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Insurers’ COVID-19 Notepad: What You Need to Know Now - Week of April 11, 2022

April 13, 2022

Courts Dismiss COVID-19 Business Interruption Claims

On April 12, 2022 the U.S. Court of Appeals for the Seventh Circuit affirmed the dismissal of a COVID-19 business interruption claim filed by the owner and operator of movie theaters. The court concluded that its decision that mere loss of use due to COVID-19 closure orders, unaccompanied by any physical alteration to property, did not constitute “direct physical loss” in Sandy Point Dental, P.C. v. Cincinnati Ins. Co., 20 F.4th 327 (7th Cir. 2021) controlled, as the policy provisions were indistinguishable from those in Sandy Point. Opinion at 5. The court further found that the policyholder failed to satisfy its burden to show that North Carolina law was different from Illinois law on this point, that multiple federal district courts applying North Carolina law have reached the same conclusion as Sandy Point, and, in any event, the “growing national consensus regarding the meaning of ‘direct physical loss’ underscores that this case does not turn on variations in state contract law.” Id. at 7. Because the policyholder failed to allege a physical alteration of its property, the court found that the trial court properly concluded it was not entitled to coverage. Id. at 6. The case is East Coast Entertainment of Durham, LLC v. Houston Cas. Co., et al.

On April 5, 2022, the U.S. Court of Appeals for the Eighth Circuit affirmed the district court’s dismissal of a Missouri synagogue’s COVID-19 business interruption complaint. It found the claims were precluded by its decision in Oral Surgeons, PC v. Cincinnati Insurance Co., 2 F.4th 1141, 1144 (8th Cir. 2021) because “direct physical loss requires some physicality to the loss or damage of property.” Order at 2. The case is United Hebrew Congregation of St. Louis v. Selective Insurance Co. of America.

On April 7, 2022 the New York Appellate Division (First Department) affirmed the trial court’s dismissal of a restaurant’s COVID-19 business interruption complaint, agreeing with the Second Circuit’s decisions and finding no coverage on either a loss of use theory or based on allegations that the virus was on the insured premises. According to the court, there must be a “showing of actual, demonstrable physical harm of some form to the insured premises.” Order at 12. The court distinguishes the cases where potential direct physical loss or damage were found for things like asbestos and ammonia because they did not involve any “negative alteration in the tangible condition of the property,” and “plaintiff fails to identify any physical change, transformation, or difference in any of its property.” Id. at 13. The court also found that the plaintiff did not identify “a single item that it had to replace, anything that changed, or that was actually damaged at any of its properties,” and “[i]ts statement that COVID-19 particles and droplets damage property is merely a conclusion that will not save the complaint from dismissal.” Id. at 13–14. The court rejected the plaintiff’s argument that the absence of a virus exclusion was relevant as “contrary to well-settled law that ‘exclusion clauses subtract from coverage rather than grant it,’” and because the court need not consider any exclusions having found no coverage. Id. at 14–15. The case is Consolidated Restaurant Operations, Inc. v. Westport Insurance Corp.

On March 31, 2022, the district court for the Northern District of Illinois dismissed four health care clinics’ COVID-19 business interruption suits. The court relied on the Seventh Circuit’s precedent that mere loss of use does not constitute physical damage to property and found that “[n]one of the plaintiffs adequately allege that their property suffered any physical alteration.” Order at 5. Movement of furniture and rearrangement of space do not constitute physical alteration under the policy because “the virus didn’t rearrange the furniture, the plaintiffs did.” Id. at 6. The cases are Haisous, LLC v. State Auto Property & Casualty Insurance Co., Sugar Bliss LLC v. Twin City Fire Insurance Co., Stone Park Entertainment, Inc. v. Lexington Insurance Co., and Watson Woods Healthcare, Inc. v. American Guarantee & Liability Insurance Co.

On March 31, 2022, the district court for the District of Nevada granted Zurich American Insurance Company’s motion to dismiss a restaurant operator’s COVID-19 business interruption claim. The court concluded that the plaintiff’s complaint failed to state a claim for coverage because it “failed to (and cannot) allege that COVID 19 causes tangible physical alteration of any property, let alone insured property” and therefore it could not “demonstrate that any insured properties suffered ‘direct physical loss of or damage caused by a Covered Cause of Loss.’” Order at 7-8. The court further found the claim excluded by the policy’s loss of use exclusion, as it “allege[d] only that it has lost the use of its various properties.” Id. at 10. The case is WP6 Rest. Mgmt. Grp., LLC v. Zurich Am. Ins. Co.

On April 4, 2022, the district court for the Eastern District of California granted Hartford Fire Insurance Company’s motion to dismiss a women’s apparel retailer’s COVID-19 business interruption claim. The court found the Ninth Circuit’s decision in Mudpie Inc. v. Travelers Cas. Ins. Co. of Am., 15 F.4th 885 (9th Cir. 2021) applicable to the claim and therefore that there was no “direct physical loss or damage.” Order at 9-10. The court further found that the policy’s virus exclusion “applies in accordance with its own unequivocal terms.” Id. at 11. The case is Lulu’s Fashion Lounge LLC v. Hartford Fire Ins. Co.

On April 4, 2022, the Superior Court of Connecticut, District of Hartford granted Twin City Fire Insurance Company, Hartford Fire Insurance Company, and Hartford Financial Services Group, Inc.’s motion for summary judgment in a restaurant operator’s COVID-19 business interruption claim. The court concluded that the policy’s virus exclusion barred coverage for COVID-19 related claims in accordance with the reasoning of its previous decision in Connecticut Dermatology Group, PC et al. v. Twin City Fire Ins. Co. et al., 2022 WL 294252. The case is WNT Farmington, LLC v. Twin City Fire Ins. Co., et al.

On April 6, 2022, the Superior Court of New Jersey, Camden County, denied several hospitality and recreation companies’ motion to reconsider it prior order dismissing their COVID-19 business interruption claims. The court reiterated its holding that the plaintiff failed to allege any material alteration to covered property due to COVID-19. Order at 6. The case is Valleybrook Country Club, LLC v. Hallmark Specialty Ins. Co.

On March 31, 2022, the district court for the District of Colorado granted Federal Insurance Company’s motion to dismiss a sports bar and restaurant owner and operator’s COVID-19 business interruption claim. The court rejected the plaintiff’s argument that loss of use could constitute direct physical loss and held the plaintiff failed to state any claim for breach of contract. Order at 15-16. The court also dismissed the plaintiff’s bad faith claims because coverage was properly denied. Id. at 18. The case is Tom’s Urban Master LLC v. Fed. Ins. Co.

On February 22, 2022, the district court for the Eastern District of North Carolina granted several Lloyd’s syndicates’ and HDI Global Specialty SE’s motion to dismiss two vacation rental businesses’ COVID-19 business interruption claim. The court held the plaintiffs’ failed to state a claim because they did not allege any damage to their property “requiring repair, rebuilding, or replacement.” Order at 12-13. The case is Palm & Pine Ventures, LLC v. Certain Underwriters at Lloyd’s London.

New Business Interruption Suits Against Insurers:

A hotel operator sued Aspen American Insurance Company in Connecticut state court (District of Hartford) for declaratory relief, breach of contract, and breach of the duty of good faith and fair dealing. The “all risk” policy allegedly provides business interruption, extra expense, dependent property, and civil authority coverage. Complaint at ¶ 16. The Complaint alleges that “SARS-CoV-2, fomites, and respiratory droplets or droplet nuclei containing SARS-CoV-2 have attached to and deprived, partially and totally, Plaintiff of the physical use of its insured premises by making them unsafe and unusable and thereby lost.” Id. at ¶ 104. The case is 147 First Realty, LLC v. Aspen Am. Ins. Co.

A retail store operator sued Hartford Fire Insurance Company in Connecticut state court (District of Hartford) for declaratory relief, breach of contract, and breach of the duty of good faith and fair dealing. The “all risk” policy allegedly provides business interruption, civil authority, decontamination costs, and extra expense coverage. Complaint at ¶ 12. The Complaint alleges that the “persistent presence of the deadly, viable SARS-CoV-2 on surfaces and in the air damages buildings and properties rendering them damaged, lost, unsafe, unfit, and uninhabitable for normal occupancy or use.” Id. at ¶ 51. The case is Am. Rag CIE, LLC v. Hartford Fire Ins. Co.

The operator of restaurants, lounges, bars, hotels, residences, retail, and catering and event businesses sued Hartford Fire Insurance Company in Connecticut state court (District of Hartford) for declaratory relief, breach of contract, and breach of the duty of good faith and fair dealing. The “all risk” policy allegedly provides business interruption, civil authority, decontamination costs, and extra expense coverage. Complaint at ¶ 12. The Complaint alleges that the plaintiff suffered direct physical loss of or damage to its properties “[b]ecause of the physical alteration of its properties, including the air, airspaces, and surfaces in its properties, which rendered the insured properties incapable of performing their essential functions[.]” Id. at ¶ 8. The case is Cipriani USA Inc. v. Hartford Fire Ins. Co.

The owner and operator of a hotel sued Hartford Fire Insurance Company in Connecticut state court (District of Hartford) for declaratory relief, breach of contract, and breach of the duty of good faith and fair dealing. The “all risk” policy allegedly provides business interruption, civil authority, decontamination costs, and extra expense coverage. Complaint at ¶ 12. The Complaint alleges that “SARS-CoV-2 and COVID-19 caused direct physical loss of or damage to the property (or both) throughout the locale where Plaintiff’s business operations are based, including to Plaintiff’s covered business and surrounding properties, by altering the physical conditions of the property so that they were no longer safe or fit for occupancy or use, and/or permitted to be used.” Id. at ¶ 6. The case is Crystal Springs Services, Inc. v. Hartford Fire Ins. Co.

The owner and operator of optometrist facilities sued Sentinel Insurance Company, Ltd. in Connecticut state court (District of Hartford) for declaratory relief, breach of contract, and breach of the duty of good faith and fair dealing. The “all risk” policy allegedly provides business interruption, civil authority, decontamination costs, and extra expense coverage. Complaint at ¶ 12. The Complaint alleges that “[b]ecause of the physical alteration of its properties, including the air, airspaces, and surfaces in its properties, which rendered the insured properties incapable of performing their essential functions, Plaintiff sustained direct physical loss of or damage to its properties (or both).” Id. at ¶ 8. The case is Eye Guys, LLP v. Sentinel Ins. Co., Ltd.

The owner and operator of a catering business sued Twin City Fire Insurance Company in Connecticut state court (District of Hartford) for declaratory relief, breach of contract, and breach of the duty of good faith and fair dealing. The “all risk” policy allegedly provides business interruption, civil authority, decontamination costs, and extra expense coverage. Complaint at ¶ 12. The Complaint alleges that the presence of COVID-19 “caused direct physical loss of or damage to properties (or both) by transforming the properties from usable and safe into properties that are unsatisfactory and prohibited for use, uninhabitable, unfit for their intended function, and extremely dangerous and potentially deadly for humans.” Id. at ¶ 5. The case is Gourmet Express, Ltd v. Twin City Fire Ins. Co.

The owner and operator of a law firm sued Sentinel Insurance Company, Ltd. in Connecticut state court (District of Hartford) for declaratory relief, breach of contract, and breach of the duty of good faith and fair dealing. The “all risk” policy allegedly provides business interruption, civil authority, decontamination costs, and extra expense coverage. Complaint at ¶ 12. The Complaint alleges that “SARS-CoV-2 and COVID-19 alter the conditions of properties and buildings such that the premises are physically damaged and no longer safe and habitable for normal use.” Id. at ¶ 50. The case is M. Weiser & Assocs., P.C. v. Sentinel Ins. Co., Ltd.

A bakery and café operator sued Twin City Fire Insurance Company in Connecticut state court (District of Hartford) for declaratory relief, breach of contract, and breach of the duty of good faith and fair dealing. The “all risk” policy allegedly provides business interruption, civil authority, decontamination costs, and extra expense coverage. Complaint at ¶ 12. The Complaint alleges that “SARS-CoV-2 attaches itself to surfaces and properties, thereby producing physical change in the condition of the surfaces and properties—from safe and touchable to unsafe and deadly” and “also physically alter and damage the air within buildings such that the air is no longer safe to breathe.” Id. at ¶ 6. The case is Quality Edibles LLC v. Twin City Fire Ins. Co.

A hospitality company sued Employers Insurance Company of Wausau for declaratory relief and breach of contract in Missouri state court (Jackson County). The “all risk” policy includes coverage for business interruption losses or time element coverage, attraction property, civil or military authority, ingress/egress, contingent time element, decontamination costs, and leasehold interest. Complaint ¶¶ 97, 105, 112. There is also a contamination exclusion. Id. ¶ 114. The plaintiff alleges it “has sustained actual loss” and “incurred extra expense directly resulting from direct physical loss or damage to property.” Id. ¶ 126. The case is One Group Hospitality Inc. v. Employers Insurance Co. of Wausau.

A restaurant owner and operator sued Erie Insurance Exchange in Pennsylvania state court (Allegheny County) for declaratory judgment and breach of contract. The plaintiff’s policy allegedly provides property, business personal property, business income, extra expense, and civil authority coverage. Complaint at ¶ 19. The complaint alleges that the “COVID-19 pandemic,” and “[t]he risk of COVID-19 entering” the plaintiff’s property, and the plaintiff’s “loss of use of” its property constituted covered physical losses. Id. at ¶¶ 49-57. The complaint also alleges that “[s]ocial anxiety over public health and society’s change in perception that indoor establishments are unsafe” constituted a covered physical loss. Id. at ¶ 58. The case is BAKN Wexford, LLC v. Erie Ins. Exch.

A restaurant owner and operator sued Erie Insurance Exchange in Pennsylvania state court (Allegheny County) for declaratory judgment and breach of contract. The plaintiff’s policy allegedly provides property, business personal property, business income, extra expense, and civil authority coverage. Complaint at ¶ 19. The complaint alleges that the “COVID-19 pandemic,” and “[t]he risk of COVID-19 entering” the plaintiff’s property, and the plaintiff’s “loss of use of” its property constituted covered physical losses. Id. at ¶¶ 49-57. The complaint also alleges that “[s]ocial anxiety over public health and society’s change in perception that indoor establishments are unsafe” constituted a covered physical loss. Id. at ¶ 58. The case is Mac & Toz, LLC v. Erie Ins. Exch.

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Laura Foggan
Partner – Washington, D.C.
Phone: +1.202.624.2774
Email: lfoggan@crowell.com
Adam J. Singer
Associate – Washington, D.C.
Phone: +1.202.688.3508
Email: asinger@crowell.com
Rachel A. Jankowski
Associate – Washington, D.C.
Phone: +1.202.624.2647
Email: rjankowski@crowell.com
Samuel H. Ruddy
Associate – Washington, D.C.
Phone: +1.202.624.2564
Email: sruddy@crowell.com