On April 27, 2020, five Missouri retailers filed a putative class action suit against their insurance provider, The Cincinnati Insurance Company, for breach of contract relating to the insurer’s denial of coverage under the retailers’ property insurance policies. The plaintiffs, comprised of one hair salon and four restaurants, had sought coverage under their policies for losses suffered as a result of the COVID-19 pandemic. The Cincinnati Insurance Company denied coverage, arguing that the plaintiffs’ losses were not eligible for coverage under their policies, and filed a motion to dismiss the policyholders’ suit.
On August 12, 2020, the United States Federal District Court for the Western District of Missouri dealt struggling businesses a small victory by denying the insurer’s motion to dismiss the suit.
Each of the plaintiffs had purchased an “all-risk” property insurance policy from The Cincinnati Insurance Company for their respective businesses. The policies provide for, among other things, (i) business income coverage, (ii) civil authority coverage, (iii) ingress and egress coverage, (iv) dependent property coverage, and (v) sue and labor coverage. Each of these coverages requires a showing of either “direct physical loss” or “direct physical damage” to a location, but the policies do not define such terms. Notably, the policies do not include any exclusion for losses caused by viruses or public-health epidemics.
The plaintiffs submitted claims under each of the aforementioned coverages for loss of income caused by (i) the presence of COVID-19 at their businesses and (ii) governmental closure orders passed in response to the COVID-19 pandemic mandating the partial or complete shut-down of their operations. The plaintiffs alleged that visitors to their premises had likely been infected with COVID-19, and that these individuals, in turn, had infected their businesses with COVID-19. The plaintiffs argued that COVID-19 is a “physical substance” that had attached to their property, and the presence of such substance rendered their property unsafe and unusable, causing a direct physical loss or direct physical damage to their property. The plaintiffs argued further that the governmental closure orders had caused a “necessary suspension of operations during a period of restoration,” thus denying them use of, and causing damage to, their property, which also resulted in direct physical loss or direct physical damage to their property.
Somewhat unsurprisingly, the defendant denied the plaintiffs’ claims under each of the five coverages, arguing that the plaintiffs had not suffered a direct physical loss as required by the policies, because “direct physical loss requires actual, tangible, permanent, physical alteration of property.” The defendant posited that COVID-19 harms people, not property.
The court, applying Missouri law, ruled that the plaintiffs had made an allegation sufficiently plausible to survive a motion to dismiss that the presence of the virus and the governmental closure orders resulted in a direct physical loss. In so doing, the court relied on the dictionary definitions for the terms “direct,” “physical,” and “loss,” noting that COVID-19 was physically present at the covered property in the form of viral particles, likening COVID-19 to physical contaminants such as asbestos fibers, and that such presence resulted in a direct physical loss. The court noted further that the defendant, in arguing that direct physical loss required a tangible, physical alteration, was conflating the terms “loss” and “damage,” and that “even absent a physical alteration, a physical loss may occur when the property is uninhabitable or unusable for its intended purpose.”
The court ruled further that the plaintiffs had plausibly stated claims for each of the five coverages under the policies:
- Civil Authority Coverage: The defendant, pointing to the fact that the governmental closure orders permitted restaurants to remain open for take-out and delivery services, alleged that civil authority coverage did not apply, because the plaintiffs were not prohibited from accessing their premises. The court held that access to the covered properties had been restricted to an extent that was sufficient to trigger the civil authority coverage, and that access need not be prohibited in its entirety.
- Ingress and Egress Coverage: The defendant argued that ingress and egress coverage did not apply, pointing to an exclusion in the policy that states that ingress and egress coverage does not apply if ingress or egress “is prohibited by a civil authority.” The court rejected this argument, pointing out that plaintiffs had alleged that both the governmental closure orders and COVID-19 had prohibited ingress and egress to their premises.
- Dependent Property Coverage: With respect to the dependent property coverage, the court held that plaintiffs had “adequately allege[d] a suspension of their businesses because of the lack of material or services from a ‘dependent property’,” as required by the policy.
- Sue and Labor Coverage: Lastly, the court found that the plaintiffs adequately alleged a claim for sue and labor coverage and that plaintiffs were entitled to recover expenses incurred in connection with the reasonable steps they had taken to protect their covered property in response to the governmental closure orders and COVID-19.
Accordingly, the court denied the defendant’s motion to dismiss in its entirety, sending the case to discovery. It is important to note, however, that the court was merely ruling that the plaintiffs’ allegations were sufficient to survive a motion to dismiss and was not ruling on the merits of the case. It remains to be seen how the case will ultimately be decided and whether other courts will take a similar approach. Insurers across the United States will be watching this case closely to see if it opens the door for insurance company liability arising out the pandemic.
We will continue to monitor the outcome of this and any other similar cases to see where the courts ultimately come out on this important issue.