Many Early Complaints Purposely Did Not Allege Physical Loss of or Damage to Insured Property
Many first-party property policies require physical loss of or damage to insured property to trigger coverage. In an effort to avoid a potentially applicable virus exclusion, however, various early complaints relating to business interruption losses caused by the virus failed to allege that the coronavirus was present at and caused damage to insured property. In dismissing such complaints for failure to state a claim, courts have not actually adjudicated the cases’ merits, precisely because the policyholders failed to plead the loss of or damage to property required by the policy. While many authorities, including courts and government entities issuing orders, have stated that the coronavirus causes physical damage to property, failure to allege as much can be fatal to a plaintiff’s claim.
The policyholder plaintiff in Turek Enterprises v. State Farm found itself in such a situation. In compliance with an executive order issued by Michigan Governor Gretchen Whitmer, the plaintiff suspended all operations at its chiropractic office on March 24, 2020. When State Farm denied the plaintiff’s claim for loss-of-income and extra-expense coverage, the plaintiff sued for breach of the insurance policy. Importantly, the plaintiff specifically alleged that the coronavirus did not enter its premises; rather, the plaintiff alleged that it suffered losses solely from the suspension of its operations in compliance with Governor Whitmer’s executive order. Because the plaintiff’s policy required “an accidental direct physical loss to property,” the court ruled that alleging a mere loss of use of the property could not bring the claim within the policy’s coverage grant. Per the court, “the plain meaning of ‘direct physical loss to Covered Property’ requires that there be a loss to Covered Property; and not just any loss, a direct physical loss. Plaintiff’s interpretation would be plausible if, instead, the term at issue were ‘accidental direct physical loss of Covered Property.’” In addition, the court found that, even if the plaintiff had properly pleaded direct physical loss of property, the policy’s virus exclusion (discussed further below) would have negated any coverage for loss of income or extra expense.
Similarly, the plaintiffs in Rose’s 1, LLC v. Erie alleged that they suffered covered losses after closing their restaurants in compliance with Washington, D.C., Mayor Muriel Bowser’s various orders restricting businesses in the District of Columbia. Although the case was procedurally distinguishable from Turek, the Rose’s 1 court applied a similar analysis to deny coverage. The plaintiffs failed to introduce evidence that the coronavirus physically entered the insured premises prior to or at the time that they were forced to close. Moreover, the court rejected the plaintiffs’ argument that “loss of use” required only that the plaintiffs “be deprived of the use of their properties, not that the properties suffer physical damage.” According to the court, a loss triggering coverage must be caused by “a direct physical intrusion on to the insured property.” Under this interpretation, and because the plaintiffs’ lacked any evidence of intrusion of the coronavirus onto the insured premises, the court denied the plaintiffs’ motion for summary judgment and granted the defendant’s cross-motion, thereby disposing of the case.
In Turek, Rose’s 1, and similar cases in which plaintiffs did not allege a physical presence of the coronavirus on the policyholder’s premises, the courts did not reach an ultimate conclusion as to whether the coronavirus can cause direct physical loss of or damage to property. Because the complaints did not allege such loss or damage, the claims were dismissed for failure to meet the policyholders’ pleading burden. These decisions thus merely stand for the uncontroversial proposition that a policyholder must plead physical loss of or damage to property to implicate the policy’s coverage grant. But even a well-pleaded complaint for damages arising from the coronavirus still can fall short if a clearly drafted policy exclusion forecloses coverage.
Decisions Applying a Virus Exclusion Do Not Affect Whether the Coronavirus Causes Loss of or Damage to Property
Analyzing a policy’s business interruption coverage begins with the threshold question of whether the loss falls within the policy’s coverage grant. But even under an all-risk policy, not “all risks” are truly covered. Exclusions can pull back coverage that the policy otherwise would provide. For coronavirus-related losses, insurance companies primarily have relied on the so-called “virus exclusion” to deny coverage even under all-risk policies.
In Martinez v. Allied Insurance Co., the court applied a virus exclusion to preclude coverage for a policyholder who had sued his first-party property insurer for failure to pay losses suffered as a result of costs incurred to clean and decontaminate his dental office of the coronavirus. In addition, the plaintiff claimed losses resulting from Florida Governor Ron DeSantis’s order requiring that dental services be limited to emergency procedures only, and sought coverage under the policy’s business income and civil authority provisions. But the policy contained a virus exclusion that excluded “loss or damage caused ‘directly or indirectly,’ by ‘[a]ny virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.’” The court reasoned that the policy’s virus exclusion eliminated coverage for the plaintiff’s losses, and for that reason, the court did not address whether the plaintiff’s claims otherwise could have triggered business interruption or civil authority coverage.
Although early decisions have relied on virus exclusions in denying policyholders’ claims for coronavirus-related business interruption losses, the debate continues as to whether these exclusions should foreclose coverage for such losses. In fact, the current stance taken by the insurance industry is premised on misrepresentations that it made to regulators during the development of the virus exclusion. Specifically, the insurance industry misrepresented to regulators that the introduction of the virus exclusion merely clarified the industry’s long-standing position that losses suffered as a result of viruses were never intended to be covered, which contradicted long-standing legal precedent. Taking this position allowed insurance companies to introduce a new exclusion while maintaining the high premiums they had previously charged. The plaintiff in Turek advanced a similar argument, which the court refused to address because it deemed evidence submitted from the 2006 Insurance Services Office (ISO) Circular to be extrinsic evidence that could not be used to interpret what that court found was a plain, unambiguous virus exclusion. But another court recently denied an insurance company’s motion to dismiss a coronavirus coverage lawsuit involving a policy with a virus exclusion, based in part on a finding of ambiguity in the exclusion. The Turek court’s reasoning notwithstanding, regulatory estoppel and ambiguity arguments regarding the virus exclusion have yet to be litigated fully.
Finally, from both a factual and legal perspective, no legitimate explanation supports the inclusion of a virus exclusion in a policy insuring against property damage unless the insurance industry understood and acknowledged that viruses do in fact cause physical loss of or damage to property. If viruses could not cause physical damage to property, as insurance companies now argue, then policy language purporting to exclude physical loss of or damage to property caused by viruses would be entirely superfluous.
Several Recent Decisions Provide Hope for Policyholders
Recent decisions should give policyholders hope that properly worded complaints alleging that the coronavirus has caused direct physical loss of or damage to property will survive to be judged on the merits. In Studio 417 v. Cincinnati, the plaintiffs presented the court with such a complaint seeking coverage under Cincinnati Insurance Company policies without a virus exclusion. The court denied Cincinnati’s motion to dismiss, rejecting the argument that the complaint did not allege “direct physical loss or damage.” The court’s reasoning in allowing the lawsuit to proceed provides a blueprint for well-pleaded complaints alleging coronavirus-related business interruption losses.
The Studio 417 court rejected the insurance company’s argument that “physical” property damage must be tangible. As discussed further below, courts throughout the country have long recognized that physical loss of or damage to property need not be tangible, structural, or visible to the naked eye in order to trigger coverage. Consistent with this persuasive authority from other jurisdictions, the Studio 417 court found that the plaintiffs’ allegations that the coronavirus physically attaches to property and renders it unsafe and unusable were sufficient to survive a motion to dismiss.
Moreover, the Studio 417 court deemed “loss of” property to be distinct from “damage to” property. The court emphasized the policies’ express coverage of either physical loss or physical damage. Looking to the plain and ordinary meaning of the policy language, the court interpreted “loss” as the act of losing possession or deprivation. Therefore, in alleging that the coronavirus attached to the insured property and rendered it unsafe and unusable, the policyholders in Studio 417 had adequately alleged a “loss.”
The Studio 417 plaintiffs’ well-pleaded allegations that the coronavirus physically attached to and damaged property on the insured premises provided the basis for the court’s policyholder-friendly ruling. In contrast to the policyholders in the cases discussed above, the Studio 417 policyholders affirmatively alleged that the virus—a physical substance—was present on their premises. This allegation tethered the economic harm suffered by the business to specific allegations of physical loss caused by the coronavirus and subsequent business closure orders. Likewise, the court in Blue Springs Dental Care, LLC v. Owners Insurance Co. denied the insurance company’s motion to dismiss because the plaintiffs had alleged, among other things, the likelihood of the presence of the coronavirus on their properties. Thus, a policyholder can meet its burden for maintaining an action for business interruption coverage by alleging the likely presence of the coronavirus, which resulted in a loss of property by depriving the policyholder of the ability to use the property as intended.
Following the ruling in Studio 417, a New Jersey state court, in Optical Services v. Franklin Mutual Insurance Co., relied on prevailing New Jersey law in denying an insurance company’s motion to dismiss and rejecting the argument that the complaint did not properly allege “direct physical loss or damage.” Specifically, the court cited Gregory Packaging, Inc. v. Travelers Property Casualty Co. and Wakefern Food Corp. v. Liberty Mutual Fire Insurance Co. in recognizing that nonstructural damage rendering property uninhabitable, due to events such as the release of ammonia or a power outage, constitutes direct physical loss or damage. As in Studio 417, the Optical Services court found that “direct physical loss or damage” does not require a showing of tangible alteration; rather, it requires only loss of functionality. Because the plaintiff had sufficiently pleaded direct physical loss of or damage to insured property, the complaint survived.
More recently, the Superior Court of the State of North Carolina granted summary judgment to policyholders after finding “physical loss” and “physical damage” to have two distinct meanings. Accordingly, the court rejected the insurance companies’ argument that both physical damage and physical loss require structural alteration to property.
An additional reason for optimism comes from overseas, where the High Court in London recently ruled that insurance companies should pay claims to roughly 370,000 businesses that were forced to close due to the coronavirus. These cases thus demonstrate that a well-pleaded complaint seeking coverage for coronavirus-related losses will survive an insurance company’s motion to dismiss. But simply surviving a motion to dismiss does not necessarily put money in a policyholder’s pocket. The substantive question remains: Does the coronavirus actually cause physical loss of or damage to property for purposes of a first-party property policy? In light of how courts have interpreted the “physical loss or damage” requirement in the past, the answer should be a resounding yes.
The Coronavirus Causes Physical Loss of or Damage to Property
The ubiquity and transmissibility of the coronavirus is well established. The Centers for Disease Control and Prevention (CDC) has acknowledged that COVID-19 (the illness caused by the coronavirus) can spread through aerosol transmission, meaning that even asymptomatic individuals carrying the disease can spread it via aerosol droplets expelled through everyday bodily functions. The CDC also has suggested that the coronavirus can remain on surfaces for several days. The ease with which the coronavirus spreads, and its ability to remain on surfaces for extended periods, led Governor Tom Wolf to declare the entire Commonwealth of Pennsylvania a disaster area—a declaration that the Supreme Court of Pennsylvania upheld as within the governor’s power.
Because coronavirus-specific case law is still developing, examining previous factual situations in which courts have found physical damage to property sheds light on how courts should interpret the substantive merits of policyholder claims arising out of coronavirus-related losses. The Studio 417 court held, in the specific context of the coronavirus, that physical loss of or damage to property need not be tangible, structural, or visible to fit squarely within the coverage grant of a first-party property policy. Many courts throughout the country have found that similar intangible, nonstructural damage meets a policy requirement of physical loss or damage. For example, the U.S. District Court for the District of New Jersey ruled that a release of ammonia that forced the closure of the policyholder’s property constituted physical loss or damage. There, the court specifically held that “property can sustain physical loss or damage without experiencing structural alteration.” Likewise, the Superior Court of Massachusetts held that carbon monoxide contamination causes direct physical loss to property despite a lack of tangible structural damage. Asbestos contamination also can constitute physical damage because it renders property uninhabitable and unfit for use. Smoke from wildfires that forced a partially enclosed theater to close and E. coli contamination also have been held to constitute physical loss or damage under first-party property policies.
Further, many first-party property policies insure business income losses caused by direct physical loss of or damage to property within a given radius of the insured premises. Courts facing such claims for coverage based on loss of or damage to insured property have found in favor of policyholders where no tangible impact to the nearby property occurred. Damage as diverse as an accumulation of gasoline in soil beneath a church, odors of cat urine, toxic gas from defective drywall, and pervasive odors from a methamphetamine lab all were held to meet the respective policy’s definition of physical loss or damage.
While none of the cases cited above deals with the exact scenario of a viral pandemic like the coronavirus, there is a simple explanation for this fact—there has not been a viral pandemic of the magnitude of the coronavirus in over one hundred years, since the 1918 flu pandemic. As a result, courts will need to rely on precedent that is factually similar when addressing coverage for coronavirus-related losses under first‑party property policies. In response to the lack of pandemic-specific insurance case law, insurance companies are arguing minor factual distinctions in an attempt to distinguish relevant and persuasive case law cited by policyholders in support of coverage. Policyholders must be prepared to refute these and other arguments, in addition to defending their own positions in favor of coverage, for coronavirus-related claims.
Policyholders also should expect insurance companies to argue that the coronavirus neither renders a property uninhabitable nor physically transforms property. Both of these points miss the mark. First, as recognized by numerous public health organizations, the coronavirus can exist on property for days. Coupled with its extreme contagiousness, the presence of the coronavirus at or around property absolutely renders that property uninhabitable. Moreover, even temporary cleaning of an insured property does not alter its uninhabitable status because the first person who walks through the door after the cleaning easily could subject the property to a renewed exposure to the coronavirus, negating prior cleaning efforts. This very possibility underlies the numerous ongoing government shutdown orders and occupancy limitations that have affected millions of businesses throughout the country.
Second, as evidenced by the rulings cited above, courts repeatedly have held that a physical, structural change to property is not a prerequisite to a finding of physical loss of or damage to property. The coronavirus certainly is at least as tangible as gasoline vapors, odors of cat urine, or methamphetamine fumes—all of which courts have found to constitute physical damage to property. Yet, insurance companies will continue to argue that minor factual distinctions make those previous holdings inapplicable to the coronavirus-related claims they now face. But, to the contrary, those cases are persuasive and factually similar.
Finally, insurance companies may attempt to distinguish prior rulings such as those in cases involving asbestos contamination, in which physical damage was ruled not to have occurred until the quantity of asbestos reached a certain level that rendered the property unusable. But due to the extremely contagious nature of the coronavirus, any presence of the virus renders property unusable. This remains true whether the coronavirus is found at the insured premises or simply acknowledged at premises within the radius set out in the policy as supporting coverage for business income losses. Ultimately, the presence of the coronavirus at or around an insured location may necessitate further factual inquiry, but the ubiquity of the coronavirus, and the ease with which it spreads, should lead courts to err on the side of policyholders.
Conclusion
Insurance coverage litigation regarding coronavirus-related claims is still in its infancy. Much remains to be decided regarding the scope of property damage that the coronavirus causes and the extent of losses that policyholders will be able to recoup. Ample precedent exists supporting the notion that the coronavirus causes physical loss of and damage to property and that first-party property policies were intended to cover such damage. Policyholders and their attorneys must be careful to draft well-pleaded allegations of physical loss and damage caused by the coronavirus and must be prepared to refute insurance company arguments improperly seeking to avoid their obligation to cover coronavirus-related losses.
