Insurers’ COVID-19 Notepad: What You Need to Know Now - Week of (March 7, 2022)

Courts Dismiss COVID-19 Business Interruption Claims

On March 7, 2022, the Fourth Circuit affirmed the dismissal of a creative events business’ COVID-19 business interruption claim. The court held that, under West Virginia law, “the policy language requiring a ‘physical loss’ or ‘physical damage’ unambiguously covers only losses caused by, or relating to, material destruction or material harm to the covered property.” Opinion at 1. Moreover, “[a]ny alternative meaning of the terms ‘physical loss’ or ‘physical damage’ that does not require a material alteration to the property would render meaningless this pre-condition to coverage for business income loss.” Id. at 10-11. Thus, dismissal was appropriate because “neither the closure order nor the Covid-19 virus caused present or impending material destruction or material harm that physically altered the covered property requiring repairs or replacement so that they could be used as intended.” Id. at 12-13. The case is Uncork & Create LLC v. The Cincinnati Ins. Co., et al.

On March 3, 2022, the Sixth Circuit affirmed the district court’s grant of summary judgment for an insurer on a brewery’s COVID-19 business interruption claim. Relying on Estes v. Cincinnati Insurance Co., 23 F.4th 695 (6th Cir. 2022), the court held that the plain text of the policy provides coverage only for “direct physical loss—that is, a tangible deprivation or destruction of property.” Order at 3. Instead of the properties being physically damaged or the policyholder being tangibly deprived of the properties, the government shutdown orders merely restricted their use, which is not physical loss. Id. at 4. The case is Goodwood Brewing, LLC v. United Fire Grp.

On March 2, 2022, the Sixth Circuit affirmed the Northern District of Ohio’s entry of judgment on the pleadings for Twin City Fire Insurance Company on a COVID-19 business interruption claim. The court explained that “‘direct physical loss of or damage to’ property means what it says—tangible destruction, in whole or part, or tangible or concrete deprivation—and thereby excludes mere loss of use.” Order at 4–5. It held that the property suffered no physical damage because “[c]onspicuously absent” was “any factual allegation to support the inference that COVID-19 altered the physical condition of specific ‘surfaces and objects.’” Id. at 5. The court acknowledged the “gravity of the pandemic” but held that it “does not authorize us to rewrite policy language to cover those losses when coverage is otherwise absent.” Id. at 6. The case is System Optics, Inc. v. Twin City Fire Insurance Co.

On March 1, 2022, the Second Circuit affirmed the U.S. District Court for the Northern District of New York’s decision to grant an insurer’s motion to dismiss a COVID-19 business interruption lawsuit. Relying on its decision in 10012 Holdings, Inc. v. Sentinel Insurance Co., 21 F.4th 216 (2d Cir. 2021), the court held the policyholder suffered no physical damage but instead “merely alleges loss of use.” Order at 3. The case is Deer Mountain Inn LLC v. Union Insurance Co.

On March 1, 2022, the district court for the District of New Jersey granted Citizens Insurance Company of America’s motion for judgment on the pleadings in a COVID-19 business interruption class action claim filed by the operator of a catering business. The court found that the policy’s virus exclusion barred coverage for the plaintiff’s alleged losses, because “the COVID-19 virus and Closure Orders were not two separate, independent events contributing to a loss, but rather were inextricably intertwined, such that the latter were entirely dependent and preconditioned on the existence of the former” and the “predominant and proximate cause of Plaintiff’s business-related losses is therefore the COVID-19 virus, not the Closure Orders that were issued in response thereto.” Order at 9. The case is Tsakos, Inc. v. Citizens Ins. Co. of Am.

On March 1, 2022, the district court for the District of Connecticut granted Hartford Casualty Insurance Company’s motion to dismiss a dentistry’s COVID-19 business interruption claim. The court concluded that that coverage was barred by the policy’s virus exclusion, as “there is only one way to read [the exclusion’s] language; Any loss caused by any virus is excluded from coverage under this provision of the Policy.” Order at 12. The court further found the “allegations that COVID-19 was present in the ambient air and on the surfaces of [the plaintiff’s] property are not sufficient to allege direct physical loss or damage to that property.” Id. at 29. The case is Dr. Jeffrey Milton, DDS, Inc. v. Hartford Cas. Ins. Co.

New Business Interruption Suits Against Insurers:

The managers and tenants of Levi’s Stadium sued American Home Assurance Company in California state court (Santa Clara County) for declaratory relief and breach of contract. The “all risk” policy allegedly provides business income, extra expense, and civil authority coverage. Complaint at ¶¶ 21-24. The Complaint alleges that “[a]ny jury would find that the stadium has suffered a direct physical loss or damage because COVID-19 impaired Plaintiff’s property by making the stadium unusable in the same manner as it had been used prior to the outbreak of COVID-19.” Id. at ¶ 8. The case is Forty Niners SC Stadium Company LLC, et al. v. Am. Home Assurance Co.

A fashion retailer sued Affiliated FM Insurance Company in Rhode Island state court (Providence/Bristol County) for declaratory judgment, breach of contract, breach of the covenant of good faith and fair dealing, and statutory bad faith. Plaintiff’s “all risk” policy allegedly provides gross earnings/gross profits, attraction property, civil authority, ingress/egress, protection of property, supply chain, and communicable disease coverage. Complaint at ¶¶ 21-34. The complaint alleges plaintiff suffered a covered physical loss under all coverage provisions due to the “loss of functionality” of its physical stores and caused other business interruption losses. Id. at ¶¶ 73-74. The complaint also alleges AFM acted in bad faith because it “effectively denied” plaintiff’s claim by contending that COVID-19 does not cause physical loss or damage and that “the only potentially applicable coverages are the Communicable Disease coverages.” Id. at ¶¶ 116-17, 119, 124-25. The case is Vera Bradley, Inc. v. Affiliated FM Ins. Co.

A hotel sued Fireman’s Fund Insurance Company, Allianz Global Corporate and Specialty, and RSG Underwriting Managers Operating as Suitelife Underwriting Managers for breach of contract. The plaintiffs allege that they had communicable disease coverage but that the insurers denied coverage. Complaint ¶¶ 14, 16. The case is William Vale Hotel, LLC v. Fireman’s Fund Insurance Co.