Insurers' COVID-19 Notepad: What You Need to Know Now (Week of May 10)

Courts Dismiss COVID-19 Business Interruption Claims

On April 13, 2021, the Supreme Court of New York (Onondaga County) granted Zurich American Insurance Company’s motion to dismiss two hotels' business interruption claims related to COVID-19. The court held “that actual physical damage to property is required to trigger coverage; loss of use alone is insufficient.” Order at *13-14. The court found the plaintiffs alleged no direct physical loss or damage to their properties, and that merely needing to clean a structure or item does not equate to physical loss or damage. Id. at *16. Finding there was no right to civil authority coverage, the court noted the government orders were issued to mitigate the spread of the coronavirus rather than “as a result of any physical loss or damage to the property” and that the plaintiffs additionally failed to allege that access to the properties was impaired. Id.

On April 29, 2021, the district court for the Western District of Louisiana granted Transportation Insurance Company’s motion to dismiss a COVID-19 business interruption claim filed by a dentist and his dental office. The court concluded that the complaint failed to state a claim for business interruption coverage because it did not allege that any insured property was damaged, as required by the policy, Order at 7, finding that “[s]imply stated, if there is not physical loss to the insured property, there is no coverage.” Id. at 4. The court further determined that civil authority coverage was unavailable, as the plaintiffs were never completely prohibited from accessing the insured property and the COVID-19 closure orders were not issued due to any prior physical loss or damage to property. Id. at 8-9.

On May 1, 2021, the district court for the Northern District of Illinois granted Massachusetts Bay Insurance Company’s motion to dismiss several dental offices’ COVID-19 business interruption complaint. Finding the virus exclusion plainly and unambiguously precludes coverage for losses “resulting from any virus,” the court found any argument that the shutdown orders rather than the virus caused the losses was meritless. Order at 8. Thus, it dismissed the breach of contract claims with prejudice. Id. at 9. The court dismissed the bad faith claims with prejudice because the virus exclusion “undercuts” its claims. Id. at 10.

On May 4, 2021, the district court for the Southern District of Florida granted Winchester Surplus Lines Insurance Company’s motion for judgment on the pleadings and dismissed a restaurant’s COVID-19 business interruption class action. The court held that “[t]he plain meaning of the terms ‘direct physical loss of or damage to property’ unambiguously requires actual, tangible damage to the physical premises itself, not merely economic losses unaccompanied by a demonstrable physical alteration to the premises.”  Order at 17-18.  Because plaintiffs did not allege any such loss, the court found that dismissal of plaintiff’s claim for business income and extra expense coverage was warranted. Id. at 19-20. Similarly, the court found there was no coverage under the disputed policy’s civil authority provision because plaintiff did not allege the civil authority orders “resulted from any damage to property elsewhere” or that the orders prohibited access to plaintiff’s restaurant. Id. at 27-28.

On May 5, 2021, the district court for the Eastern District of Pennsylvania granted State Farm Fire and Casualty Company’s motion to dismiss a fashion boutique’s COVID-19 business interruption claim. The court concluded that the unambiguous phrase “direct physical loss to Covered Property” means “an immediate, actual, identifiable, and material impact to the structure of a building or to tangible items located therein,” Order at 7, and that the plaintiff’s claim of economic loss due to COVID-19 closure orders was not in any way connected to such a direct physical loss. Id. at 8-9. The court further concluded that the policy’s unambiguous virus exclusion precluded coverage, rejecting the plaintiff’s contentions that the exclusion did not apply to pandemics because it did not specifically include the word “pandemic” or that the exclusion did not apply where loss was caused by closure orders, rather than the coronavirus itself. Id. at 10-11.   

On May 5, 2021, the district court for the Northern District of Alabama granted Employers Insurance Company of Wausau’s and Liberty Mutual Insurance Company’s motion for judgment on the pleadings in a hotel operator’s COVID-19 business interruption claim. The court held that the policy requires “physical" loss or damage, which means it must be “of or relating to matter or the material world; natural; tangible, concrete.” Order at 9. Although the coronavirus particles physically manifest the virus, there was no allegation the particles caused physical damage to the property, and simply requiring cleaning and disinfecting does not create the type of loss envisioned to render coverage under the policy. Id. at 9-10. Even if the plaintiff could plead coverage, the court would not entertain “the type of mental gymnastics” necessary to find the “coronavirus is not a virus,” and thus the contamination exclusion applies to preclude coverage. Id. at 11.

On May 6, 2021, the district court for the Southern District of Alabama granted Cincinnati Insurance Company’s motion to dismiss a dental practice’s COVID-19 business interruption claim. The court found that the clear and unambiguous phrase “direct physical loss” by “its plain meaning (based on certain related definitions in the Policy and applicable case law) requires actual, physical damage to the covered premises,” Order at 7, and that the complaint, therefore, failed to allege a direct loss to covered property “by virtue of the mere existence and proliferation of the COVID-19 virus in the community.” Id. at 8. 

On May 6, 2021, the district court for the Southern District of Iowa granted Regent Insurance Company’s motion to dismiss a restaurant’s COVID-19 related business loss complaint with prejudice. Calling the plaintiff’s attempts to distance its closure from COVID-19 “fruitless,” the court held coverage was unambiguously excluded under the policy because the virus played a role in its closure. Order at 12. Even though, as plaintiff alleged, the coronavirus was not present on the property, it was still in “the chain of causation.” Id. The government order also did not cause a “direct physical loss of or damage” to the property; the plaintiff merely lost its intended use. Id. at 10. Despite the plaintiff’s losses, the court found the law and the policy’s language were clear, and “the Court cannot change” them. Id. at 15.

New Business Interruption Suits Against Insurers:

A law firm sued Sentinel Insurance Company, Limited and The Hartford Financial Services Group in New Jersey state court (Bergen County) alleging declaratory and injunctive relief, breach of contract, breach of the covenant of good faith and fair dealing, consumer fraud, and negligent misrepresentation. The “all risk” policy allegedly provided business income, extra expense, civil authority, and virus coverage, as well as a virus exclusion. Complaint ¶¶ 98-99, 102, 119. The plaintiff alleges that the insurers made material representations that the policy was an all risk policy, yet denied the claim anyway without a proper investigation. Id. ¶¶ 109-11, 166. It alleges that because its property was rendered uninhabitable, it has suffered “direct physical loss or damage.” Id. ¶ 167. Finally, the plaintiff asserts that the virus exclusion was a “fraudulent inclusion” and involves a “convoluted interpretation.” Id. ¶ 197.

A restaurant owner and operator sued Scottsdale Insurance Company and Nationwide Mutual Insurance Company in Pennsylvania state court (Allegheny County) for declaratory judgment. Plaintiff’s “all-risk” policy allegedly provides, among other things, personal property, business income, extra expense, and civil authority coverage. Complaint at ¶¶ 12, 20. The complaint alleges plaintiff suffered a direct physical loss of or damage to its property because COVID-19 “made the Insured Property unusable in the way it had been used before the pandemic,” and related civil authority orders prohibited access to plaintiff’s business. Id. at ¶¶ 88, 91.The complaint also alleges that although the policy contains a virus exclusion, the exclusion was “never intended to exclude coverage for a pandemic” and, in any event, the exclusion is unenforceable because the Insurance Services Organization allegedly obtained state regulatory approval of such exclusions through fraud. Id. at ¶¶ 32-33, 38.

A real estate investment trust sued 29 different insurers in Pennsylvania state court (Philadelphia County) for declaratory judgment, breach of contract, and bad faith. Plaintiff’s “all-risk” policy allegedly provides business interruption, extra expense, soft costs, and civil authority coverage. Complaint at ¶¶ 150-63. The complaint alleges plaintiff suffered a covered physical loss because “COVID-19 was and continues to be present at” plaintiff’s hotel properties and because state civil authority orders limited access to these properties. Id. at ¶¶ 115, 135. The complaint also alleges the defendants acted in bad faith by delaying the processing of, and subsequently denying, plaintiff’s claim without a reasonable basis to do so. Id. at ¶¶ 284-87.

Two public hospital districts sued Ironshore Specialty Insurance Company in Washington state court (King County) for declaratory relief. Plaintiffs’ “site pollution incident” policy allegedly provides disinfection event coverage. Complaint at ¶¶ 1.1-1.2. The complaint alleges that plaintiffs’ efforts to “address the presence of COVID-19 in its facilities” constitute a covered disinfection event. Id. at ¶ 1.2. The complaint also alleges that Ironshore has acknowledged coverage under the policy but has yet to remit any payments to plaintiffs. Id. at ¶ 4.5.