Dec. 2, 2020 – To stay afloat during the ongoing pandemic, especially in the food and beverage sector, some businesses have turned to insurance policies, claiming coverage for business losses caused by COVID-19 and government shutdown orders.

Since the COVID-19 outbreak in early 2020, U.S. businesses have filed nearly 2,000 lawsuits in state and federal court, according to the University of Pennsylvania Law School’s COVID Coverage Litigation Tracker.

More than 1,200 cases have been filed in federal district courts across the U.S. Of 66 reported decisions thus far, only 19 have survived the insurer’s motion to dismiss.

Some cases filed against the same insurer, with similar factual allegations, have been transferred to single federal districts by the U.S. Judicial Panel on Multidistrict Litigation.

At least two cases are pending in Wisconsin circuit courts, and at least three cases are pending in the U.S. District Court for the Eastern District of Wisconsin.

This article highlights the common claims by businesses seeking coverage of business losses due to COVID-19 and government shutdown orders (actions of civil authorities), with three categories of cases emerging based on policy language.

Physical Loss

A Chicago tavern is one of the latest businesses to lose an argument, in federal court, that a policy covering “business interruptions” covers losses that occurred when COVID-19 came to town and Illinois Governor J.B. Pritzker closed nonessential businesses.

The Chicago tavern’s business interruption insurance policy covered any risk except those specifically excluded. But the court concluded the policy only covered “direct physical loss or damage to property” resulting from a covered cause.¹

“The Court agrees with the courts that have found that loss of use of property without any physical change to that property cannot constitute direct physical loss or damage to the property,” concluded the U.S. District Court for the Northern District of Illinois.

In other words, the court concluded that COVID-19 did not do physical damage or cause a physical loss to the tavern’s property, as contemplated by the policy.

The court also noted numerous decisions rejecting coverage for business income losses due to government shutdowns that prohibit or limit access to the premises, concluding those policies required closure based on physical property damage or loss.

The district court cited numerous cases “deciding against coverage for losses resulting from closure orders under similar policy provisions.” However, the court acknowledged that some decisions have reached a different result at the motion to dismiss stage.

For instance, numerous hair salons and restaurants in Missouri and Kansas filed a class action lawsuit in federal court against Cincinnati Insurance Company.²

Like the Chicago tavern, the plaintiffs had “all-risk” property insurance policies that covered all losses except those specifically excluded. The policies provided coverage for losses stemming from “physical loss” or “physical damage” without defining those terms, and for actions of a civil authority prohibiting access to the premises.

Plaintiffs alleged that COVID-19 is indeed a physical substance – emitted into the air and active on inert physical surfaces – that rendered their physical property unsafe and unusable for business purposes. They said customers and/or employees likely infected their properties with COVID-19, and they were forced to suspend or reduce business.

Civil authorities in Missouri and Kansas also issued orders suspending or restricting nonessential business operations based on public safety. The insurer argued that coverage for government shutdowns must be based on physical loss or damage.

“[A]s argued by Defendant, there is case law in support of its position that physical tangible alteration is required to show a ‘physical loss,’” U.S. District Judge Stephen Bough wrote. “However, Plaintiffs correctly respond that these cases were decided at the summary judgment stage, are factually dissimilar, and/or are not binding.”

“Plaintiffs here have plausibly alleged that COVID-19 particles attached to and damaged their property, which made their premises unsafe and unusable. This is enough to survive a motion to dismiss.”

Government Shutdown Orders

In the Chicago case, the court ruled that policy provisions covering business losses from government shutdowns require the shutdown order to be based on physical property damage that require the business owner to close for restoration.

The policy provision required the shutdown order to prohibit access to the premises, “taken in response to dangerous physical conditions resulting from the damage.”

The COVID-19 shutdown orders did not prohibit access to the premises based on physical damage or physical loss to the property, the court ruled.

But in the Missouri case, the court reached a different result. First, as noted, the court concluded that the business owners adequately alleged a physical loss from COVID-19.

Second, the court ruled that the business owners “adequately alleged that their access was prohibited” by government orders, even though they could carry on some limited aspects of the business, such as delivery and take-out orders.

“At the motion to dismiss stage, these allegations plausibly allege that access was prohibited to such a degree as to trigger the civil authority coverage,” Judge Bough wrote. “This is particularly true insofar as the Policies require that the ‘civil authority prohibits access,’ but does not specify ‘all access’ or ‘any access.’”

Since the start of COVID-19, states have grappled with shutdown and reopening decisions, meaning government-imposed business restrictions vary by state.

In May, the Wisconsin Supreme Court ruled that the executive branch did not have authority to extend a statewide safe-at-home order restricting some business operations, meaning businesses have not been restricted since the end of May.

A Dane County order that limits capacity levels at bars, restaurants, gyms, and prohibits indoor sports activities also faces a challenge at the state supreme court.

The original action lawsuit was filed last week on behalf of a gymnastics club and parents of children who cannot participate in their hockey and soccer club activities.

Virus Exclusion?

In the Chicago and Missouri cases discussed, the insurance policies at issue did not contain a virus exclusion that would bar coverage for losses that stem from viruses.

In other cases decided in recent months, the policy did include a virus-exclusion policy. In eight of 19 cases in which the insurer’s motion to dismiss was denied, the court ruled in favor of the business owner despite the existence of a virus-exclusion clause.

All but two were state court decisions. In one case, the U.S. District Court for the Middle District of Florida ruled in favor of a gynecology practice forced to close its doors because of COVID-19.³ The practice submitted insurance claims for business losses.

The insurer argued that coverage was barred because the policy included an exclusion for losses caused by a virus. The virus exclusion, the court noted, said the insurer would not pay for losses caused directly or indirectly by the presence, growth, proliferation, spread, or any activity of “fungi, wet rot, dry rot, bacteria or virus.”

“It is not clear that the plain language of the policy unambiguously and necessarily excludes Plaintiff's losses,” U.S. District Court Judge Anne Conway wrote.

“Denying coverage for losses stemming from COVID-19 … does not logically align with the grouping of the virus exclusion with other pollutants such that the Policy necessarily anticipated and intended to deny coverage for these kinds of business losses.”

Judge Conway said the insurer cited cases that dealt with pollution exclusions or other exclusions that arguably did not contemplate losses from a global pandemic.

“[N]one of the cases dealt with the unique circumstances of the effect COVID-19 has had on our society – a distinction this Court considers significant,” Conway wrote.

“Thus, without any binding case law on the issue of the effects of COVID-19 on insurance contracts virus exclusions, this Court finds that Plaintiff has stated a plausible claim at this juncture.”

This Florida case may be an outlier. Almost 40 cases involving policies with virus-exclusion clauses have been dismissed.

For instance, in a case from the U.S. District Court for the Eastern District of Michigan, a chiropractic practice filed suit after its insurer denied coverage for business losses.⁴ The policy included a virus-exclusion clause similar to the one in the Florida case.

“By its terms, the Policy does not limit the Virus Exclusion to contamination, and Plaintiff has failed to show that the Virus Exclusion is ambiguous,” the court concluded.

Headed to Trial

Most if not all the decisions noted in the COVID Coverage Litigation Tracker denied or granted a motion to dismiss, meaning the case dies or merely continues.

However, the nation’s first reported case seeking coverage for business losses based on COVID-19 is headed for trial in Louisiana state court. Last month, a judge in New Orleans denied the insurer’s a motion for summary judgment, noting disputed facts in a case filed by Oceana Grill, a restaurant in New Orleans’ famed French Quarter.

The judge concluded there’s a genuine factual dispute on whether “the suspension of Oceana Grill’s operations was caused by a physical loss or damage to its property.”

“While Underwriters argues that the harms can be abated with simple household cleaning supplies, Oceana Grill’s citation to studies that offer a contrary interpretation presents a genuine issue of material fact,” wrote Judge Paulette Irons.

Conclusion

Many more decisions are expected in the coming months, which will leave a significant body of case law to examine in determining coverage amidst public health emergencies that result in business losses or business suspension by government order.

Endnotes

¹ T & E CHICAGO LLC, individually, & on behalf of all others similarly situated, Plaintiff, v. THE CINCINNATI INSURANCE COMPANY, Defendant., No. 20 C 4001, 2020 WL 6801845, at *5 (N.D. Ill. Nov. 19, 2020).

² Studio 417, Inc. v. Cincinnati Ins. Co., No. 20-CV-03127-SRB, 2020 WL 4692385, at *7 (W.D. Mo. Aug. 12, 2020).

³ Urogynecology Specialist of Fla. LLC v. Sentinel Ins. Co., LTD., No. 620CV1174ORL22EJK, 2020 WL 5939172, at *1 (M.D. Fla. Sept. 24, 2020).

⁴ Turek Enterprises, Inc. v. State Farm Mut. Auto. Ins. Co., No. 20-11655, 2020 WL 5258484, at *1 (E.D. Mich. Sept. 3, 2020).