How Are Insurers And Policyholders Faring in COVID-19 Business Interruption Coverage Litigation?
This article is based on a presentation by the authors (along with Marc L. Penchansky and Felix S. Yelin) at White and Williams LLP’s Virtual Coverage College® on October 22, 2020. Every year, hundreds of insurance professionals come to Philadelphia—this year via our online platform—to participate in a full day of lectures and interactive presentations by White and Williams lawyers and guest panelists about the latest issues and challenges involved in claims handling and insurance litigation. Visit coveragecollege.com for more information and stay tuned for Coverage College® 2021.
With the COVID-19 pandemic and government stay-at-home orders came an unprecedented number of claims for business interruption coverage under first-party property policies—and the inevitable coverage litigation over those claims followed closely behind. As of this writing, we are aware of at least 70 court decisions on motions by insurers to dismiss policyholder lawsuits seeking business interruption coverage for COVID-19 related losses.
So far, the insurers are prevailing. However, there is a small, but steady stream of decisions denying motions to dismiss and even one finding coverage. Of cases with merits-based rulings:
- 35 have been dismissed with prejudice;
- 16 have been dismissed without prejudice, leaving the policyholders an opportunity to amend their complaints;
- 18 have been allowed to proceed (i.e., the insurers’ motions were denied); and
- 1 has found coverage for the policyholder on summary judgment.
What follows is a brief summary of the essentials of coverage for COVID-19 business interruption claims and a survey of recent cases and notable trends, including those favorable to insurers and policyholders.
COVID-19 Business Interruption Coverage Essentials
The “direct physical loss or damage” requirement has attracted renewed debate in the wake of COVID-19. Most “all-risk” commercial property policies do not define the phrase. Courts generally used to apply the “widely accepted definition” of physical damage—“distinct, demonstrable, and physical alteration” of a property’s structure, i.e., visible damage. However, before COVID-19, some jurisdictions had expanded the definition to include damage from “sources unnoticeable to the naked eye”—such as asbestos, gasoline vapors, and odors—as long as the “invisible” damage rendered the property “uninhabitable and unusable.” Policyholders typically cite these cases and argue the “likely” presence of COVID-19 at an insured property, or even its existence in the world generally, satisfies this requirement. Still, before and since COVID-19, most courts have held “loss of use” or “forced closure” alone, without “actual, demonstrable harm,” is not enough.
Policyholders are also seeking coverage under civil authority provisions based on government COVID-19 orders. However, this coverage is not triggered whenever a government order or action affects business. Rather, most policies require: (1) damage to property at a location other than the insured location but within a certain radius (usually one mile) of the insured premises; (2) damage caused by a covered cause of loss; and (3) a civil authority order that prohibits access to the insured premises on account of the damage to other property.
Many policies include a virus exclusion. The 2006 ISO “Exclusion for Loss Due to Virus or Bacteria,” for example, excludes loss or damage “caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” Such exclusions often apply explicitly to “business income” (i.e., business interruption) claims and apply whether the virus is alleged to directly or indirectly cause loss or damage (by virtue of anti-concurrent causation clauses).
Insurer Successes & Trends
Commentators anticipated the “direct physical loss or damage” requirement would create a difficult hurdle for policyholders seeking coverage for COVID-19 business interruption claims. As expected, the first “direct physical loss or damage” ruling was a decisive win for insurers. In Gavrilides Mgmt. Co. LLC v. Mich. Ins. Co., the policyholder acknowledged COVID-19 had never been present at its premises, but claimed its property was damaged because “people were physically restricted from dine-in services.” The court disagreed, holding a change of “material existence” that “alters the physical integrity of the property” is required.
Since Gavrilidies, over 20 federal district court decisions, and several state court decisions, have ruled policyholders did not (and many could not) allege direct physical loss or damage. In the majority of cases, the policyholder makes no allegations of COVID-19 at its property or concedes COVID-19 never entered its property. However, most courts hold that without actual contamination, there is no “direct physical loss or damage.” And some courts, including the West Virginia federal court in Uncork & Create LLC v. Cincinnati Ins. Co., are unconvinced that even actual presence would satisfy this requirement:
[E]ven when present, COVID-19 does not threaten the inanimate structures covered by property insurance policies, and its presence on surfaces can be eliminated with disinfectant. Thus, even actual presence of the virus would not be sufficient to trigger coverage for physical damage or physical loss to the property. Because routine cleaning, perhaps performed with greater frequency and care, eliminates the virus on surfaces, there would be nothing for an insurer to cover, and a covered “loss” is required to invoke the additional coverage for loss of business income under the Policy.
Arguments that COVID-19 civil authority orders, themselves, cause direct physical loss or damage to property are also unavailing. In Henry’s La. Grill v. Allied Ins. Co. of Am., a Georgia federal court held that an order restricting the policyholder’s use of its dining room did not have a “direct” effect on the property; the policyholder made an intervening decision to implement the restriction. Nor did the order change any “physical element” of the dining room itself.
Policyholders also argue that the use of prepositions and the disjunctive in the phrase “direct physical loss of or damage to” means pure loss of use—without any tangible alteration to property—is also covered. Some courts agree “loss of,” in the disjunctive, affords coverage for “permanent dispossession” of property (e.g., losing a table) as an alternative for coverage to damage to property (e.g., cracks/dents to the table). Even so, courts consistently hold temporary loss of use due to civil authority orders is not “permanent dispossession.” As one court explained, “[w]hen the Stay at Home orders are lifted, [the policyholder] can regain possession of its storefront.”
Nor are policyholders having much success under civil authority provisions, which require very particular conditions for coverage. Just as many complaints do not allege direct physical loss or damage to policyholders’ property, they do not allege any such loss or damage to other, nearby property, as required by this coverage. Also, the government orders relied upon, while they may limit policyholder’s operations, do not “prohibit access” to their premises.
And, of course, many courts are holding virus exclusions are unambiguous and apply to preclude coverage for these claims nonetheless. Indeed, some courts begin (and, for the most part, end) their analysis with the exclusion. The California federal court in Franklin EWC, Inc. v. Hartford Fin. Servs. Grp. observed that the complaint “repeatedly alleges that the virus caused and continues to cause risk of direct physical loss” and summarily held the unambiguous virus exclusion applied to preclude coverage. Similarly, in Boxed Foods Co. v. Cal. Capital Ins. Co., the court went right to a “Pathogenic Organisms Exclusion” (including “any virus”), holding the exclusion “is only subject to one reasonable interpretation: that coverage does not extend to any claim premised on virus-induced damage, regardless of the virus’s magnitude.”
Courts are also enforcing exclusions’ anti-concurrent causation (ACC) clauses. Whether the policyholder artfully pleads its losses were caused by government orders or “respiratory droplets”—and not the virus itself—to attempt to avoid the exclusion, “the coronavirus still remains part of the causal chain.”  Thus, under the typical ACC clause, the exclusion “applies regardless of any other cause or event that contributes concurrently or in any sequence to the loss.”
Many courts are dismissing policyholders’ lawsuits on initial motions to dismiss with prejudice, reasoning any attempt to amend the complaint to plead a case for coverage would be futile. Indeed, one court that has granted leave to amend acknowledged it was “doubtful” the policyholder could establish a direct physical loss of property, but allowed the policyholder to re-plead as COVID-19 business interruption coverage law is “very much in development.”
Policyholder Successes & Trends
However, some courts are allowing lawsuits to proceed past motions to dismiss. In Studio 417 v. Cincinnati Ins. Co., the first major pro-policyholder decision, a Missouri federal court found the policyholder stated a claim for “direct physical loss” where the complaint alleged the virus was “likely” on their premises. However, the court “emphasize[d]” the policyholder “merely pled enough facts to proceed with discovery,” which would shed light on the nature and extent of COVID-19 actually on the premises.
A handful of other courts have followed suit, allowing policyholders to survive dismissal on the “direct physical loss or damage” requirement—some based on allegations of “probable” COVID-19 contamination, like in Studio 417, and some based on “novel” arguments that loss of use due to government closure orders, itself, might constitute direct physical loss or damage to property.
At least one court has gone further, finding coverage on summary judgment. In North State Deli v. Cincinnati Ins. Co., a North Carolina state court held that the ordinary meaning of “direct physical loss” includes the scenario where businesses “lose the full range of rights and advantages of using or accessing their business property” due to government orders. Moreover, because of the disjunctive in “accidental physical loss or accidental physical damage,” the court held the policy contemplated coverage for structural alteration (“damage”) to property and “loss” of use without any structural alteration—otherwise, the term “physical damage” would be superfluous.
Notably, the policies at issue in most of these cases (including North State Deli) did not have virus exclusions. However, a Florida federal court, in Urogynecology Specialist of Fla., LLC v. Sentinel Ins. Co., denied the insurer’s motion to dismiss even though the policy included a virus exclusion. The court held that business losses from COVID-19 “do not logically align with the grouping of the virus exclusion with other pollutants”—fungi, wet rot, dry rot, bacteria—such that the policy necessarily intended to deny coverage for COVID-19 losses. The court distinguished pre-COVID-19 cases applying the same virus exclusion to preclude coverage because of the “unique circumstances of the effect COVID-19 has had on our society.”
Specifically, the court in Urogynecology was interpreting an exclusion that excluded loss caused by “[p]resence, growth, proliferation, spread or any activity of ‘fungi,’ wet rot, dry rot, bacteria or virus.” To date, the 2006 ISO Virus Exclusion—which applies to loss caused by “any virus … that induces or is capable of inducing physical distress, illness or disease”—remains undefeated in these cases.
Decisions favorable to policyholders continue to come down, primarily from state courts and, to date, from federal courts in Missouri, Texas and Florida. However, they are still outnumbered over 2 to 1 by dismissals.
Business interruption coverage decisions continue to come down almost daily and the law is, indeed, very much in development. That said, early trends and takeaways are emerging:
- Policyholders continue to face an uphill battle in demonstrating coverage. But some are defeating early dispositive motions by alleging “likely” presence of COVID-19 at the insured property, “probable” contamination by community spread, and other novel COVID-19 arguments that courts are not willing to dismiss outright given the still-developing COVID-19 case law and the unprecedented nature of the virus and the pandemic itself.
- Insurers have several coverage defenses and are “winning” many more cases based on, e.g., the lack of physical loss of or damage to property and the policyholder’s failure to meet one or more of the many conditions precedent for civil authority coverage.
- Other than in at least one federal case to date, virus exclusions are proving nearly unassailable. Courts are finding that various forms of virus exclusions are unambiguous and clearly apply to preclude coverage, regardless of artful pleading and arguments that COVID-19 itself, does not cause, or only indirectly causes, the policyholder’s losses.
 These results are based, in part, on Penn Law’s Covid Coverage Litigation Tracker, as well as White and Williams LLP’s own tracking, collection, and analysis of COVID-19 business interruption coverage decisions.
 See Newman Myers Kreines Gross, P.C. v. Great Northern Ins. Co., 17 F. Supp. 3d 323, 328–33 (S.D.N.Y. 2014) (law firm’s inability to access its offices due to Hurricane Sandy evacuation orders, without damage to the building itself, was not “direct physical loss or damage”).
 No. 20-258-CB-C30 (Mich. Cir. Co., July 1, 2020).
 See e.g., Diesel Barbershop, LLC v. State Farm Lloyds, No. 5:20-CV-461, 2020 U.S. Dist. LEXIS 147276 (W.D. Tex. Aug. 13, 2020); Malaube, LLC v. Greenwich Ins. Co., No. 20-22615, 2020 U.S. Dist. LEXIS 156027 (S.D. Fla. Aug. 26, 2020); 10E, LLC v. Travelers Indem. Co., No. 2:20-CV-04418, 2020 U.S. Dist. LEXIS 156827 (C.D. Cal. Aug. 28, 2020); Seifert v. Imt Ins. Co., No. 20-1102, 2020 U.S. Dist. LEXIS 192121 (D. Minn. Oct. 16, 2020); Hospitality v. Travelers Cas. Ins. Co. of Am., No. 2:20-CV-00087, 2020 U.S. Dist. LEXIS 208599 (S.D. Miss. Nov. 4, 2020); Brian Handel DMD, P.C. v. Allstate Ins. Co., No. 20-2198, 2020 U.S. Dist. LEXIS 207892 (E.D. Pa. Nov. 6, 2020).
 No. 2:20-CV-00401, 2020 U.S. Dist. LEXIS 204152, at *12–13 (S.D. W.Va. Nov. 2, 2020); see also Pappy’s Barber Shops, Inc. v. Farmers Grp., Inc., No. 20-CV-907, 2020 U.S. Dist. LEXIS 182406, at *2–3 (S.D. Cal. Oct. 1, 2020) (even assuming truth of speculative allegations that COVID-19, or individuals infected with COVID-19, had entered premises, “the presence of the virus itself, or of individuals infected [with] the virus, at Plaintiff’s business premises or elsewhere do not constitute direct physical losses of or damage to property”); Sandy Point Dental, PC v. Cincinnati Ins. Co., No. 20-CV-2160, 2020 U.S. Dist. LEXIS 171979, at *7 (N.D. Ill. Sept. 21, 2020) (“The coronavirus does not physically alter the appearance, shape, color, structure, or other material dimension of the property.”).
 No. 1:20-CV-2939, 2020 U.S. Dist. LEXIS 188353, at *12 (N.D. Ga. Oct. 6, 2020); see also Hillcrest Optical v. Cont’l Cas. Co., No. 1:20-CV-275, 2020 U.S. Dist. LEXIS 195273, at *17 (S.D. Ala. Oct. 21, 2020) (inability to use property due to Order is not direct physical loss, as “the Order did not immediately cause some tangible alteration to Plaintiff’s office”).
 See Hillcrest Optical, 2020 U.S. Dist. LEXIS 195273, at *11–14.
 Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., No. 20-CV-03213, 2020 U.S. Dist. LEXIS 168385, at *10 (N.D. Cal. Sep. 14, 2020).
 See id. at *20 (“Because the orders were preventative – and absent allegations of damage to adjacent property – the complaint does not establish the requisite causal link between prior property damage and the government’s closure order.”). See also Henry’s La. Grill, 2020 U.S. Dist. LEXIS 188353, at *16–18 (argument that “community spread of COVID-19” necessarily means “property other than its own has been damaged by the virus” not addressed where complaint failed to allege all other civil authority coverage requirements).
 See Sandy Point Dental, 2020 U.S. Dist. LEXIS 171979, at *8.
 No. 20-CV-04434, 2020 U.S. Dist. LEXIS 174010, at *5 (N.D. Cal. Sep. 22, 2020).
 No. 20-CV-04571, 2020 U.S. Dist. LEXIS 198859 (N.D. Cal. Oct. 26, 2020); see also Wilson v. Hartford Cas. Co., No. 20-3384, 2020 U.S. Dist. LEXIS 179896 (E.D. Pa. Sep. 30, 2020); Travelers Cas. Ins. Co. of Am. v. Geragos and Geragos, No. 2:20-CV-03619, 2020 U.S. Dist. LEXIS 196932 (C.D. Cal. Oct. 19, 2020) (“The Virus Exclusion Provision, which explicitly applies to civil authority coverage, also explicitly excludes loss or damages resulting from a virus.”); Turek Enters. v. State Farm Mut. Auto. Ins. Co., No. 20-11655, 2020 U.S. Dist. LEXIS 161198, at *21–25 (E.D. Mich. Sep. 3, 2020) (virus exclusion unambiguous; thus court did not consider extrinsic evidence including a 2006 ISO circular on the ISO virus exclusion).
 See Franklin EWC, 2020 U.S. Dist. LEXIS 174010, at *6–7 (policyholder theory that “the loss is created by the Closure Orders rather than the virus, and therefore the Virus Exclusion does not apply” is “[n]onsense”); Founder Inst. Inc. v. Hartford Fire Ins. Co., No. 20-CV-04466, 2020 U.S. Dist. LEXIS 196732, at *2 (N.D. Cal. Oct. 22, 2020) (rejecting argument that loss results from “respiratory droplets on surfaces,” and not the virus itself, as a “contorted characterization”).
 Nahmad v. Hartford Cas. Ins. Co., No. 1:20-CV-22833, 2020 U.S. Dist. LEXIS 203838, at *25 (S.D. Fla. Nov. 2, 2020).
 See Diesel Barbershop, 2020 U.S. Dist. LEXIS 147276, at *22; Turek Enters., 2020 U.S. Dist. LEXIS 161198, at *25.
 Mudpie, 2020 U.S. Dist. LEXIS 168385, at *23.
 No. 20-CV-03127, 2020 U.S. Dist. LEXIS 147600 (W.D. Mo. Aug. 12, 2020) (J. Bough).
 Id. at *24. Judge Bough has denied at least two other insurer motions to dismiss, citing his decision in Studio 417. See K.C. Hopps, Ltd. v. Cincinnati Ins. Co., No. 20-CV-00437, 2020 U.S. Dist. LEXIS 144285 (W.D. Mo. Aug. 12, 2020); Blue Springs Dental Care LLC v. Owners Ins. Co., No. 20-CV-00383, 2020 U.S. Dist. LEXIS 172639 (W.D. Mo. Sep. 21, 2020).
 See, e.g., Optical Servs. USA/JCI v. Franklin Mut. Ins. Co., No. BER-L-3681-20, 2020 N.J. Super. Unpub. LEXIS 1782, at *27–28 (Law Div. Bergen Co. Aug. 13, 2020) (affording policyholder opportunity for discovery on “interesting argument” that physical damage occurs when “a policy holder loses functionality of their property and by operation of civil authority such as the entry of an executive order results in a change to the property”).
 No. 20-CVS-02569 (N.C. Super. Oct. 9, 2020) (Order Granting Plaintiffs’ Rule 56 Motion for Partial Summary Judgment). The insurer appealed this ruling to the Court of Appeals of North Carolina on November 5, 2020. As of this writing, the appeal is pending.
 No. 6:20-CV-1174, 2020 U.S. Dist. LEXIS 184774, at *9–11 (M.D. Fla. Sept. 24, 2020).