Insurers' COVID-19 Notepad: What You Need to Know Now (Week of June 14)

Courts Dismiss COVID-19 Business Interruption Claims

On June 10, 2021, the district court for the Eastern District of Kentucky granted West Bend Mutual Insurance Company’s motion for judgment on the pleadings of a fitness center’s COVID-19-related business interruption complaint. According to the court, the gym failed to plead the type of physical loss required under the policy—a physical alteration; instead, it suffered “purely economic losses.” Order at 1-2, 8-9. The court dismissed the plaintiff’s argument that the policy was unambiguous and unenforceable, finding the court did not need to “reach[ ] for any dictionary or case law” because the plaintiff’s definition conflicts with the plain policy language. Id. at 8. While the government closure order “undoubtedly” hurt the gym, the court held “it was not the type of civil authority action” covered under the policy. Id. at 11.

On June 7, 2021, the district court for the Middle District of Pennsylvania granted American Select Insurance Company’s motion to dismiss a Comfort Suites’ COVID-19 business interruption complaint. Even though the hotel lost guests, the court found the COVID-19 pandemic and resulting government orders caused no property damage because they did not touch “upon the Property’s physical form in any tangible way.” Order at 14, 16. The hotel was never ordered to close and was excluded under the government closure orders. Id. at 16. The court also found the hotel failed to show how its properties lost function or access, and therefore, it was not entitled to civil authority coverage. Id. at 16–18. “Plaintiff’s allegations of the risks, stigma, and ubiquity of COVID-19 bear no relation to the structure of the covered property and in no way suggest that the hotel became wholly defunct or was otherwise reduced to uselessness or uninhabitability. Insofar as the pandemic prompted individuals to refrain from patronizing certain businesses, the consequences of that phenomenon are too removed from the Covered Property itself to be capable of establishing any ‘direct physical loss’ or ‘direct physical damage,’ particularly given that ‘direct’ connotes an immediacy of consequences flowing from the cause of the losses.” Id. at 16. Finally, even had the hotel adequately pled the coronavirus physically damaged the property, the policy’s virus exclusion unambiguously bars the damage from coverage. Id. at 19.

On May 19, 2021, the district court for the Southern District of New York issued a ruling from the bench granting Selective Insurance Company of America and Selective Way Insurance Company’s motion to dismiss a steel shelving manufacturer’s COVID-19 class action.  Noting that “courts applying New York law have consistently concluded that loss of use of an insured’s premises does not trigger business income coverage when the policy provides that such coverage requires evidence of physical damage or physical loss,” the district court found the plaintiff’s alleged inability to use its property for its intended purposes “simply does not constitute physical loss or damage.” Transcript at 34-35. Even if the plaintiff had claimed that the presence of the virus caused physical damage, however, the court found that the plaintiff’s claim would fail “because the virus’s presence can be eliminated by routine cleaning and disinfecting, and an item or structure that merely needs to be clean[ed] has not suffered a direct physical loss.” Id. at 36. The court rejected the plaintiff’s theory of civil authority coverage for similar reasons, finding the plaintiff failed to allege that neighboring property was damaged or that the civil authority order denied access to the insured property. Id. at 38-39. Finally, the court found that even if the plaintiff had sufficiently alleged a physical loss, plaintiff’s claim would have been barred by the policy’s virus and ordinance or law exclusions.  Id. at 40.

On June 8, 2021, the district court for the Southern District of New York granted Travelers Indemnity Company of America’s motion to dismiss a hotel operator’s COVID-19 business interruption claim. The court held that the policy’s virus exclusion unambiguously bars coverage for the plaintiff’s business losses and, therefore, that it need not decide whether the physical presence of COVID-19 constitutes loss or damage within the meaning of the policy. Order at 3. The exclusion applied because the business losses were plainly caused by a virus capable of inducing physical distress, illness, or disease. Id. at 4.

On June 11, 2021, a magistrate judge for the district court for the Southern District of Texas recommended that National Fire Insurance Company of Hartford’s motion to dismiss a law firm’s COVID-19 business interruption claim be granted. The magistrate found that the plaintiff failed to state a claim because COVID-19 does not cause physical damage to property, as direct physical loss or damage to property requires “allegations of ‘distinct, demonstrable physical alteration of the property.’” Order at 4-5.

On June 11, 2021, the district court for the Southern District of New York granted National Fire Insurance Company of Hartford’s motion to dismiss an office project management and furniture installation company’s COVID-19 business interruption claim. The court concluded that the plain meaning of the phrase “direct physical loss or damage” requires “physical damage to the covered property to invoke coverage and that loss of usage does not rise to the level of physical damage.” Order at 12- 13. Accordingly, the court found that the plaintiff was not entitled to coverage, because it failed to allege harm beyond having to close its doors to the public. Id. at 13.  Additionally, the court concluded that the policy’s microbe exclusion “unambiguously excludes coverage for damage caused by the COVID-19 virus.” Id. at 16.

New Business Interruption Suits Against Insurers:

A health care provider network sued Factory Mutual Insurance Company in federal court (E.D. Wisc.) for declaratory relief, breach of contract, and bad faith denial of coverage. The plaintiff’s “all risks” policy allegedly provides, among other things, property damage, time element, communicable disease response, and expediting cost coverage. Complaint at ¶¶ 21-28. The complaint alleges the plaintiff suffered a covered physical loss because “SARS-CoV-2 virions have a corporeal existence” and “physically change the air, airspaces, property, and property surfaces by becoming a part of the air or property.” Id. at ¶ 60.  The complaint also alleges that Factory Mutual acted in bad faith because it allegedly did not conduct a reasonable investigation of the plaintiff’s claim and “refused even to pay sublimits under the Communicable Disease Response and Time Element additional coverage.”  Id. at ¶ 115.

A Native American tribe and its tribal economic authority sued fourteen different insurers in Washington state court (Spokane County) for breach of contract, declaratory judgment, bad faith, and Washington Consumer Protection Act claims. The plaintiffs’ “all risk” tribal property insurance policies allegedly provide, among other things, property damage, business interruption, extra expense, rental income, civil authority, tax revenue interruption, accidental contamination, and ingress/egress coverage. Complaint at ¶¶ 4.1-4.33. The complaint alleges plaintiffs suffered covered physical losses because “the presence of the Covid-19 virus . . . caus[es] a tangible change of [insured] property into a transmission vehicle for disease from one host to another” and because state and tribal civil authority orders “had the effect of dispossessing, restricting, or preventing Plaintiffs from using all or a portion of insured business property for its intended use.” Id. at ¶¶ 4.66, 4.87, 4.92. The complaint also alleges the defendants acted in bad faith by denying coverage without adequately investigating plaintiffs’ claims. Id. at ¶¶ 4.132-4.146.

The owner and operator of an inn sued State National Insurance Company in California state court (San Luis Obispo County) for declaratory relief. The “all risk” policy allegedly provides business interruption, extra expense, and civil authority coverage. Complaint at ¶ 10. The Complaint alleges that the coronavirus “created an unsatisfactory condition without repair for the future and caused a direct change to the property in that the property could no longer be used safely which represents a fortuitous event beyond the control of Plaintiff and therefore entitling Plaintiff to damages for direct loss of income and damage to the property.” Id. at ¶ 10.

Franchisees of fitness clubs sued Nova Casualty Company in Colorado state court (Arapahoe County) for declaratory relief, breach of contract, and violation of Colo. Rev. Stat. §§ 10-3-1115 and 10-3-1116. The “all risk” policies allegedly provide business income and civil authority coverage. Complaint at ¶¶ 80, 85. The Complaint alleges that the plaintiffs have been deprived of access to, and have been separated from, their business facilities and that their “losses and damages are ‘direct’ in that they have been directly caused by the Executive Orders; and they are ‘physical’ in that Plaintiffs’ properties and operations have been physically impacted by governmental shutdowns.” Id. at ¶ 97. The Complaint further alleges that the losses “fall outside of the ambit of the Virus Exclusion, because they were not ‘caused by’ and did not ‘result[] from’ contamination by SARS-CoV-2.” Id. at ¶ 108.