COVID-19 Business Interruption Claims Survive Dismissal

A federal court has held that whether an insurance policy covers business interruption losses from COVID-19 depends on a factual determination of whether the virus can stick to surfaces. The case is among the first that addresses the enforceability of an insurance policy based on whether droplets containing a microscopic virus caused property damage. ABA Litigation Section leaders advise that the answer to this question will require significant discovery and potentially a battle of the experts.

Does Virus Cause a Physical Loss as Required for Property Damage Coverage?

In Studio 417, Inc. v. Cincinnati Insurance Company, the plaintiff business owners brought a class action against an insurance company seeking property damage coverage based on the presence of COVID-19 at their places of business and government orders requiring their businesses to close due to the virus. The plaintiffs claimed the virus rendered their physical property unsafe and unstable, forcing them to suspend or reduce business on their premises. The insurance company sought dismissal of the claim, arguing that its policies covered physical losses only.

The U.S. District Court for the Western District of Missouri denied the insurance company’s motion based on the language in the insurance policies and the complaint. The court noted that the insurance policies provided for coverage for “physical loss,” but did not define the term “physical loss.” The complaint alleged that COVID-19 “is a physical substance” that lives on physical surfaces and travels through the air.

The district court held the plain meaning of the phrase “physical loss” could include COVID-19 on physical surfaces and did not require “a tangible, physical alteration.” Thus, the court recognized a property that becomes uninhabitable or unusable for the purpose intended by its owner could constitute “physical loss” under an insurance policy. The court concluded that the complaint stated claims under the direct physical loss, civil authority, ingress and egress, and dependent property coverage provisions of the policies due to the COVID-19 virus and the government’s resulting orders restricting access to the business’ premises.

In so holding, the district court observed that the central issue of the case was whether “COVID-19 particles attached to and damaged [the plaintiffs’] property, which made the premises unsafe and unusable,” thereby constituting a physical loss. It noted that “[d]iscovery will shed light on the merits of Plaintiff’s allegations, including the nature and extent of COVID-19 on their premises,” and reserved the right to reconsider the insurance company’s same arguments after discovery.

Experts Will Determine If the Virus and the Claim Will Stick

Litigation Section leaders explain how microscopic particles could result in property damage. “There are analogies that could be drawn in the environmental context, such as to vapors from contamination in the soil and ground water where vapors emanate up into the sub slab, basements, and sometimes indoor air,” explains Brent W. Huber, Indianapolis, IN, cochair of the Section’s Property Coverage Subcommittee of the Insurance Coverage Litigation Committee. “It’s a loss or damage caused by the presence of particles in the air which are going to create an inhalation risk, land on the surfaces of the building, and create a loss of use, which is ‘property damage,’ and a risk of bodily injury.”

Regardless, the court’s denial of the motion to dismiss had significant consequences for the insurance company. “You now have a reported case that policyholders can use against the insurance company,” notes Huber. “That said, I can understand why they would want to seek a motion to dismiss for failure to state a claim.”

The decision will assist the parties in proceeding in this litigation. “You can cater your discovery related to the position set forth by the plaintiff and the question on which the judge appears focused,” comments Tracy A. DiFillippo, Las Vegas, NV, member of the Section’s Content Management Committee. “Instead of doing your normal questions and answers, you have an idea of the arguments and you can focus on those issues.”

This does not mean that the target of discovery will not move, however, given the ever-changing science related to COVID-19. “If you look at the Center for Disease Control and changing rules about whether small particles or large droplets cause an infection, the regulatory authorities seem to be all over the map on how COVID-19 is transmitted,” states Huber. “Reasonable people can disagree as to whether that helps the plaintiff or the insurance company,” he explains.

Huber further noted that multiple courts are considering this issue with an uncertain future as to how these cases will be resolved. “It is still too early to say how it will go,” he says. “There seems to be a split and it is marked by policy language differences and changes in the various jurisdictions,” he comments.

Ultimately, decisions regarding coverage for property loss will depend on the evidence and the interpretation of that evidence. “With respect to the alleged losses due to COVID-19 being on surfaces, it is going to come down to what the experts say regarding whether COVID-19 can actually attach to the surfaces or not,” concludes DiFillippo.