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A recent decision out of the Western District of Missouri supports policyholders’ arguments for business interruption coverage for loss from COVID-19. See Studio 417, Inc., et al. v. The Cincinnati Ins. Comp., No. 20-cv-03127-SRB, Order Denying Mot. to Dism., issued Aug. 12, 2020 (W.D. Mo.) (the Order). The district court denied The Cincinnati Insurance Company’s (referred to hereafter as “Cincinnati”) motion to dismiss based on the now ubiquitous argument that the virus causing COVID-19 cannot satisfy the requirement that “direct physical loss or damage” caused the loss.
Cincinnati took the same position as nearly all insurance companies—that 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. Rejecting this argument, the court reasoned that the coverage trigger is physical loss or damage, and that it “must give meaning to both terms.” To adopt Cincinnati’s argument, the court decided, would conflate physical loss with physical damage.
Cincinnati and its brethren certainly hoped for a quick end to this case providing persuasive authority, and powerful leverage, in similar cases simmering around the country as the pandemic continues. Instead, the decision provides a boon to policyholders across the country in their fight for coverage.
Background of Coverage Disputes
Commercial property policy holders have submitted claims throughout the country for business interruption based on closures from COVID-19. The claims are generally for business income loss and extra expense incurred due to closure of the premises because of the presence of the virus or government orders. Insurance companies have almost universally denied the claims, stating that the presence or risk of the presence of the virus does not meet the requirement that there be “direct physical loss or damage” at the covered property (or, for coverage based on closures as a result of government orders, around the covered property). This has led to hundreds of insurance coverage lawsuits, including many putative class actions. Some plaintiffs are seeking consolidation of the federal lawsuits in multidistrict litigation. See IN RE: COVID-19 Business Interruption Protection Insurance Litigation, MDL No. 2942 (J.P.M.L., filed Apr, 20, 2020). The Judicial Panel on Multidistrict Litigation heard argument for consolidation on August 6, 2020, and is expected to issue a decision in the coming weeks.
Of the court decisions to date, most have sided with insurance companies, indicating that the risks posed by COVID-19 would not meet the direct physical loss or damage requirement. A judge from the Southern District of New York bluntly stated, “[The virus] damages lungs. It doesn't damage printing presses.” See Social Life Magazine v. Sentinel Ins. Co., Ltd., No. 1:20-CV-03311-VEC, May 20, 2020 Hearing for Prelim. Inj., Dkt. No. 24 at 5:3-4 (S.D.N.Y. 2020). Other decisions out of Michigan and Washington, D.C., have shown similar leanings. See Gavrilides Management Co. LLC v. Michigan Ins. Co., No. 20-258-CB, 2020 WL 4561979, at *1 (Mich. Cir. Ct. July 21, 2020); Rose’s 1, LLC et al., v. Erie Ins. Exh., No. 2020-CA-002424-B, Order Denying PL.’s Mot. for S.J. & Granting Def.’s Mot. for S.J., issued on Aug. 6, 2020 (D.C. Super. Ct.).
The new Studio 417 decision provides a well-reasoned counterpoint to those decisions.
Studio 417 Decision
In Studio 417, a hair salon and several restaurants brought a putative class action for breach of contract and declaratory judgment against Cincinnati based on its denial of their claims for loss caused by the COVID-19 pandemic. The plaintiffs submitted claims under several different coverages in their policies, including business income loss and extra expense incurred based on
- the suspension of operation from physical loss or damage at the plaintiffs’ premises (Business Income Coverage);
- government orders based on physical loss or damage around their premises causing a suspension of operation at their premises (Civil Authority Coverage);
- a “dependent property,” or a property on which the policyholder relies for materials or services, not providing the material or services to the policyholders based on physical loss or damage at the dependent property (Dependent Property Coverage); and
- the prevention of “existing ingress or egress” at the policyholders’ premises based on physical loss or damage at a “contiguous” location (Ingress and Egress Coverage).
Each of the coverages requires a showing of direct physical loss or damage at some location. Notably, the plaintiffs’ policies in Studio 417 do not have a virus exclusion. Many other policies do have this exclusion which, if present, provides a separate and formidable hurdle to coverage. Without the virus exclusion, the plaintiffs in Studio 417 focused on establishing direct physical loss.
The retail plaintiffs alleged that it was likely that persons infected with COVID-19 entered the relevant premises within the past several months and, as a result, infected the premises with the virus. To show this would constitute physical loss, plaintiffs alleged that the virus “is a physical substance,” that it “live[s] on” and is “active on inert physical surfaces,” and is “emitted into the air.” (Order at 4.) Additionally, plaintiffs alleged that the presence of the virus “renders physical property … unsafe and unusable” and that plaintiffs “were forced to suspend or reduce business” at the covered premises. (Id.) In response, Cincinnati Insurance argued that the policies provide coverage “only for income losses tied to physical damage to property, not for economic loss caused by governmental or other efforts to protect the public from disease.” (Id. at 5.)
The court sided with the hair salon and restaurants, denying Cincinnati’s motion to dismiss and sending the case to discovery. Applying the maxim of contract law that a court must give meaning to all the words in an agreement, including both direct physical loss and direct physical damage in the insurance policies, the court turned to the dictionary definitions of direct, physical, and loss to determine the “plain and ordinary meaning” of the phrase “direct physical loss.” (Order at 8.) As the court explained,
- direct means, in part, “characterized by a close, logical, causal, or consequential relationship”;
- physical means “having material existence perceptible especially through the senses and subject to the laws of nature”; and
- loss is “the act of losing possession” and “deprivation.”
Id. 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. This satisfied the requirement of direct physical loss.
It remains to be seen if other courts will adopt this position and, if so, what facts sufficiently establish direct physical loss. But, at least under this ruling, showing that the virus has a physical presence and that it caused deprivation at the property would be sufficient to invoke coverage. This is a win for retailers looking for any means to recover COVID-19 losses.
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