With the onset of the coronavirus pandemic and the various statewide “shelter-in-place” orders issued across the nation, many businesses have been faced with restricted operations due to social distancing concerns, resulting in reduced business volume or sometimes even total closure. Many of these businesses sought relief from their insurers for loss of revenue and other business losses. Most policyholders claimed that they were entitled to coverage under policies that included “business interruption” coverage parts or “civil authority” coverage parts, arguing that the government shelter-in-place orders and the resulting business limitations triggered coverage under both coverage parts. Other policyholders made claims under their “all-risk” policies which, as their name suggests, are designed to provide coverage from all losses except for those that are specifically excluded by the policy.
To the disappointment of policyholders, insurers nationwide denied coverage for business interruption claims that result from the COVID-19 pandemic and the related shut down orders. As detailed below, the primary reason for the denials is that, though the specific language differs, the policies in question require “direct physical loss or damage” as a condition precedent to coverage. Insurers have taken the position that, because there is no tangible loss related to both COVID-19 and the resulting shut down orders, there is no coverage under the policy. Many insurers also referred to specific exclusions in their policies that excluded coverage for viruses or communicable diseases.
In response, hundreds of policyholders brought lawsuits nationwide seeking declaratory judgments that their insurers owed coverage under their insurance policies. Now that these cases have had several months to progress, courts have begun weighing in on the validity of those claims.
Below is a summary of the most significant rulings made by Courts regarding the issue of whether policyholders are entitled to coverage for their business interruption resulting from the COVID-19 pandemic and the related civil orders.
1. Court Decisions in Favor of Insurers
Social Life Magazine v. Sentinel Insurance Company – Case No. 20-cv-3311
On May 14, 2020, a New York Federal Judge for the Southern District of New York ruled in favor of an insurer during an injunction hearing in Social Life Magazine, Inc. v Sentinel Insurance Company Limited. The hearing centered on the issue of whether plaintiff had a probability of success on the merits of their claim that they suffered physical damage at its property. Judge Caproni disagreed with plaintiff’s position and distinguished plaintiff’s cited case law in support of its claims.
Following the hearing, plaintiff voluntarily dismissed its claim and requested that the Court did not need to issue a written opinion on the May 14, 2020 hearing. Plaintiff initially sought an appeal of Judge Caproni’s decision, but then withdrew its appeal and voluntarily dismissed its case. This represents the first court opinion on the issue of whether COVID-19 constitutes physical damage to property in the context of business interruption insurance.
Gavrilides Management Company v. Michigan Insurance Company – Case No. 20-cv-258CB
On July 1, 2020, Judge Joyce Draganchuk in Ingham County, Michigan issued the first dispositive ruling in the nation with regard to business interruption coverage litigation related to the COVID-19 pandemic. In that case, Nick Gavrilides, the owner of two restaurants in Lansing, Michigan made an insurance claim to his insurer, seeking approximately $650,000 in losses due to business interruption. Its insurer, Michigan Insurance Company, denied coverage on the basis that coverage was not available because the policy required “direct physical loss of or damage to the [insured’s] property” to trigger coverage under the policy’s business interruption coverage parts. After the plaintiff sued, its insurer moved to dismiss the lawsuit, arguing that there could be no “direct physical loss” to plaintiff’s property because “the insured’s property today exists in the very same condition as [it] existed the day prior to the effective date of the stay-at-home order.”
In that ruling, which was conducted remotely and later uploaded to YouTube, the court granted the insurer’s motion for summary disposition against plaintiff’s claims as a matter of law. Judge Draganchuk stated, “[I]t is clear from the policy coverage that only direct physical loss is covered. Under their common meanings and under federal case law … direct physical loss of or damage to the property has to be something with material existence, something that is tangible, … something that alters the physical integrity of the property. The Complaint here does not allege any physical loss of or damage to the property.”
As evidenced by Judge Draganchuk’s ruling, Gavrilides did not allege that his restaurants were physically damaged by the COVID-19 virus. Instead, he argued that his other non-physical losses triggered coverage under his business interruption policy.
Judge Draganchuk also dismissed Gavrilides’ claims for coverage based on the argument that the governor’s shelter-in-place order triggered the policy’s civil authority provision of the business interruption policy, holding that that coverage part also required physical damage to the insured’s property, which was absent here.
The court finally ruled that even if coverage had been triggered, it would be excluded under the policy’s virus exclusion. That exclusion provided that the insurer “will not pay for loss or damages caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease.” The Gavrilides decision was the first ruling on a business interruption claim related to the coronavirus nationwide.
Rose’s 1 LLC, et al. v. Erie Insurance Exchange – Case No. 2020 CA 002424 B
On August 6, 2020, the Washington D.C. Superior Court issued another decision related to the COVID-19 business interruption coverage litigation. In that case, ten plaintiffs that “own and operate a number of prominent restaurants in the District of Columbia” sued their mutual insurer, Erie Insurance Exchange.
The plaintiffs alleged that the Washington D.C. Mayor Muriel Bowser’s declarations of a state of emergency beginning on March 11, 2020, which closed all non-essential businesses due to the COVID-19 public health emergency. The plaintiffs alleged that, as a result of the declarations, they “were forced to close their businesses and suffered serious revenue losses. To cover those losses, [the plaintiffs] filed insurance claims with [Erie Insurance Exchange],” which were denied by their mutual insurer.
As in the court’s decision in Gavrilides, the primary issue was whether Mayor Bowser’s Orders constituted a “direct physical loss” under the insureds’ policies. The plaintiffs offered arguments to support their claim that the loss of use of their restaurants was “direct,” “physical,” and constituted a “loss” as defined in their policies.
The Court disagreed. In granting the defendant insurer’s motion for summary judgment, the court held that Mayor Bowser’s emergency declarations did not constitute direct physical damage to plaintiffs’ properties. The court further noted that there was no evidence that COVID-19 was actually physically present on any of the insured properties at the time they were forced to close, so that also could not constitute direct physical damage. In short, the court held that a government civil shut-down order such as the one issued by Mayor Bowser is not sufficient to support a claim of business interruption due to the COVID-19 pandemic where there is no alleged physical presence of COVID-19 on the property. The court further clarified that “the term ‘direct loss’ implies some form of direct physical change to the insured property.”
Diesel Barbershop LLC, et al., v. State Farm Lloyds – Case No. 5:20-cv-461-DAE
On August 13, 2020, Judge David Alan Ezra of the Western District of Texas granted insurer State Farm’s motion to dismiss, finding that there was no coverage for plaintiffs’ claims for business interruption losses resulting from the COVID-19 pandemic.
In support of its motion, State Farm argued that coverage was only triggered if there was an “accidental direct physical loss to the insured property” and that the loss was not excluded by any policy exclusions. Plaintiffs argued in response that the policies allowed for a partial loss to the properties, including loss of use of the properties due to the statewide civil orders restricting use of the properties.
Judge Ezra held consistently with the prior rulings nationwide, finding that COVID-19 does not cause direct physical damage to property. The Court also noted that the policy in question contained a virus exclusion. Judge Ezra held that the Civil Authority provision in the policy was not triggered under the same reasoning. “Judge Ezra elaborated that “while there is no doubt that the COVID-19 crisis severely affected Plaintiffs’ businesses, State Farm cannot be held liable to pay business interruption insurance on these claims as there was no direct physical loss, and even if there were direct physical loss, the Virus Exclusion applies to bar Plaintiffs’ claims.”
Inns by the Sea v. California Mutual Insurance Company, et al. – Case No. 20CV001274
On August 18, 2020, the California State Court in Monterey County held in favor of another insurer. In its brief opinion, the Court granted the defendant insurer’s demurrer to plaintiff’s complaint without leave to amend. In so holding, the Court held that plaintiffs had failed to allege facts sufficient to state a cause of action, and could not amend its complaint to overcome the deficiencies.
In the transcript for the hearing, Judge Villarreal stated, “[i]t seems to me that the language of the policy supported the defendant’s position that … business suspension must be caused by direct physical loss of or damage to property at the premises, … and I am not sure that COVID creates that physical change.”
Judge Villarreal also responded directly to plaintiffs’ citations to other decisions in which courts held that smoke damage, gasoline vapors, airborne asbestos, and other similar “intangible” things nevertheless constituted a direct physical alteration to the insured property. Judge Villarreal stated, “the distinction in my mind is that when California shut down, when the Governor ordered us all to shelter in place and businesses to close, it wasn’t necessarily because there was COVID at your hotels. … So even if we assume that COVID infects the air, … was that the cause?” By ruling in favor of the defendant insurer, the Court ultimately determined that the COVID-19 virus was distinct from the other substances cases cited by plaintiffs.
2. Court Decisions in Favor of Policyholders
Studio 417 v Cincinnati Insurance Company – Case No. 20-cv-03127
On August 12, 2020, the Western District Court of Missouri rendered one of the only decisions supportive of policyholders when it denied the defendant insurer’s motion to dismiss the plaintiff’s complaint.
While the primary issue was the same as the other decisions addressed in this article—whether the virus causing COVID-19 causes “direct physical loss or damage” to the insured’s property—the district court reached a position in contrast with those in other jurisdictions nationwide. The Defendant insurer argued that, for coverage to be triggered, there must be tangible or structural damage to property, such as storm damage, to satisfy the physical loss or damage requirement in practically all business interruption policies.
The court disagreed, reasoning that the coverage trigger is physical loss or damage, and that it “must give meaning to both terms.” In so holding, the court identified a potential distinction between physical loss and physical damage. To support its reasoning, the court relied on dictionary definitions of direct, physical, and loss to determine the “plain and ordinary meaning” of the phrase “direct physical loss.” Relying on these definitions, the court ruled that plaintiffs had provided sufficient allegations of the virus’s physical presence at the premises such that the property was unsafe and unusable, which in turn satisfied the requirement of direct physical loss. Accordingly, the court denied the defendant insurer’s motion to dismiss and the case will now proceed to discovery.
Optical Services USA, et al v. Franklin Mutual Insurance Company – Docket No. BER-L-3681-20
On August 13, 2020, a New Jersey State Court again allowed a policyholder to proceed with discovery, denying its insurer’s motion to dismiss. In that case, the plaintiff specifically alleged that the loss of use of their business as a result of the shelter-in-place order enacted in New Jersey constitutes a “direct covered loss” under their policy. In his oral ruling for the case, Judge Michael Beukas held that “[b]y operation of the distinct and opposite interpretations of the language set forth before the Court by the parties with no other clarity from the record having been established to date, which the Court notes is largely non-existent, this Court reaches the inevitable conclusion solely for the purposes of disposition of this Motion that the plaintiff should be afforded the opportunity to develop their case and prove before this Court that the event of the COVID-19 closure may be a covered event under the [policy].” In so ruling, the Judge Beukas noted the novelty of the case, and highlighted that the lack of a legal precedent “warrants a denial of the Motion to Dismiss at this early stage of the litigation.”
Ridley Park Fitness, LLC v. Philadelphia Indemnity Insurance Company – Case No. 01093
On August 31, 2020, a judge in Pennsylvania State Court allowed a third policyholder’s case to move forward. In denying the defendant insurer’s demurrer to the plaintiff’s complaint, the court’s limited opinion again emphasized the preliminary nature of the litigation, noting that “[a]t this very early stage, it would be premature for this court [to] resolve the factual determinations put forth by defendants to dismiss plaintiff’s claims. … As such, the preliminary objections are overruled.”
3. Panel on Multi-District Legislation Denies Motion to Consolidate Cases – Case No. MDL 2942
As governors nationwide began to issue civil orders and emergency declarations in connection with the COVID-19 pandemic, it also became clear that policyholders were not finding relief by filing insurance claims with their business interruption insurers, most of whom were denying coverage for claims alleging business interruption as a result of the COVID-19 pandemic and related civil orders. Many plaintiffs sought to consolidate all related litigation against their various insurers into a single matter before the Jurisdictional Panel on Multi-District Litigation (“JPMDL”). While there was substantial debate among plaintiffs regarding the best manner of consolidation, hundreds of plaintiffs submitted briefs in support of consolidation.
In response, most insurers argued that the differing plaintiffs, state laws, applicable civil orders, applicable policy terms, and defendant insurers between the hundreds of cases simply would not be best served by consolidation. This position was echoed by some plaintiffs as well, who argued that consolidation would impair their ability to obtain a swift resolution of their claims.
On August 12, 2020, the JPMDL denied motions from numerous groups of plaintiffs who sought consolidation of the litigation pending nationwide regarding COVID-19 business interruption litigation. In short, the panel agreed that consolidation was not appropriate due to the lack of commonality between the cases. The court noted that there is “little potential for common discovery,” and that with more than one hundred different insurers involved, the cases involve differing policies, coverages, conditions, exclusions, and state laws, among multiple different industries. The court concluded that these differences would overwhelm any common factual questions.
The court did acknowledge one potentially viable theory of consolidation – combining specific actions based on specific groups of insurers against whom many actions are brought. The court identified four groups of insurers in this group: Certain Underwriters at Lloyd’s, London; Cincinnati Insurance Company; the Hartford, and Society Insurance. Each of these parties was directed to show cause why those actions should not be centralized. The court will consider the submissions of those parties at its next hearing session on September 24, 2020.
Courts have only begun to weigh in on the dispute between policyholders and their insurers regarding whether losses related to the COVID-19 pandemic are covered under policies that offer business interruption coverage and civil authority coverage. This matter continues to develop as policyholders nationwide continue to litigate with their insurers. The fact that the JPMDL declined to consolidate litigation into a single case means that we will continue to see decisions rendered nationwide on a case-by-case basis.
These preliminary decisions demonstrate that, so far, courts generally agree with insurers on three primary points: 1) the emergency declarations and stay-at-home orders issued nationwide, without more, are not sufficient to trigger the civil authority clauses that require direct physical damage to property as a condition precedent to coverage; 2) the mere existence of the COVID-19 pandemic does not itself constitute physical damage or loss to property, especially when plaintiffs do not specifically allege that the virus was present at the insured property; and 3) to the extent that coverage may be available, clearly worded and unambiguous policy exclusions for viruses will likely exclude coverage. These decisions also suggest that courts are hesitant to find the ambiguity that policyholders are arguing exists in the policy language requiring “direct physical loss of or damage to property.”
However, as evidenced above, some courts are less willing to issue dispositive rulings at the pleading stage, and have allowed some policyholders the opportunity to seek discovery to support their claims. These cases will provide further insight into the validity of litigants’ arguments, since the parties will be the first in the nation to conduct formal discovery on these issues.