A majority of trial courts adjudicating COVID-related property insurance coverage lawsuits have found that coverage is not triggered absent direct physical loss or property damage. The insurance industry now waits to see if the same holds true at the appellate level.
As the pandemic winds down, the number of COVID-related insurance lawsuits in American courts also is waning. A fair number initially were filed by business owners seeking income replacement during the temporary government-ordered shutdowns, peaking in mid-2020. The predicted flood of such cases, however, has slowed to a trickle, for reasons both practical and legal. Many business owners were able to access healthy stimulus payments that replaced their lost income and covered their overhead, such as the Paycheck Protection Program (“PPP”). Perhaps more importantly, U.S. courts in most jurisdictions have now weighed in on the legal question of whether such government-ordered closures and the resulting economic loss, are covered under a standard property insurance policy, absent any actual physical damage. The key language in such policies requires “direct physical loss of or damage to property.” An overwhelming majority of courts have said this requires concrete physical damage; a mere temporary closure to shoppers or diners is not enough, even if government-ordered for public safety reasons.
The win rate for insurers on this issue is high according to the “Covid Coverage Litigation Tracker,”[1] a website published by the University of Pennsylvania’s Carey Law School. The website reports around 80-90 percent of all Covid-19 property insurance cases have resulted in dismissal.[2]
The overwhelming majority of courts have held that such cases should be dismissed in the absence of real physical damage. That includes claims for “Business Income,” which is one of the sub-coverages offered under a property insurance policy when the business is forced to close for “repair” or “restoration” of its physically damaged property. It still requires “direct physical loss of or damage to covered property” (or similar language) for any coverage at all. An example is tornado damage to a retail store; the policy would cover the store’s repairs plus lost income while closed for repair. Such “Business Income” coverage is thus different from “Business Interruption” insurance, although it is often incorrectly confused. “Business Income” coverage is merely a component of a traditional property insurance claim that involves real physical damage.
Court after court has held that a property insurance policy provides coverage for “income” only during a period of “restoration” “repair” or “replacement” of the physically damaged property – a further indication that the policy requires actual loss of or damage to the insured’s property, not merely economic loss. In deciding this issue, many courts have referred to the Merriam-Webster Dictionary definitions of words such as “physical” (“having material existence and perceptible especially through the senses and subject to the laws of nature”); “loss” (“destruction or ruin”); and “damage” (“loss or harm resulting from injury to person, property, or reputation”). One federal court in Alabama noted, “you cannot tear the adjective ‘physical’ from the noun it modifies ‘loss.’” A common understanding of that term would be “a material, perceptible destruction or ruin of property.”[3]
The few exceptions where a policyholder has prevailed on a motion to dismiss have mostly revolved around whether a pandemic-triggered closure can be a literal “physical loss,” but most courts are not buying it.[4] A few others have allowed a policyholder to go forward with a Covid-19 suit (overruling the insurers’ motions to dismiss) where an express factual allegation was made of COVID contamination and sick employees.[5] None of those cases, however, has reached the issue of whether the policy nonetheless still excludes coverage, for example, under exclusion of coverage for “Acts or Decisions” of a government body. The cases in which any court has ruled that economic loss is enough (without accompanying physical damage) have been generally rejected and not followed by other Courts.[6]
The presence of a virus exclusion, such as ISO form CP 01 40 07 06 “Exclusion for Loss Due to Virus or Bacteria,” has furnished courts with an easy out in those cases where they exist. The inverse, however, has not been true — that the absence of a virus exclusion means the presence of coverage. Courts that have considered this question still hold that the policy requires an initial incident of actual property damage before the exclusions (including virus exclusion) even come into play.[7]
Perhaps this litigation is reaching a tipping point, with more than 120 cases in 25 states now queued up for appeal.[8] Every U.S. Circuit Court of Appeals is now considering this issue, as well as multiple state courts of appeal including Ohio and Oklahoma. While there are nuances in each state’s rules of contract interpretation, their rulings thus far have been surprisingly uniform. Until the final appeal is decided, however, the insurance industry is taking the issue seriously because of its potential danger if courts were to hold that a government official can essentially order insurance payments with the stroke of a pen. Property insurance, they say, is strictly for property damage.
Stay tuned for updates from the Burr team as these matters make their way through the appeals process.
[1] https://cclt.law.upenn.edu/.
[2] See Law360, Erin Badham and Keith Moskowitz, Outliers Offer False Hope For Virus Biz Interruption Claims, (April 14, 2021), available at: https://www.law360.com/articles/1374951/outliers-offer-false-hope-for-virus-biz-interruption-claims (last visited May 25, 2021). The COVID litigation tracker takes into account only cases that are able to be found publicly, with state law filings less readily available.
[3] Woolworth LLC v. Cincinnati Ins. Co., No. 2:20-CV-01084-CLM, 2021 WL 1424356, at *3–4 (N.D. Ala. Apr. 15, 2021)
[4] See Café International Holding Company v. Westchester Surplus Lines Insurance Company, Case No. 20-21641, 2021 WL 1803805, *1 (S.D. Fla. May 4, 2021)(explaining why the simple fact that coronavirus may have been present on the premises or in the community at large, does not give rise to “direct physical loss or damage.”)
[5] See e.g. Studio 417, Inc. v. Cincinnati Insurance Company, No. 6:20-cv-03127-SRB (W.D. Mo. Aug. 12, 2020); Serendipitous, LLC/Melt v. Cincinnati Ins. Co., No. 2:20-CV-00873-MHH, 2021 WL 1816960, at *1 (N.D. Ala. May 6, 2021)
[6] See Henderson Rd. Rest. Sys., Inc. v. Zurich Am. Ins. Co., No. 1:20-CV-1239, 2021 WL 168422 (N.D. Ohio 2021); Podiatry Foot & Ankle Inst. P.A. v. Hartford Ins. Co. of Midwest, No. CV2020057KMESK, 2021 WL 1326975, at *3, n.3 (D.N.J. Apr. 9, 2021)(declining to follow Henderson Road and collecting other cases rejecting that holding)
[7] Bel Air Auto Auction, Inc. v. Great Northern Ins. Co., No. RDB-20-2892, 2021 WL 1400891 (D. Md. Apr. 14, 2021) (Bennett, J.) (granting insurer’s motion for judgment on the pleadings in COVID-19–related insurance coverage case and rejecting plaintiff’s argument that absence of virus exclusion indicated there was coverage).
[8] See Bronstad, Amanda, Legal Fight Over COVID-19 Insurance Coverage Heads to Appellate Courts, available at https://www.law.com/2021/05/10/legal-fight-over-covid-19-insurance-coverage-heads-to-appellate-courts/?slreturn=20210425130030 (last visited May 25, 2021)
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