[co-author: Tess Olinger - Summer Associate]
In the wake of COVID-19 and governmental closure orders, many businesses were forced to temporarily suspend their operations. Consequently, many consumer-facing businesses lost out on a significant source of income. As previously predicted, some of these business turned to their Commercial General Liability (“CGL”) insurance policies to seek coverage for these losses. After insurers denied coverage, these businesses brought suit.
Claims for coverage for COVID-related loss have faced significant hurdles in most jurisdictions, including Minnesota. Over the past year, most courts around the country have held there is no coverage under CGL policies because these policies require a showing of “direct physical loss or damage,” which is often interpreted to mean a physical alteration to the property, not merely an economic loss to the business. Additionally, some policies contain virus, law and ordinance exclusions, or both.
Recently, the Eighth Circuit Court of Appeals (applying Iowa law) became the first federal appellate court to affirm denial of coverage. In its published opinion in Oral Surgeons P.C. v. The Cincinnati Insurance Co. (discussed below), the Eighth Circuit joined the vast majority of courts around the country—including in Minnesota—that have denied coverage. Both insureds and insurers should be aware of potential language in their policies that could trigger or prevent coverage in these situations.
I. Minnesota Courts have Uniformly Denied Coverage for COVID-Related Loss
Insureds have had no success whatsoever in obtaining coverage in Minnesota courts. There have been six cases in total, and each resulted in dismissal of the insured’s claim for coverage.
The first of these cases is Seifert v IMT Insurance Co.[1] The Minnesota federal district court held that the plaintiff was not entitled to coverage for their COVID-related losses because the insured failed to allege that it suffered direct physical loss or damage to its premises. The court held that the policy only provided coverage in the event of direct physical loss or damage, not for economic loss. This decision aligns with numerous similar decisions across the country.
In attempts to prove physical loss or damage, some insureds have argued that infections occurring at insured premises demonstrates that the premises are contaminated with COVID-19, and that is a direct physical loss. One such case is Berkseth Rojas DDS v. Aspen American Insurance Co.[2] The insured alleged that three employees were infected with COVID-19, and, therefore, “it [was] an absolute certainty that covered property has been infiltrated and contaminated by COVID-19 by those three persons.” The insured alleged that this contamination forced her to make repairs and changes to her property, such as installing plexiglass at the reception area and limiting the number of patients in the building at one time, thus limiting the functional space of her building. The court rejected this attempt to compare the presence of coronavirus on her property to other conditions, such as asbestos and smoke contamination, noting that there is a difference between contamination by particles and damage by those particles. The insured claimed only contamination by COVID-19, not physical damage to her property.
Another important component in determining the potential success of a COVID-related coverage claim is coverage exclusions. Even if a court agreed that “direct physical loss or damage” could apply to COVID-related contamination, virus or law and ordinance exclusions may preclude coverage. For example, in Blue Ox LLC et al. v. Midwest Mutual Family Insurance Co,[3] a Minnesota state court held that the policy in question did not cover plaintiffs’ COVID-19 related losses both because there was a lack of direct physical loss or damage, and because there was a virus exclusion, stating that the insurer would not “pay for loss or damage caused directly or indirectly by any virus.” The court emphasized the term “indirectly” in rejecting the plaintiffs’ argument that their loss was caused by Governor Walz’s Executive Orders, not COVID-19 specifically, reasoning: “plaintiffs do not dispute that the coronavirus is part of the causal chain that prompted the governor to issue his executive orders, which resulted in their business losses.” The policy also contained an Ordinance or Law exclusion precluding coverage for losses caused directly or indirectly by “the enforcement or compliance with any ordinance or law regulating the construction, use, or repair of any property.” According to the court, the Executive Orders were issued pursuant to authority delegated to Governor Walz, and thus had the force of law. Finally, yet another exclusion barred coverage. The “Consequential Loss Exclusion” stated that the insurer “will not pay for any loss or damage caused by or resulting from delay, loss of use, or loss of market.” The court determined that plaintiffs were claiming a loss of use during the time they were unable to be open to normal capacity, which meant their business losses were not covered.
II. The Eighth Circuit Recently Issued the First Federal Appellate Decision, Joining the Vast Majority of Courts to Deny Coverage for COVID-Related Loss.
The Eighth Circuit recently became the first federal appellate court to address a COVID-related loss coverage dispute, in Oral Surgeons P.C. v. The Cincinnati Insurance Co., a case interpreting Iowa law.[4] The Eighth Circuit agreed with the district court that the policy at issue unambiguously required physical alteration, physical contamination, or physical destruction of insured property, and that the insured’s losses were confined to an “inability to use” the property, resulting in economic loss. The insured did not, however, allege any physical alteration to its property from COVID-19. Although Oral Surgeons interpreted and applied Iowa contract law, the Eighth Circuit referred to Minnesota case law in its analysis, reasoning there is no material difference between Iowa and Minnesota law on insurance contact interpretation.
In short, insureds in Minnesota have an uphill battle to obtain coverage for their COVID-related business losses, and insurers likely have strong grounds to deny coverage.
III. COVID-19 Business Insurance Cases in Other Jurisdictions
While many Minnesota insureds have struggled to obtain coverage, some jurisdictions have interpreted “direct physical loss or damage” in a way that favors coverage.
For example, Missouri courts have accepted the COVID-19 contamination theory advanced in Berkseth Rojas. In Blue Springs Dental Care LLC., et al. v. Owners Insurance Company, the court held that the insured plausibly alleged that COVID-19 physically damaged its property by physically “attaching” to the insured’s premises.[5] The court determined this allegation was sufficient to survive a motion to dismiss, but that Blue Springs would need to prove that COVID-19 actually contaminated the premises.
In another example, Studio 417 Inc., et al. v. The Cincinnati Insurance Co., the court reasoned that the insurer was conflating the terms “physical loss” and “physical damage,” and that in order to give effect to the policy language in its entirety, the two words must have distinct meanings.[6] The policy at issue did not define either term. Using the dictionary definition of “loss”, the court determined that the ordinary meaning of loss reasonably could be “the act of losing possession” or “deprivation”. Under this definition, the insured pled sufficient facts that it had suffered a physical loss due to COVID-19.
As stated, however, Minnesota courts have not issued similar decisions.
IV. The Future of COVID-Related Loss Insurance Claims
The recent Eighth Circuit decision in Oral Surgeons further solidifies the interpretation that most CGL policies require direct physical loss or damage, and that COVID-19 does not cause any such harm. But even if COVID-19 could cause this harm, many policies include exclusions that likely preclude coverage, such as virus exclusions and anti-concurrent loss provisions. Whether insureds will have an uphill battle to obtain coverage for COVID-related losses in the future all depends, of course, on the exact terms of the policy at issue and the kind of loss caused by COVID-19.
[1] Seifert v IMT Insurance Co., 495 F.Supp.3d 747 (D. Minn. 2020).
[2] Berkseth-Rojas v. Aspen American Insurance Co., No. 3:20-cv-948-D (N.D. TX. July 13, 2021).
[3] Blue Ox LLC et al. v. Midwest Mutual Family Insurance Co., No. 62-CV-20-3771 (Minn. 2d Dist. Ct. Jan. 29, 2021).
[4] Oral Surgeons P.C. v. The Cincinnati Insurance Co., 2 F.4th 1141 (8th Cir. 2021).
[5] Blue Springs Dental Care, LLC, et al. v. Owners Insurance Co., 488 F.Supp.3d 867, 873 (W.D. Mo. 2020).
[6] Studio 417, Inc., et al. v. The Cincinnati Insurance Co., 478 F.Supp.3d 794, 801 (W.D. Mo. 2020).
