BUSINESS INTERRUPTION – CORONAVIRUS (COVID-19)
Federal Court Decisions
California federal magistrate judge rules that a virus exclusion* in a business owner’s policy precludes coverage for an insured’s claim for lost income due to COVID-19 closure orders directed at “non-essential businesses.” Calling the insured’s suggestion that the loss was due to the orders and not the virus “[n]onsense,” the judge concluded that the exclusion’s “plain and unambiguous language” applied since the complaint repeatedly alleged that the virus caused the risk of direct physical loss; also, there was no indication that the policy’s “Limited Fungi, Bacteria, or Virus Coverage” (for a virus that results from a “specified cause of loss”) was implicated.
* The exclusion states, in part, that the insurer “will not pay for loss or damage caused directly or indirectly by. . .[p]resence, growth, proliferation, spread or any activity of ‘fungi’, wet rot, dry rot, bacteria or virus.”
California federal court dismisses putative class action complaint by insured-retailers seeking coverage for lost business income allegedly resulting from a state COVID-19 “stay at home” order. Finding the circumstances similar to Gavrilides Management Company v. Michigan Insurance Company, No. 20-000258-CB (Mich. Cir. Ct., Ingham Cnty. July 1, 2020), the court concluded that the lead plaintiff-insured merely claimed loss due to government closure orders and failed to establish a “direct physical loss of property” under the policy (i.e., did not allege that a physical force had “induced a detrimental change in the property’s capabilities”).
California federal court dismisses policyholders’ putative class action complaint seeking business income and civil authority coverage for alleged losses resulting from government-mandated COVID-19 closures. The court concluded that the lead plaintiff-insureds’ claimed inability to operate their businesses as a result of the closures, without any allegation of tangible physical damage or alteration to their properties, did not satisfy the “direct physical loss” requirement for business income coverage. It also rejected their claim for civil authority coverage, finding that the complaint did not plausibly allege that (1) any civil authority orders prohibited access to the insureds’ places of business (as opposed to simply prohibiting them from operating their businesses), or (2) any direct physical loss of or damage to property had occurred, other than at the insureds’ premises.
California federal court issues tentative ruling dismissing putative class action complaint by restaurant owner-insureds seeking coverage under property policies for income loss resulting from COVID-19 orders requiring shelter at home/restaurants to suspend on-premises dining. The court rejected the lead plaintiff-insured’s interpretation that the policy’s “physical loss of” language includes changes in activities that can occur (e.g., the inability to offer on-premises dining) and did not require a tangible alteration to the property, calling it a “sweeping expansion of insurance coverage without any manageable bounds” and a “major departure from established California law.”
Note: On September 15, 2020, in light of the court’s decision, the insured accepted a with-prejudice dismissal of the case.
California federal court holds that pandemic-related dining restrictions that allegedly caused a “complete and total shutdown” of an insured’s restaurant business did not give rise to civil authority coverage. The court explained that the insured had failed to plausibly allege “direct physical loss of or damage to property” and that, under California law, losses from inability to use property do not qualify as such; “[p]hysical loss or damage occurs only when property undergoes a ‘distinct, demonstrable, physical alteration.’” It granted the insureds leave to amend, but noted that “[a]n insured cannot recover by attempting to artfully plead impairment to economically valuable use of property as physical loss or damage to property.”
Note: The insureds did not file an amended complaint within the time the court had allowed.
Florida federal court rules that a virus exclusion in a commercial insurance policy precludes coverage for an insured’s claims for coverage for decontamination costs and loss of business income resulting from pandemic restrictions imposed on dental services. The exclusion applies to loss or damage caused “directly or indirectly” by “[a]ny virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”
Florida federal magistrate judge recommends dismissal of restaurant-insured’s claims for lost income due to government orders that prohibited on-site dining for failure to allege “direct physical loss or damage.” The judge explained that any “interruption in business must be caused by some physical problem with the covered property. . .which must be caused by a ‘covered cause of loss.’” The recommendation disposes of the insured’s “last ditch” argument that coverage could exist if the property was not useable:
Assuming we were inclined to ignore both Eleventh Circuit and Florida precedent, Plaintiff still fails to state a claim because — even under an expanded definition — there are no allegations that the restaurant was uninhabitable or substantially unusable. Plaintiff only alleges that the government forced it to close its indoor dining to contain the spread of COVID-19. The government permitted Plaintiff to continue its takeout and delivery services. While Plaintiff never makes clear whether it undertook either of these options, the government never made the restaurant uninhabitable or substantially unusable.
Note: On September 8, 2020, the insured voluntarily discontinued the case.
Illinois federal court finds no coverage for revenue losses claimed by a dental practice-insured that alleged it was “effectively forced to shut down” by the governor’s COVID-19 closure order. The court explained that “direct physical loss,” as used in the policy, “unambiguously requires some form of actual, physical damage to the insured premises to trigger coverage,” and that the language “ordinarily connote[s] actual, demonstrable harm of some form to the premises itself, rather than forced closure of the premises for reasons extraneous to the premises themselves, or adverse business consequences that flow from such closure.” Here, the insured only alleged loss of use and “substantial closure” of its clinic: “In essence, plaintiff seeks insurance coverage for financial losses as a result of the closure orders. The coronavirus does not physically alter the appearance, shape, color, structure, or other material dimension of the property. Consequently, plaintiff has failed to plead a direct physical loss—a prerequisite for coverage.”
Michigan federal court dismisses a putative class action by policyholders seeking coverage for lost income and extra expense under commercial policies insuring “accidental direct physical loss.” The lead plaintiff-insured suspended its operations in compliance with the governor’s “stay at home” order and insisted that “COVID-19 never entered its premises.” The court interpreted the policy to “unambiguous[ly]” require “some tangible damage to Covered Property.” It also determined that the policy’s virus exclusion applied.*
* The exclusion bars coverage for any loss that, “regardless of. . .whether other causes acted concurrently or in any sequence with [an] excluded event to produce the loss,” would not have occurred but for some “[v]irus, bacteria or other microorganism that induces or is capable of inducing physical distress, illness, or disease.”
Missouri federal court declines to dismiss putative class action complaint by policyholders seeking coverage under “all-risk” policies insuring “accidental physical loss or accidental physical damage” for business losses allegedly caused by the presence of COVID-19 and state closure orders. According to the court, the lead plaintiff-insureds adequately alleged a direct physical loss, and that requiring proof of tangible, physical alteration would “conflate ‘loss’ and ‘damage’” and not “give meaning to both terms.” It emphasized that the insureds had “merely pled enough facts to proceed with discovery” and that all rulings are subject to further review following discovery.
Note: Since then, the same judge declined, in another case, to dismiss claims by a dental practice for coverage for losses related to the pandemic and state and local “stay at home” orders, finding that their complaint plausibly alleged that “COVID-19 physically attached itself to their dental clinics, thereby depriving them of the possession and use of those insured properties,” and that the issue is “better suited for resolution at the summary judgment stage, after the parties have had the benefit of discovery.” Blue Springs Dental Care v. Owners Insurance Company, 2020 U.S. Dist. LEXIS 172639 (W.D. Mo. Sept. 21, 2020).
Texas federal court dismisses insureds’ complaint seeking coverage for business income losses due to the COVID-19 outbreak and state and local closure orders under policies insuring for “accidental direct physical loss.” The court concluded that the insureds failed to plead tangible injury to their property and that, given the allegation that COVID-19 was the reason for the orders and the underlying cause of their losses, the policies’ virus exclusion barred coverage.*
* The exclusion precludes coverage for any loss that, “regardless of. . .whether other causes acted concurrently or in any sequence with [an] excluded event to produce the loss,” would not have occurred but for some “[v]irus, bacteria or other microorganism that induces or is capable of inducing physical distress, illness, or disease.”
State Court Decisions
California state court sustains demurrer to insured’s complaint seeking business interruption and civil authority coverage for alleged COVID-19 losses. At oral argument, the court explained that mere “detrimental economic impact” to the insured’s property, “without the distinct, demonstrable physical alteration of the property,” was insufficient to meet the policy’s requirement of “direct physical loss of or damage to property.” The court later issued an order dismissing the complaint without leave to amend “on the grounds that the allegations fail to state facts sufficient to constitute a cause of action.”
District of Columbia trial court rules on summary judgment that the plaintiff-insureds failed to show that forced closure of their restaurants due to the mayor’s COVID-19 orders constituted “direct physical loss” under their commercial property policies. Among other things, the court explained that (1) the insureds offered no evidence that COVID-19 was actually present on their properties at closure; (2) the orders “did not have any effect on the material or tangible structure of the insured properties;” and (3) “none of the cases cited by [the insureds] stand for the proposition that a governmental edict, standing alone, constitutes a direct physical loss under an insurance policy.”
Note: On September 4, 2020, the insureds filed a notice appealing the dismissal of the case.
New Jersey trial court declines to dismiss insureds’ complaint seeking coverage for business income losses allegedly caused by the governor’s order suspending non-essential retail operations on account of the COVID-19 pandemic. The court indicated that a ruling on the merits of the insureds’ claims at this early stage would be premature given the limited record and “novel” theory advanced by the insureds that physical damage occurs when a policyholder loses “physical functionality and the use of their business” by operation of civil authority.
Multidistrict Litigation (MDL)
Judicial Panel on Multidistrict Litigation (JPML) rejects petitions to centralize hundreds of cases seeking coverage for business interruption losses caused by the COVID-19 pandemic and related government orders. After hearing argument from interested parties, the seven-member JPML concluded that an industry-wide MDL would not promote a speedy resolution of the cases:
The proponents of centralization identify three core common questions: 1) do the various government closure orders trigger coverage under the policies; 2) what constitutes “physical loss or damage” to the property; and 3) do any exclusions (particularly those related to viruses) apply. These questions, though, share only a superficial commonality. There is no common defendant. . .as these actions involve either a single insurer or insurer-group. . . .Thus, there is little potential for common discovery across the litigation. Furthermore, these cases involve different insurance policies with different coverages, conditions, exclusions, and policy language, purchased by different businesses in different industries located in different states. These differences will overwhelm any common factual questions.
The JPML did not rule out MDLs as to certain insurers and London affiliates. On September 24, 2020, it heard argument over whether to create several such MDLs. A decision is pending.
Tenth Circuit finds (under Wyoming law) that, having defended its insured for 18 months without reserving rights, an insurer is equitably estopped from asserting a punitive damages exclusion in a CGL policy 11 days before trial. The court acknowledged that Wyoming law does not permit estoppel to expand coverage, but noted its prior prediction (in Cornhusker Casualty Company v. Skaj, 786 F.3d 842 (10th Cir. 2015)) that the state’s Supreme Court would adopt an exception in cases where the insurer, despite knowing a policy exclusion applies, agrees to defend the insured unconditionally. In those specific circumstances, the Tenth Circuit explained, prejudice to the insured can be presumed. The court disagreed that the insured here could not have been prejudiced because it was aware of the exclusion, noting “the inherent nature of the prejudice that results from relinquishing control of the defense” and that the insurer had not adequately communicated its intention to rely on the exclusion.
Pennsylvania federal court holds that claims for consequential damage to an airship due to faulty design and construction of a hangar did not allege a covered “occurrence” under a CGL policy.* The court explained that, under Pennsylvania law, the term “accident” in the “occurrence” definition “implies a degree of fortuity that is not present in a claim for faulty workmanship.” It rejected the insured’s argument based on Pennsylvania Manufacturers Indemnity Company v. Pottstown Industrial Complex LP, 215 A.3d 1010 (Pa. Super. Ct. 2019), which it said merely held that faulty workmanship does not preclude the finding of an “occurrence” when third-party property is damaged, and that an underlying complaint “must still allege that the damage was caused by ‘an unexpected and undesirable event’ that ‘falls within the definition of the term occurrence under the [policy].’”
* The policy defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful condition.”
PROPERTY DAMAGE – DIRECT PHYSICAL LOSS
Eleventh Circuit holds that (under Florida law) claims by a restaurant-insured for cleaning and painting costs due to migrating construction debris and dust were not covered “direct physical loss or damage” under its commercial property policy. The court explained that “[a] ‘loss’ is the diminution of value of something. . .‘Direct’ and ‘physical’ modify loss and impose the requirement that the damage be actual.” In this case, there was no “direct physical loss” since all that was required was cleaning and painting (i.e., “an item or structure that merely needs to be cleaned has not suffered a ‘loss’ which is both ‘direct’ and ‘physical’”). For this reason, the insured’s claims for business income that was lost when it closed parts of the restaurant for cleaning also were not covered.
New York federal court holds that facultative reinsurance contracts with “follow-the-settlements” provisions obligate a reinsurer to indemnify an “all sums” settlement by an insurer (pursuant to Hawaii law), even though the contracts were in effect for only 3 of the 44 years of alleged damage at issue. The court rejected the reinsurer’s argument that holding it liable for the settlement would expand its coverage, reasoning that English law applicable to the contracts imposes a strong presumption in favor of “back-to-back” coverage (i.e., making the reinsurance contract co-extensive with the underlying insurance). It found that, under the follow-the-settlements provisions, the parties assumed the risk that the reinsurer would have to indemnify any settlement the insurer was required to pay, including one based on “all sums” liability.