Law360 reports that more than five thousand civil lawsuits have been filed by businesses seeking to recoup pandemic-related losses under their commercial policies. This new wave of litigation has called upon courts across the country to determine whether commercial policyholders have a right to recover for business losses in light of the COVID-19 pandemic.
Just last month, two federal courts reached conflicting decisions in similar suits brought by commercial policyholders against their insurers. The rulings, issued one day apart, highlight the challenges litigants will face in pursuing lawsuits of this nature on either side of the docket.
In Studio 417, Inc., et al. v. The Cincinnati Ins. Comp., the plaintiff-insureds brought a class action against their insurer after their claims for pandemic-related business losses were denied. The respective policies each contained the same relevant language, which obligated the insurer to cover “direct ‘loss’ unless the ‘loss’ [was] excluded or limited”. A “Covered Cause of Loss” was defined as “accidental [direct] physical loss or accidental [direct] physical damage”. However, the policies were silent as to what constituted a “physical loss” or “physical damage”.
The insurer argued that the plaintiff-insureds had not adequately pled a “physical loss” as required by the policies, and urged the court to define a physical loss as requiring “actual, tangible, permanent, physical alteration of property”. In contrast, the plaintiff-insureds argued that the “physical loss” requirement was met as it was “likely that customers, employees, and/or other visitors to the insured properties … infected the insured properties with the [Coronavirus]”. In addition, the plaintiff-insureds alleged that multiple state orders mandating the closure of plaintiffs’ businesses constituted a loss that “required and continue to require [p]laintiffs to cease and/or significantly reduce operations”.
The court ultimately turned to our dear friend Webster to resolve this dispute. In denying the insurer’s motion to dismiss, the court ruled that the “plain and ordinary meaning” of the phrase “direct physical loss” encompassed the plaintiff-insureds’ claims that the presence of COVID-19 “deprived plaintiffs of their property, making it unsafe and unusable” and “result[ed] in direct physical loss to the premises and property”.
In contrast, the United States District Court for the Western District of Texas issued its decision one day later in Diesel Barbershop, LLC v. State Farm Lloyds, in which the court precluded business owners from recovering COVID-19 related losses under their commercial policies. As in Studio 417, the inquiry in Diesel focused on whether the plaintiffs had sufficiently pled a ‘direct physical loss’. However, the plaintiffs in Diesel argued that only the state-mandated closures resulted in their business losses, not COVID-19 or potential exposure of their properties to COVID-19.
The Diesel court reviewed the plain language of the policies, which read, in relevant part:
“When a Limit Of Insurance is shown in the Declarations for that type of property as described under Coverage A – Buildings, Coverage B – Business Personal Property, or both, we will pay for accidental direct physical loss to that Covered Property at the premises described in the Declarations caused by any loss as described under SECTION I — COVERED CAUSES OF LOSS.”
‘SECTION I — COVERED CAUSES OF LOSS’ stated that the insurer would “insure for accidental and direct physical loss to Covered Property” unless the loss was excluded. Relying on decisions from the Fifth Circuit, Second Circuit, and Northern District of Texas, the Diesel court held that the plain language of the policies calling for a “direct physical loss” necessitated “distinct, demonstrable, physical alteration of the property” and granted the insurer’s motion to dismiss. The court also concluded that the plaintiff business owners’ claims were precluded by a Virus exclusion in the policies.
What do these decisions mean for insurance companies and their insureds moving forward?
Read the policy. While the majority of cases discussing COVID-19 related business losses have been resolved in favor of the insurer, the above courts’ conflicting decisions demonstrate the need for litigants to familiarize themselves with the language of the policy in question, as well as any exclusions that may apply. Thousands of policyholders and their insurers have sought redress on this issue in just the last few months, and we expect them to continue to do so as the pandemic lingers.