As businesses continue to grapple with the severe impacts that COVID-19 has had on their operations, many have turned to their insurance policies for help, only to be surprised that in most cases their business interruption insurance does not actually cover what is likely the biggest interruption their businesses have ever seen. Typically, business interruption insurance covers losses caused by physical damage to insured property, such as damage caused by a hurricane or a fire, and after the SARS outbreak in the early 2000s, many policies were modified to specifically exclude losses caused by virus or bacteria. Insurers across the board have taken the position that COVID-19 claims are not covered under their policies at all, issuing outright denials of claims without investigation or requests for additional information from their policyholders. This has led to more than 700 lawsuits being filed against insurers by various companies across the country, including many small businesses trying everything they can to stay afloat.
The majority of these cases will turn on whether a direct physical loss, a requirement for business interruption coverage, can be shown. Plaintiffs have raised various arguments trying to make the case that a direct physical loss is indeed caused by COVID-19, such as claiming the presence of COVID-19 particles in a physical space is sufficient to show such loss or that the mandated suspension of operations as a result of COVID-19 has caused a direct physical loss of their property. So far, the insurance companies have been successful in getting these lawsuits dismissed, although a Missouri court gave plaintiffs a glimmer of hope this month when it denied an insurer’s motion to dismiss and allowed the case to proceed to discovery.
In Studio 417, Inc. v. The Cincinnati Ins. Co., 2020 WL 4692385, a group of salon owners and restaurateurs in Missouri sued The Cincinnati Insurance Company, claiming that they should be entitled to coverage under their insurance policies as a result of COVID-19. The policies in question require Cincinnati to pay for a direct loss that is not otherwise excluded (notably, the policies in this case are not subject to any exclusions for losses caused by a virus); a covered loss is defined in the policies as “accidental [direct] physical loss or accidental [direct] physical damage.” The court determined that the language in the policy requiring physical loss or physical damage did not mean an actual physical alteration to the property was required in order for the plaintiffs to be covered. It further found that the plaintiffs’ argument that the presence of COVID-19 in the air and on the surfaces of the premises rendered the premises unsafe and unusable (thus resulting in a “direct physical loss” of the premises by denying use thereof) was plausible and denied Cincinnati’s motion to dismiss. The court was careful to note, however, that its ruling merely means that the plaintiffs have pled enough facts to move forward with the case and that discovery will determine whether they will prevail on the merits.
The decision in Studio 417 to allow the plaintiffs’ case to proceed is an outlier. In fact, the very next day, a court in Texas granted an insurer’s motion to dismiss in Diesel Barbershop, LLC, et al. v. State Farm Lloyds, 2020 WL 4724305. In that case, Diesel sued State Farm to recover losses Diesel incurred as a result of various government orders prohibiting the use of its premises. The court found, however, that while there are cases in other jurisdictions that do not require tangible damage to be shown, the 5th Circuit does require a “distinct, demonstrable physical alteration of the property” in order for a business interruption claim to succeed, and that Diesel failed to plead there was a direct physical loss. The court further noted that, even if Diesel had been able to show the necessary physical loss, the business interruption policies at issue included a “Fungi, Virus, or Bacteria” exclusion, which bars Diesel’s claim.
Diesel is similar to many other cases that have been dismissed across the U.S. In New York, for example, a court declined to grant a preliminary injunction requiring the insurer to pay insurance proceeds while the case for coverage was pending (Social Life Magazine, Inc. v. Sentinel Ins. Co. Ltd., 2020 WL 2530721). The judge noted that under New York law, physical damage that prohibits use of the space is a requirement for recovery. Similarly, a Michigan court rejected a restaurateur’s claim because it found that tangible damage—i.e., an alteration to “the physical integrity of the property”—was required for coverage (Gavrilides Mgmt. Co. LLC, et al. v. Michigan Ins. Co., 2020 WL 4561979). Gavrilides is distinguishable from Studio 417 on two additional grounds: the policy at issue included a virus exception and the plaintiff did not claim that COVID-19 was ever present within the premises.
Whether a plaintiff can successfully recover under its business interruption policy will depend on many specific factors unique to that plaintiff’s case, including the jurisdictional case law and the specific policy language. Some states have considered passing legislation that would require coverage for some policyholders (perhaps even in spite of a virus exception), but whether anything will come of that remains to be seen.