Insurers' COVID-19 Notepad: What You Need to Know Now (Week of February 1)

On January 28, 2021, the district court for the Eastern District of Pennsylvania granted Selective Insurance Company of the Southeast’s motion to dismiss a putative class action’s COVID-19 business interruption claim. The court held that “the mere inability to access the property” did not constitute “direct physical loss of or damage to property.” Order at 8, 11. That the plaintiff “could immediately resume business, without a period of restoration” proved the property suffered no damage and the loss was purely economic. Id. at 11. The court concluded there was also no coverage under the civil authority provision because the closure orders were meant to prevent the spread of COVID-19 rather than because of physical damage to neighboring property. Id. at 13. Finally, the virus exclusion barred the claim, even if the plaintiff had adequately pled a claim for coverage under the policy. Id. at 15.

On January 25, 2021, the district court for the Northern District of California granted without prejudice The Hanover Insurance Group’s motion to dismiss COVID-19 business interruption claims. First, the court held that the policy did not provide business income coverage, because the plaintiff had neither alleged “loss at his property which can be fixed, replaced, or disinfected,” nor identified “any other outside, intervening physical force responsible for the loss of use of his property.” Order at 3-4. Next, the court held that the policy did not provide civil authority coverage, because the plaintiff had alleged that the government closure orders were “intended to mitigate the COVID-19 pandemic” and were “preventative,” as opposed to establishing a “causal link between prior property damage and the government’s closure order.” Id. at 5.

On January 27, 2021, the district court for the Middle District of Florida granted with prejudice Aspen Specialty Insurance Company’s motion to dismiss a restaurant owner’s COVID-19 business interruption claims. The court concluded that there was no coverage under the policy’s business income or extra expense provisions because there were no allegations that COVID-19 caused direct physical loss of or damage to the insured property, noting that Florida law requires “actual, concrete damage” to property. Order at 9-10. The court rejected the plaintiff’s arguments that “the COVID-19 virus physically altered its property by making surfaces dangerous to human health” and that “it sustained direct physical loss when the restaurant’s habitability and functionality were impaired.” Id. at 10-14. The court also found that there was no coverage under the policy’s civil authority provision for “substantially the same reasons,” because “neither physical contamination by COVID-19 nor a decrease in business constitutes direct physical loss or damage.” Id. at 14-15.

On January 26, 2021, the federal district court for the Northern District of Georgia granted Hartford Casualty Company’s motion to dismiss a law firm’s COVID-19 business interruption class action complaint. The court concluded that a direct physical loss or damage to property occurs only when there is an actual physical change in the property and that the likely presence of COVID-19 within the plaintiff’s property “cannot be regarded as a physical change, as it does not and has not physically altered the insured property.” Order at 9. Additionally, loss from an inability to use property was determined not to amount to a direct physical loss or damage under Georgia law. Id. at 10-11.

On January 26, 2021, the federal district court for the Northern District of California granted Sentinel Insurance Company, Ltd.’s motion for judgment on the pleadings on a salon’s COVID-19 business interruption complaint. Acknowledging California law requires a “distinct, demonstrable, physical alteration of the property” or a “physical change in the condition of the property” to qualify as a direct physical loss, the court held the salon’s allegations of temporary loss of access and use were “plainly insufficient.” Order at 4–5. The court reasoned that this interpretation also comports with the “period of restoration” language in the business income and extra expense provisions. Id. at 4. Additionally, the losses, which were caused by COVID-19, were excluded by the policy’s virus exclusion. Id. at 5. The court rejected the plaintiff’s argument that the efficient proximate cause doctrine would allow for coverage because, the court found, the virus was the efficient proximate cause of the claimed losses. Id. at 6.

New Declaratory Action Filed by Insurer:

Mitsui Sumitomo Insurance USA Inc. sued its insured in New York state court (New York County) for declaratory relief. The commercial property and liability policy allegedly provides business income and civil authority coverage, as well as a virus exclusion. Complaint ¶¶ 25–26, 28. The insurer alleges there is no coverage for the claimed losses because of the virus exclusion and because the losses were not caused by “direct physical loss of or damage to property.” Id. ¶¶ 49–50. In addition, the insurer alleges there is also no civil authority coverage for the business interruption because the government closure orders did not deny access to the policyholder’s property. Id. ¶ 51.

New Business Interruption Suits Against Insurers:

The operator of a thoroughbred racing track sued American Home Assurance Company in federal court (D. Ariz.) for declaratory relief and breach of contract. The “all risk” policy allegedly provides business income, extra expense, and civil authority coverage. Complaint at ¶ 16. The Complaint alleges that the presence of COVID-19 caused direct physical loss of or damage to property “by impairing [the plaintiff’s] premises and business functions and by causing a necessary suspension of operations during a period of indemnity.” Id. at ¶ 73. The Complaint further alleges that the insurer “knew exactly how to exclude coverage for losses caused by viruses like COVID-19, but just chose not to do so.” Id. at ¶ 101.

A manufacturer and distributor of electrical, electronic and fiber optic connectors and interconnect systems, antennas, sensors and sensor-based products sued Factory Mutual Insurance Company in federal court (D. Conn.) for declaratory relief and breach of contract. The “all risk” policy allegedly provides time element, extra expense, civil authority, ingress or egress, and contingent time element coverage. Complaint at ¶ 31. The Complaint alleges that there has been an “actual adverse physical alteration of [the plaintiff’s] property as a result of the SARS-CoV-2 virus adhering to the property,” id. at ¶ 63, and that the policy’s contamination exclusion reflects the insurer’s decision to exclude “only virus contamination resulting from acts of pollution” and is inapplicable to coronavirus-related losses. Id. at ¶ 35. The Complaint further alleges that the insurer has failed to state whether or not it will provide coverage and has “declined to enter into any form of tolling agreement to ensure that [the plaintiff] . . . does not lose the opportunity to seek coverage in court due to the expiration of potentially applicable limitations on the time for filing suit.” Id. at ¶ 15.

A tribal nation sued Factory Mutual Insurance Company in Connecticut state court (District of New London) for declaratory relief, breach of contract, and bad faith. The “all risk” policy allegedly provides business income, extra expense, communicable disease response, communicable disease, civil authority, ingress/egress, attraction property, and protection and preservation of property coverage. Complaint at ¶¶ 93-138. The Complaint alleges that “COVID-19 causes a physical, tangible alteration to property, and the presence of COVID-19 amounts to physical loss and damage to property.” Id. at ¶51.

The owner and operator of a restaurant sued Grange Insurance Company in federal court (N.D. Ill.) for declaratory relief, breach of contract, and bad faith. The “all risk” policy allegedly provides business income, extra expense, and civil authority coverage. Complaint at ¶¶ 16-17, 24. The Complaint alleges that the presence of coronavirus on or around the plaintiff’s premises “has rendered the premises unsafe and unfit for its intended use and therefore caused physical property damage or loss under the Policies.” Id. at ¶ 20.

Several airport operators sued Employers Insurance Company of Wausau in federal court (D.N.J.) for declaratory relief, breach of contract, bad faith, and consumer fraud act violations. The “all risk” policy allegedly provides time element, attraction property, civil or military authority, imminent threat, and ingress/egress coverage. Complaint ¶¶ 83–95. The plaintiffs allege that COVID-19 was present at the airports and on its surfaces, causing physical loss or damage to the plaintiffs’ properties. Id. ¶¶ 67–69. According to the plaintiffs, the defendant’s denial of the claim was improper and constituted bad faith. Id. ¶¶ 123–24.

A healthcare nonprofit sued ACE American Insurance Company in federal court (D. Minn.) for breach of contract and declaratory judgment. The premises pollution liability policy allegedly provides pollution condition coverage, and the plaintiff contends COVID-19 constitutes a “pollution condition.” Complaint ¶¶ 13, 47. By denying the claim, the defendant allegedly committed a wrongful action. Id. ¶¶ 44–45.