Insurers’ COVID-19 Notepad: What You Need to Know Now - Week of April 4, 2022

Courts Dismiss COVID-19 Business Interruption Claims

On March 29, 2022, the Fifth Circuit affirmed a district court’s decision to dismiss a medical clinic’s COVID-19 business interruption complaint. The court relied on its decision in Q Clothier New Orleans, LLC v. Twin City Fire Insurance Co. to find the claims do not trigger coverage under the insured’s policy. Order at 4. The court found the insured’s “attempts to insert ambiguity” into the policy “unreasonable.” Id. at 4–5. According to the court, to hold that loss of use is encompassed under physical loss of or damage “would render the adjective ‘physical’ meaningless” and would be “at odds” with the period of restoration provision. Id. at 5. The court found the governmental orders did nothing to change the property and do not trigger civil authority coverage. Id. at 5–6.The case is Louisiana Bone & Joint Clinic, LLC v. Transportation Insurance Co.

On March 24, 2022, the Supreme Court of New York, New York County, granted in part North American Elite Insurance Company’s motion to dismiss a restaurant operator’s counterclaims seeking coverage for COVID-19 losses and affirmative defenses in response to the insurer’s declaratory judgment action. The court concluded that coverage was unavailable because the defendant failed to allege direct physical loss or damage to its property or the actual or suspected presence of COVID-19 at any of its insured properties. Order at 8. The case is North American Elite Ins. Co. v. Mac Parent LLC.

On March 28, 2022, the district court for the Western District of Louisiana granted State Farm Fire and Casualty Company’s motion to dismiss a chiropractic clinic’s COVID-19 business disruption complaint. Since the policy’s plain text provides for coverage only for a “direct physical loss to property,” and there was no tangible alteration of or injury to property, the court relied on the Fifth Circuit’s decision in Q Clothier New Orleans, LLC v. Twin City Fire Insurance Co. to hold there was no coverage. The court noted only the insured’s preferred use of its property was restricted. As for civil authority coverage, the plaintiff alleged no damage to neighboring property, only damage to its own property due to civil authority action, and thus it is not covered under the policy. The case is Cohn Chiropractic Clinic v. State Farm Fire & Casualty Co.

On March 29, 2022, the Superior Court of Rhode Island granted Affiliated FM Insurance Company’s motion for partial summary judgment in a real estate investment company’s COVID-19 business interruption claim and denied the plaintiff’s motion for partial summary judgment. The court concluded that “COVID-19 does not constitute ‘physical loss or damage’ in the context of the Policy presently before this Court,” Order at 26, and agreed “with the rationale that COVID-19 cannot cause ‘physical loss or damage’ to property where no physical alteration or damage has occurred to the property.” Id. at 29 (emphasis in original). The court further found that the policy’s contamination exclusion “unambiguously applies to bar [the plaintiff’s] claim.” Id. at 23. The case is Josephson, LLC v. Affiliated FM Ins. Co.

On March 29, 2022, the district court for the Southern District of New York granted Illinois Union Insurance Company’s motion to dismiss a health system’s COVID-19 business interruption claim. The court rejected plaintiff’s argument that COVID-19 constituted a covered “pollution condition,” and also found the plaintiff failed to plausibly allege facts demonstrating satisfaction of its policy’s conditions precedent to coverage. Order at 14-16. The court dismissed the plaintiff’s bad faith claim, reasoning that the interpretation dispute turned on “only an ‘arguable difference in opinion’” and that the alleged delay in responding to the claim was insufficient to support a bad faith claim when it “came in the context of a pandemic with ‘staggering’ impacts ‘on life and property’ and . . . at a time when both the scientific understanding of COVID-19 and government mandates to it were ‘rapidly evolving.’” Id. at 17 (citation omitted). Finally, the court rejected a claim alleging violations of New York General Business Law § 349 because “a plaintiff asserting a claim under section 349 must allege consumer-oriented conduct, and ‘[t]ransactions between businesses or sophisticated parties that do not affect average consumers do not constitute consumer-oriented conduct.’” Id. at 18. The case is Northwell Health, Inc. v. Ill. Union Ins. Co.

On March 29, 2022, the district court for the Southern District of New York granted Hartford Underwriters Insurance Company’s motion to dismiss a law office’s COVID-19 business interruption claim. The court rejected the plaintiff’s argument that “physical loss should be interpreted as loss of use” of covered property, reasoning that “[t]his reading of the policy provision at issue runs contrary to New York law.” Order at 5. The case is Michael Block, Att’y at Law v. Hartford Underwriters Ins. Co.

On March 30, 2022, the Appellate Court of Illinois, First Judicial District, affirmed the Cook County Circuit Court’s dismissal of a medical imaging clinic owner and operator’s COVID-19 business interruption claims. The court “join[ed] the vast majority of authority from other jurisdictions” in holding that “physical loss of or damage to property” requires an “alter[ation] in appearance, shape, color or in other material dimension.” Order at 10-11. The court found the complaint failed to state a claim because it did not allege any facts supporting the plaintiff’s assertion that the COVID-19 virus caused such alterations. Id. at 14. The court also affirmed the dismissal of the plaintiff’s bad faith denial of coverage claim because there was no coverage owed under the plaintiff’s policy. Id. at 16-17. The case is ABW Dev. LLC v. Continental Casualty Co.

On March 30, 2022, the Appellate Court of Illinois reversed and remanded the circuit court’s grant of class certification. The court held that whether the named representative of the putative class has a valid cause of action is a threshold consideration, which it found had not been met. The plaintiff failed to allege that its operations were suspended due to contamination in its premises. Order at 37. Moreover, access to the premises was neither forbidden nor prevented by the Orders. Id. at 41–42. Because the plaintiff did not have a valid claim for contamination coverage, the trial court’s order granting class certification was reversed and the case was remanded. The case is Alley 64, Inc. v. Society Insurance.

Motion to Certify Question Rejected

On March 30, 2022, the district court for the Eastern District of Michigan denied a casino operator’s motion to certify to the Michigan Supreme Court the question whether coverage is triggered in a policy covering “all risks of ‘direct physical loss of or damage’” when “a toxic, noxious, or hazardous substance, such as Coronavirus or COVID-19, that is physically present in the indoor air of that property damages the property or causes loss, either in whole or in part, of the functional use of the insured property.” Order at 2-3. The court concluded that certification was not necessary, as there was already a general consensus among courts about the governing legal principles at issue, which “collectively provide this Court with sufficient guidance concerning how the Michigan Supreme Court would decide the controlling question here[.]” Id. at 8. The case is Detroit Entertainment, LLC v. Am. Guarantee & Liability Ins. Co.

New Business Interruption Suits Against Insurers:

The owner and operator of a shopping mall sued Lexington Insurance Company and Starr Surplus Lines Insurance Company in federal court (C.D. Cal.) for declaratory relief, breach of contract, and tortious breach of the implied covenant of good faith and fair dealing. The policy allegedly provides time element-cancellation, contingent time element, civil authority, and ingress or egress coverage. Complaint at ¶ 17. The Complaint alleges that the insurer did not deliver a copy of the policy until several weeks after its inception and “purported to ‘cross out’ the policy’s ‘Special Time Element – Cancellation Coverage’ extension,” id. at ¶ 18, which was an invalid and unenforceable “unilateral post hoc modification” contrary to the parties’ mutual intent and understanding. Id. at ¶ 19. The case is C.J. Segerstrom & Sons v. Lexington Ins. Co., et al.