Insurers' COVID-19 Notepad: What You Need to Know Now (Week of January 18)

Courts Dismiss COVID-19 Business Interruption Claims

On January 15, 2021, the federal district court for the Western District of Pennsylvania granted National Fire & Marine Insurance Company’s motion to dismiss a restaurant’s proposed class action complaint for losses from the coronavirus. Writing that “[f]our words are critical to the determination of this issue: ‘direct,’ ‘physical,’ ‘loss’ and ‘damage,’ the court found that “[t]here is no reasonable question that the Policy language presupposes that the request for coverage stems from an actual impact to the property’s structure, rather than the diminution of its economic value.” Order at 9, 11. Given the restaurant’s ability to remain open for takeout, the court held it did not sustain a “direct” or “physical” loss to its property under the dictionary definition of those words and to determine otherwise “would stretch the language beyond the plain meaning of its terms and beyond the interpretive authority of the Court.” Id. at 11. Although the governor’s orders closed or restricted indoor dining, the civil authority provision also did not trigger coverage because the restaurant remained partially open. Id. at 14. “[R]eduction to partial access does not suffice to trigger business income coverage.” Id. The court did not reach whether the virus exclusion applied.

On January 14, 2021, the federal district court for the Central District of California granted Sentinel Insurance Company, Ltd.’s motion to dismiss a restaurant’s business interruption complaint for its failure to allege it suffered a “distinct, demonstrable, physical alteration” or permanent dispossession of its property. Order at 5–6. The “mere temporary inability” to operate or use the restaurant, the court held, does not constitute “direct physical loss” under the policy. Id. at 6–7. The court held the civil authority provision does not apply because the plaintiff did not allege that damage to a nearby property caused the closure orders to issue. Id. at 11. Instead, the government issued the orders to prevent COVID-19’s spread. Id. Lastly, the court held the virus exclusion bars coverage because the spread of COVID-19 “at least indirectly” caused the loss. Id. at 12.

On January 12, 2021, the federal district court for the Central District of California granted Hartford Fire Insurance Company’s motion for summary judgment because the plaintiff hotel and office owners provided no evidence demonstrating loss or damage to their properties or the surrounding properties. Order at 6. Without even an allegation “of distinct, demonstrable, physical alteration, or permanent dispossession of property,” the court held that the plaintiffs cannot establish coverage under the policy. Id. Additionally, the court held the virus exclusion bars coverage as COVID-19, a virus, caused governments to issue orders to mitigate its spread and was the “efficient proximate cause” of the losses the plaintiffs sustained. Id. at 7–8.

On January 12, 2021, the federal district court for the Northern District of California granted Transportation Insurance Company’s motion to dismiss a marketing agency’s COVID-19 business interruption class action complaint. The court concluded that, under California law, a “direct physical loss” requires a “distinct, demonstrable, physical alteration of the property” or a “physical change in the condition of the property,” Order at 5, and that the presence of the coronavirus, or individuals infected with the virus, “does not constitute direct physical loss of or damage to property.” Id. at 7. The court further rejected the plaintiff’s claim for civil authority coverage, because “it is apparent from the plain language of the cited civil authority orders that such directives were issued to stop the spread of COVID-19 and not as a result of any physical loss of or damage to property.” Id. at 8-9.

On January 13, 2021, the Circuit Court of Cook County, Illinois granted State Farm Fire & Casualty Company’s motion to dismiss a COVID-19 business interruption class action complaint filed by a restaurant. The court concluded that the plaintiff’s alleged economic losses due to COVID-19 closure orders did not constitute “accidental direct physical loss” to covered property, because there was no allegation that the property “suffered an ‘alteration in appearance, shape, color or other material dimension’ as a result of the Closure Orders.” Order at 6. The court further found that the policy’s virus exclusion barred coverage, rejecting that plaintiff’s argument that the exclusion was inapplicable because its losses were caused by closure orders rather than a virus, as “each of the Closure Orders were entered in response to the COVID-19 virus.” Id. at 7.

On January 13, 2021, the federal district court for the Southern District of Florida granted Aspen Specialty Insurance Company’s motion to dismiss a restaurant owner’s COVID-19 business interruption claim. The court concluded that COVID-19 “does not cause direct physical loss or damage to a property sufficient to trigger coverage under the policy.” Order at 3-4.

On January 14, 2021, the federal district court for the Eastern District of Pennsylvania granted summary judgment to Continental Casualty Company on a COVID-19 business interruption claim filed by the operators of hearing aid stores. The court concluded that, while structural damage is not required to show a direct physical loss of or damage to property, “the source that destroys the property’s utility must have something to do with the physical condition of the premises.” Order at 11. As the plaintiff expressly disclaimed that the virus was on its property and contended that government closure orders prohibited it and its customers from entering the property, the loss did “not bear a causal connection to the physical condition of its premises.” Id. at 11-12. The court also rejected the plaintiff’s claim for bad faith in the investigatory process or process or denial, concluding that in the context of a claim for coverage based solely on government closure orders “there is nothing to investigate: coverage does not exist on the face of that claim.” Id. at 20-21.

On January 14, 2021, the federal district court for the Eastern District of Pennsylvania also granted Certain Underwriters at Lloyd’s, London’s motion to dismiss a COVID-19 business interruption class action complaint filed by the owner and operator of a restaurant/beer garden. The court concluded that the plaintiff’s allegations of loss of use due to COVID-19 closure orders failed to state a clam because, under Pennsylvania law, in order to assert a claim for economic loss resulting from an inability to operate within the policy’s “physical loss” provision, “the loss and the bar to operation from which it results must bear a causal relationship to some physical condition of the premises” and that the property “must be uninhabitable and unusable, or nearly as such.” Order at 11 (emphasis in original).

Also on January 14, 2021, the federal district court for the Eastern District of Pennsylvania granted Twin City Fire Insurance Company’s motion to dismiss a COVID-19 business interruption claim filed by the owner of optical offices. The court held that the plaintiff had failed to allege necessary elements of business income, extra expense, and civil authority coverage. Opinion at 6. First, the complaint had not alleged “loss of or damage to property” essential to its business income and extra expense claim, because the “source that destroy[ed] … the property’s utility” (the COVID-19 virus) was not related to “the physical condition of the premises.” Id. at 7. Second, the complaint had not alleged a civil authority response to a covered loss, because “[t]he civil authorities issued their Orders to address the health crisis, not some ‘direct physical loss’” essential to trigger coverage under the civil authority provision. Id. at 10-11. The court further held that, even if the plaintiff had asserted coverage, the policy’s virus exclusion precluded coverage. Id. at 11-13. The court declined to grant leave to amend. Id. at 15.

On January 14, 2021, the federal district court for the Eastern District of Pennsylvania further granted The Hartford Financial Group and Twin City Fire Insurance Company’s motion to dismiss an art gallery owner’s COVID-19 business interruption claims. The court held that the plaintiff had failed to meet its burden of establishing prima facie coverage, because the complaint did not allege facts sufficient to establish a “covered cause of loss,” i.e., “direct physical loss of or damage to property.” Order at 8. The court also held that the plaintiff “ha[d] pleaded no facts that lead the Court to believe it reasonably expected business losses not tied to any kind of actual damage to property would be covered by a property insurance policy.” Id. at 14. The court further held that even if the plaintiff had plausibly alleged coverage, the policy’s virus exclusion nevertheless precluded coverage. Id. at 17. Lastly, the court rejected the plaintiff’s argument that regulatory estoppel should prevent Twin City from relying on the virus exclusion because the exclusion was fraudulently adopted. Id. at 20-21. The court denied leave to amend. Id. at 24.

On January 14, 2021, the federal district court for the Eastern District of Pennsylvania granted Twin City Fire Insurance Company’s motion for summary judgment on a hearing aid and care company’s COVID-19 business interruption claim. First, addressing the plaintiff’s breach of contract claim, the court held that there was no genuine dispute of material fact as to whether the plaintiff suffered “direct physical loss or damage” to its property, because the plaintiff’s losses did not bear any “causal connection to the physical conditions of its premises” and did not “operate to completely or near completely preclude operation of the premises as intended.” Order at 14-18. The court then held that even if plaintiffs had established prima facie coverage under the policy, the policy’s virus exclusion precluded coverage. Id. at 24-26. Second, the court held that, under Pennsylvania law, Twin City could not be liable for the plaintiff’ bad faith claim based on its decision to decline coverage because the court had found that the policy did not cover the plaintiff’s losses. Id. at 28. The court also found that the plaintiff had not met its burden to show that Twin City had exhibited bad faith in its conduct in handling the claim, because since coverage did not exist on the fact of that claim, there was “nothing to investigate.” Id. at 29.

On January 14, 2021, the federal district court for the Eastern District of Pennsylvania granted Twin City Fire Insurance Company’s motion to dismiss a class action complaint brought by restaurants for COVID-19 business interruption. The court held that the plaintiffs did not “allege losses that bear a causal connection to the physical condition of the premises or show that the conditions operated to completely or nearly completely preclude operation of the premises as intended.” Order at 12. The plaintiffs also did not plead that the coronavirus directly caused their losses but instead that the closure orders prevented them from using their properties for their intended purposes. Id. This was not enough, according to Judge Kenney, because the orders merely limited their business operations rather than completely rendering the unusable or uninhabitable. Id. at 13. Additionally, any changes the plaintiffs made to the property to mitigate the spread of COVID-19 were “alterations” rather than a rebuild or replacement of the property. Id. at 14. Even if the plaintiff had plausibly alleged coverage, the court held the policy’s virus exclusion precluded coverage. Id. at 18. Lastly, the court rejected the plaintiff’s argument that regulatory estoppel should prevent Twin City from relying on the virus exclusion because its allegations failed to rise above speculation. Id. at 21. The court dismissed the restaurants’ claims with prejudice. Id. at 22–23.

Finally, on January 14, 2021, the federal district court for the Eastern District of Pennsylvania granted Twin City Fire Insurance Company’s motion to dismiss a restaurant’s business income loss claims because the plaintiff’s loss is “untethered from the physical condition of the property itself.” Order at 10. The court held loss of use does not constitute “direct physical loss of or damage to property” because it renders two other provisions “unnecessary or nonsensical” and sows discord into the policy. Id. Nor did the orders require the restaurant to close or prohibit access completely, implying the property remained usable and functional. Id. at 11–12. The court found the plaintiff’s regulatory estoppel argument failed because the plaintiff could not point to contradictory statements Twin City allegedly made to state regulatory authorities. Id. at 16. Judge Kenney dismissed the claims with prejudice. Id. at 17.

On January 11, 2021, the federal district court for the southern district of Florida granted Fireman’s Fund Insurance Company’s motion to dismiss a commercial property owner’s COVID-19 business interruption claim. The court held that the plaintiff had “fail[ed] to allege that the business loss that it suffered was caused by any physical problem, nor that the Properties suffered a diminution of value in some way.” Order at 5-6. However, the court reasoned, this was insufficient to state a claim, because the plaintiff did not allege “whether a person infected with COVID-19 had entered the Properties, which of the Properties were “infected,” or whether COVID-19 was present on any particular surfaces of the Properties.” Id. at 7.

On January 13, 2021, the district court for the northern district of California granted Sentinel Insurance Company’s motion for judgment on the pleadings on a retailer’s COVID-19 business interruption claim. The court held that the plaintiff “has not, and cannot, allege direct physical loss of property, [and] it need to address the scope of [the policy’s] ‘virus endorsement.’” Order at 5. The court found other cases dismissing similar claims for coverage “persuasive” and “that direct physical loss of property does not include the temporary loss of use due to … governmental Stay-at-Home Orders.” Id. at 7. The court granted the motion without leave to amend, finding that the plaintiff “could not plausibly allege that its premises, or that nearby properties, have been physical damaged or lost due to COVID-19 or the Stay-at-Home Orders.” Id. at 11.

On January 12, 2021, the district court for the Northern District of Texas granted Aspen American Insurance Company’s motion to dismiss a dental practice’s business interruption coverage complaint due to the COVID-19 pandemic. The court held that for the plaintiff to plead sufficiently direct physical loss or damage, it must plead more than “loss of use or function.” Order at 11. It must also plead “actual physical contamination.” Id. Because the plaintiff did not allege that COVID-19 contaminated her property, it did not adequately plead direct physical loss or damage and thus did not trigger coverage under the policy. Id. at 13.

On January 8, 2021, the district court for the Southern District of Florida granted Scottsdale Insurance Company’s motion to dismiss a catering company’s COVID-19 business interruption complaint. The court held that the plaintiff failed to allege “direct physical loss” when the alleged harm was the “mere presence of the virus” at the property. Order at 12. The plaintiff’s policy contained spoilage coverage for perishable food, but the court held the policy did not cover the plaintiff’s claim because the food spoiled due to cancellations, not power outages or temperature issues. Id. at 11. Coverage was excluded when governmental orders “directly or indirectly” caused the loss. Id. The court also held that the virus exclusion “broadly and unambiguously” applies to bar coverage and “is not restricted to viruses of a specific strain, familiarity, or lethality.” Id. at 14, 16. Unmoved by the plaintiff’s argument that it did not know of COVID-19 when it entered the policy and would not have agreed to the virus exclusion had it known, the court said the plaintiff’s subjective understanding was “irrelevant” and did not work to reinstate coverage. Id. at 19. The complaint was dismissed with prejudice.

On January 7, 2021, the district court for the Central District of California granted Certain Underwriter’s at Lloyd’s, London’s motion to dismiss a COVID-19 business interruption claim. Noting that it was agreeing with “the vast majority of courts to have considered the issue,” the court held that the plaintiffs had not suffered any physical loss or damage required to trigger coverage. Order at 2. The court reasoned that “[n]othing physical has happened to Plaintiffs’ property,” such that the plaintiffs were “complaining about a loss of intended use, not a physical loss of, or damage to, their property.” Id. at 2. The court granted leave to amend. Id. at 3.

New Business Interruption Class Actions:

The owner of a car dealership sued Erie Insurance Exchange in federal court (W.D. Pa.), asserting claims for declaratory relief and breach of contract. The “all risk” policies allegedly provide business income, extra expense, and civil authority coverage. Complaint at ¶¶14-22. The nationwide class is defined as “[a]ll policyholders… who purchased commercial property coverage … from Defendant and who have been denied under their policy for lost business income after being ordered by a governmental entity, in response to the COVID-19 pandemic, to shut down or otherwise curtail or limit in any way their business operations.” Id. at ¶45. The complaint alleges that Erie denied the plaintiff’s claim for coverage, and that it “has similarly refused to, or will refuse to, honor its obligations under the … policy(ies) purchased by Plaintiff and the other members” of the class. Id. at ¶¶4-5.

The owners of fitness franchises with locations in every state sued Markel Insurance Company on behalf of themselves and all others similarly situated in federal court (E.D. Va.), asserting claims for declaratory relief, breach of contract, and breach of the duty of good faith and fair dealing. The “all risk” policy allegedly provided business income, extra expense, extended business income, and civil authority coverage. Complaint at ¶¶ 44-52. The complaint alleges that the “class claims all derive directly from [Markel’s] systematic, uniform, capricious and arbitrary refusal to pay insureds for covered losses and the actions taken by civil authorities to physically suspend or limit business operations.” Id. at ¶ 99. The nationwide class is divided into business income, extended business income, and civil authority subclasses. Id. at ¶ 101.

The owner of a bar and restaurant in Seattle sued Scottsdale Insurance Company on behalf of itself and all others similarly situated in federal court (W.D. Wash.), asserting claims for declaratory relief and breach of contract. The “all risk” policy allegedly provides business income, extra expense, extended business income, and civil authority coverage. Complaint at ¶¶ 12-16. The complaint alleges that the defendant wrongfully denied the plaintiff’s coverage without conducting a meaningful investigation, and that the defendant “has denied and will deny coverage to Plaintiff and all other similarly situated policyholders.” Id. at ¶¶ 60-70. The class is divided into nationwide and statewide; declaratory relief and breach of subcontract; and business income, extra expense, extended business income, and civil authority subclasses. Id. at ¶75.

New Business Interruption Suits Against Insurers:

A restaurant sued White Pine Insurance Company in Florida state court (Hillsborough County) for breach of contract. The “all risk” policy allegedly provides business income coverage. Complaint at ¶ 9. The Complaint alleges that the plaintiff suffered losses due to COVID-19 and related closure orders, which “arose as a direct proximate result of an act of nature” and that [g]overnment suspension of a business, as a result of a global pandemic is not specifically excluded under the Policy.” Id. at ¶ 11,18.

A dental office sued Cincinnati Insurance Company and Cincinnati Casualty Company in Indiana state court (Marion County) for declaratory relief. The policy allegedly provides business income, extra expense, and civil authority coverage. Complaint at ¶¶ 16-21. The Complaint alleges that damages resulting from COVID-19 closure orders are a covered cause of loss under the policy because the closure orders “resulted in a loss of Plaintiff’s ability to use covered property for the intended purpose of a dental practice.” Id. at ¶ 15.

The owners of various restaurants sued Fireman’s Fund Insurance Company in federal court (W.D. Wash), asserting claims for declaratory relief, breach of contract, violation of the state Insurance Fair Conduct Act, violation of the state Consumer Protection Act, and bad faith. The “all risk” policy allegedly provides business income, extra expense, civil authority, and dependent property coverage. Complaint at ¶¶ 25-33. The complaint alleges that Fireman’s Fund wrongfully denied the plaintiffs’ claims for coverage. Id. at ¶¶58-60.