Entertainment Inc., people familiar with the matter said. Theirs is effectively a long-shot bet Caesars will prevail in still-unfolding litigation over the claim or land a large settlement.


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The casino and hotel operator sued its insurers in 2021, alleging the carriers had wrongly rejected its claim for lost profits during Covid-19’s shutdown phase. Now, Caesars has hedged its bet by selling $330 million of its claim to distressed-debt specialist Avenue Capital Group for roughly 10 cents on the dollar, the people said.

Avenue, in turn, sold parts of its stake earlier this year to a group of funds including Highbridge Capital Management LLC, owned by JPMorgan Chase & Co., and Saba Capital Management LP, some of the people said. The deal allows Caesars to monetize a small portion of the claim, providing some cash even if it loses in court. The funds stand to gain multiples of what they invested if Caesars wins.

Businesses that collectively lost hundreds of billions of dollars during the pandemic turned to the courts after property insurers rejected their “business-interruption” claims. More than 2,300 Covid-19-related insurance disputes have landed in state and federal courts nationwide.

Momentum is on insurers’ side. Courts have ruled for insurers on 967 motions to dismiss or for summary judgment, compared with 99 policyholder wins, according to a Covid-19 litigation-tracking effort at the University of Pennsylvania Carey Law School.

Insurance disputes are resolved under state law, and the claims-stake wager has gained ground in Nevada because plaintiffs have had a favorable lower-court ruling there. Avenue believes its Nevada claims have better odds than the nationwide data suggest, said people familiar with the firm, because many of the early losses for plaintiffs around the country involved policies with less-favorable provisions than those its team is focused on.

New York-based Avenue is making the largest known bet that insurers will pay up. It has bought parts of claims from various Nevada casinos for a fund dedicated to business-interruption claims, according to the people familiar with the matter.

Avenue’s fund also has acquired portions of claims from hotels, restaurants and healthcare companies from other states where the trade’s architect, Jon Greenbaum, and his team view the legal environment as sympathetic to plaintiffs. Mr. Greenbaum, who previously worked for Citadel and other hedge funds and focused on industrial-company investments, has hired insurance lawyers to advise on strategy and the merits of individual claims, the people said.

When a claim is too large for the fund to hold on to by itself, Avenue sells a portion to other investors. Traders say Avenue is the most active buyer of such claims.

Mr. Greenbaum pitched the idea in 2021 to several fund managers, including Avenue co-founder Marc Lasry, with whom he regularly plays poker. Avenue brought Mr. Greenbaum in-house late that year to start and manage a business-insurance opportunities fund. Mr. Greenbaum has told prospective investors the aim is to generate an internal rate of return of up to 30% over several years.

Avenue aimed to raise up to $500 million for the fund and to buy as many as 250 claims, according to a marketing document viewed by The Wall Street Journal. A $500 million fund would be small in the context of Avenue, which managed $12.6 billion at the end of March, but the face value of its holdings would be larger because of the discounts the fund is negotiating on claims, said people familiar with the matter.

The Covid-19 coverage disputes come down to whether the hundreds of billions of dollars of income lost nationwide by restaurants, hotels and other businesses involved property damage, as is typically required under commercial-insurance policies. In general, insurers assert there must be “direct physical loss or damage” that physically altered a property, such as from a fire, for a business-interruption claim to be paid.

That is the position generally taken by dozens of Caesars insurers, a roll call of big companies worldwide including American International Group Inc. and Chubb Ltd.

Caesars says in its lawsuit that “the tangible, physical presence” of Covid-19 on surfaces or suspended in the air had altered, damaged and left its property “unfit and unsafe for its intended use.” It says it paid for a top-of-the-line policy that protected against “all risk of physical loss or damage.”

In court filings in many cases, lawyers for plaintiffs have identified instances in which courts over the decades have ruled for policyholders over unpleasant odors, noxious particles, carbon monoxide, ammonia and gasoline fumes, even without accompanying structural alteration.

The Caesars case has been stayed pending a ruling in JGB Vegas Retail Lessee LLC v Starr Surplus Lines Insurance Co., viewed as a pivotal case that is currently before Nevada’s Supreme Court. What constitutes property damage is at the heart of that dispute.

In a filing, Starr says Covid-19 “poses a risk to people but does not physically alter property.”

Write to Juliet Chung at Juliet.Chung@wsj.com and Leslie Scism at leslie.scism@wsj.com

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