Insurers’ COVID-19 Notepad: What You Need to Know Now - Week of December 27, 2021

Courts Dismiss COVID-19 Business Interruption Claims

On December 27, 2021, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of an art gallery and dealership’s COVID-19 business interruption claim. The court held that, under New York law, “the terms ‘direct physical loss’ and ‘direct physical damage’ in the Business Income and Extra Expense provisions do not extend to mere loss of use of a premises where there has been no physical damage to such premises; those terms instead require actual physical loss of or damage to the insured’s property.” Opinion at 13. The court therefore agreed with the district court that the insured could not recover because it alleged “only that it lost access to its property as a result of COVID-19 and the governmental shutdown orders, and not that it suspended operations because of physical damage to its property[.]” Id. at 15. The case is 10012 Holdings, Inc. v. Sentinel Ins. Co.

On December 21, 2021, the U.S. Court of Appeals for the Tenth Circuit affirmed the district court for the Western District of Oklahoma, which granted Philadelphia Indemnity Insurance Company’s motion to dismiss a nonprofit organization’s COVID-19 business interruption complaint. The court held that the governmental shutdown orders associated with the pandemic did not cause the organization to suffer a direct physical loss under its insurance policy. Order at 7. Specifically, the phrase “direct physical loss” “requires an immediate and perceptible destruction or deprivation of property.” Id. at 7–8. According to the court, the orders did not cause the nonprofit to lose possession of its property; it temporarily lost the ability “to use its property for its intended purpose,” which does not constitute a “direct physical loss.” Id. at 8–9. “To conclude otherwise would ignore the word ‘physical’ and violate the requirement that every part of a policy be given meaning.” Id. at 9. The court also held that the period of restoration provision supports the conclusion that damage must be physical, and because the nonprofit did not need to repair its property and “[n]othing ‘physical’ happened to its property,” it did not trigger coverage. Id. at 10. Additionally, the virus exclusion precluded coverage for the losses under its plain language and the efficient proximate causation doctrine. Id. at 11. The case is Goodwill Industries of Central Oklahoma, Inc. v. Philadelphia Indemnity Insurance Co.

On December 20, 2021, the district court for the Eastern District of New York granted Affiliated FM Insurance Company’s motion for judgment on the pleadings and dismissed hotel owners’ claims for losses related to the COVID-19 pandemic with prejudice. The court found neither shutdown orders nor the presence of the coronavirus qualify as “physical loss or damage” under the policy. Order at 12–13. Instead, the phrase “is clear and unambiguous” and “requires actual physical damage to the insured’s property. Mere loss of use or functionality will not do.” Id. at 12. Id. The case is St. George Hotel Associates, LLC v. Affiliated FM Insurance Co.

On December 17, 2021, the district court for the District of New Jersey granted Zurich American Insurance Company’s partial motion to dismiss a theatre operator’s COVID-19 business interruption claim. The court found the policy’s microorganism exclusion was “specific, plain, clear, prominent, and not contrary to public policy” and therefore applied to exclude coverage. Order at 11. The case is Count Basie Theatre Inc. v. Zurich Am. Ins. Co.

On December 21, 2021, the district court for the Eastern District of Pennsylvania granted Selective Insurance Company of the Southwest’s motion to dismiss a restaurant’s COVID-19 business interruption claim. The court concluded that the insured’s allegation of partial loss of use of its property for dine-in services failed to state a claim for relief under the policy, as it did not allege “any actual physical loss from the presence of the COVID-19 virus,” Order at 6, and “generalized economic loss from COVID-related shutdowns, as a matter of law, does not constitute ‘direct physical loss.’” Id. at 7. The court further held that, even if the insured’s allegations otherwise met the requirements for business income or civil authority coverage, it still could not recover, because its “alleged losses caused by a virus are unambiguously excluded by the plain language of the virus exclusion.” Id. at 10. The case is Maggios Famous Pizza, Inc. v. Selective Ins. Co. of the Southwest.

On December 22, 2021, the district court for the Southern District of Indiana granted Citizens Insurance Company of America’s motion for summary judgment on a group of restaurants’ COVID-19 business interruption claims.  Relying on the Seventh Circuit’s decision in Sandy Point Dental, P.C. v. Cincinnati Insurance Co. and a “unanimous” string of precedents applying Indiana law, the court held the plaintiffs failed to allege any covered physical harm to their premises. Order at 14-17. The case is Cafe Patachou at Clay Terrace, LLC v. Citizens Ins. Co. of Am.

New Business Interruption Suits Against Insurers:

A commercial real estate manager sued its insurer, Illinois Union Insurance Company for breach of contract in New York state court (New York County). The policy allegedly provided coverage for remediation costs, business interruption, diminution in value, and an indoor environmental conditions endorsement. Complaint ¶¶ 77–80. The policyholder alleged it sustained business interruption losses because of the physical presence of the coronavirus, including losses of rental income and a diminution in value of the properties. Id. ¶¶ 83–84. Because of the shutdown orders, it also lost revenue. Id. ¶ 85. The case is Crescent Land Dev. Assoc LLC v. Illinois Union Insurance Co.