Cracks in the Dam? COVID-19 Business Interruption Insurance Coverage Litigation Update

From the Desk of Cassandra Porsch

The dam has begun to show cracks in the insurance industry’s adamant position that general business interruption coverage does not cover losses due to the pandemic.  How much water will seep through the cracks?

One of the biggest legal issues arising out of the COVID-19 pandemic continues to be the ability of businesses to collect on their business interruption insurance policies for lost income due to lock downs.  According to an Oct. 22 report by the National Association of Insurance Commissioners (NAIC), there have been at least 201,285 claims for business-interruption losses caused by coronavirus orders in the United States.  The NAIC reports that of those 164,178 were closed without payment, 34,106 remained open and 3,001 were paid.

Jilted businesses denied insurance recoveries have taken to the courts with thousands of individual and class actions filed all over the country.  As decisions on motions to dismiss in these cases begin to come down, a hodgepodge of conflicting case law is emerging across jurisdictions.  Two of the pivotal issues upon which conflicting law is arising are whether the policy at issue contains a virus exclusion and whether the existence of the virus constitutes a direct physical loss.  A few recent cases have suggested recovery may be possible even over these obstacles.

Whether the Policy Contained a Virus Exclusion

Many cases filed by insureds whose policy contained a virus exclusion are being dismissed.  For example, in Mac Prop. Grp. LLC v. Selective Fire & Cas. Ins. Co., a New Jersey bakery sued its insurer for denying a business interruption claim when it had to close during a shutdown of nonessential businesses.  The policy excluded coverage for loss caused directly or indirectly by “any virus, bacterium or other micro-organism that induces or is capable of inducing physical distress, illness or disease.”  The New Jersey Superior Court found this language “clear and unambiguous,” and determined in dismissing the case that it did not need to reach any other issue such whether there was direct physical loss to the property in dismissing the complaint.

Likewise, in Chattanooga Professional Baseball LLC et al. v. National Casualty Co. et al., the United States District Court for the District of Arizona dismissed a case by a group of Minor League Baseball teams seeking coverage from their insurer for lost income due to the cancellation of their season.  While the teams argued that their losses stemmed from government shutdown orders, the judge noted that those shut down orders were as a result of the virus and that because their policies contained a virus exclusion, they were barred from recovery.

However, faced with a similar virus exclusion clause, a federal judge in Florida came to the opposite conclusion.  In Urogynecology Specialist of Florida v. Sentinel Insurance, a medical practice which was forced to cease normal operations during Florida’s state of emergency sought to recover its business losses under an “all-risk” insurance policy.  The insurer sought to dismiss the case based on the virus exclusion clause in the policy, which disclaimed coverage for losses caused by the “[p]resence, growth, proliferation, spread or any activity of ‘fungi,’ wet rot, dry rot, bacteria or virus.”  Here, the court found that the language of the policy did not clearly and unambiguously exclude losses related to COVID-19 because the word “virus” was grouped with pollutants, and thus did not necessarily contemplate for exclusion “the unique circumstances of the effect COVID-19 has had on our society.”

“Physical Loss” Clauses

In many cases, business interruption coverage cases are also being dismissed based on a requirement in policies that there be “physical loss” to the property, which courts have interpreted to mean physical damage, and not just loss of use due to the spread of a virus.  For example, a judge in the United States District Court for the Southern District of New York in Social Life Magazine, Inc. v. Sentinel Insurance Company Limited ruled at oral argument on an order to show cause that a publisher could not show a likelihood of success on the merits of its declaratory judgment claim because its insurance policy contained a physical loss provision and merely having to shut down due to the spread of the virus did not cause physical loss to the premises.  The judge noted that the virus “…damages lungs. It doesn’t damage printing presses.”

Similarly, the U.S. District Court for the Southern District of West Virginia in Uncork & Create LLC v. The Cincinnati Insurance Co. found that a restaurant that had to close in response to a government shut down order had not shown a “physical loss” as required for coverage under its policy.  While the plaintiff argued that it was not required to show a physical alteration to its property in order to meet the physical loss standard, the court still was not convinced that the potential presence of the virus met the standard.  Specifically, the court noted that even if the virus were attached to surfaces at the property, it would not threaten the physical structures as the virus’ presence could be eliminated with surface disinfectants. The court dismissed the case.

However, based on essentially the same facts and another “physical loss” provision, the United States District Court for the Western District of Missouri found that the general presence of the virus in the area was sufficient to constitute physical loss and meet that requirement in the insureds’ policies.  Studio 417, Inc. et al. v. The Cincinnati Insurance Co. involved a hair salon and several restaurants seeking business interruption coverage for COVID-19 shutdowns.  The court noted that a “loss” included “the act of losing possession” and “deprivation” of property.  In reasoning directly contrary to that used by the West Virginia court, it also found that the virus was a physical substance that attached to surfaces and thus made the property unusable.  This court also focused on the disjunctive phrase “physical loss or damage” in the relevant policies, noting that the use of “or” meant that “loss” could occur without physical alteration, with such loss including an inability to inhabit the property even without any alteration to the state of the property.

With both of the above issues, the viability of a case may hinge heavily on minor differences in the language of the insurance policy at issue.  However, even with similar or identical language, the outcome may depend upon a judge’s willingness to consider alternative definitions of basic terms.  As more conflicting case law arises, we should see the business interruption insurance issue work its way through the appellate courts to determine a more standard approach across jurisdictions.  The issue will likely be with us long after the virus has receded.  The insureds’ door to recovery has been opened by at least some courts despite the virtually blanket insurer denials seen to date.

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