As the impact of COVID on businesses becomes increasingly dire, business owners are making claims under their commercial insurance policies for their heavy financial losses suffered. Companies are arguing that business interruption coverage in their policies apply. There are generally two theories as to coverage: 1) contamination due to the virus; and 2) losses due to the restrictions placed on business operations by governmental authorities which are intended to lessen and prevent the spread of the coronavirus. Insurance companies have been summarily denying these business interruption claims, prompting a flood of lawsuits by business owners against their insurance companies.
The University of Pennsylvania’s COVID Coverage Litigation Tracker currently estimates over 1,000 cases involving business interruption insurance claims: https://cclt.law.upenn.edu/ . Coverage claims center on whether the virus contamination is a covered event and whether government orders closing businesses constitute an accidental direct physical loss to the insured property.
Insurance companies are faced with the difficult task of evaluating the numerous individual business interruption lawsuits currently pending in multiple jurisdictions around the country. Recently, the U.S. Judicial Panel for Multidistrict Litigation denied a request to consolidate hundreds of lawsuits involving business interruption claims. The Panel found that the differences in each case would overwhelm any common factual questions. Therefore, each of the over 1,000 cases will be decided individually, based upon that state’s interpretation of the insurance policy at issue with different coverages, conditions, exclusions, and policy language. This has the potential to lead to conflicting opinions and interpretations of policy language from the different states.
There have been a handful of cases decided to date. Of note is the US District court case out of the West District of Texas, Diesel Barbershop, LLC, et. al. v. State Farm Lloyds, Case No. 5:20-CV-461-DAE. The court granted a Motion to Dismiss filed by defendant State Farm Lloyds dismissing the plaintiff’s claim for coverage for business interruption to the properties. In its reasoning, the Court agreed with the Plaintiffs that some courts have found physical loss even without tangible destruction to covered property in cases involving ammonia, E. coli, and/or carbon monoxide cases. However, the Court found these cases to be distinguishable and held that the line of cases requiring tangible injury to property was more persuasive. The Court held that the definition of policy language “physical loss” requires a distinct, demonstrable physical alteration of the property and Plaintiffs failed to plead a direct physical loss from COVID-19.
In another case out of the District of Columbia Superior Court, Rose’s 1, LLC, et. al. v. Erie Insurance Exchange, 2020 CA 002424 B, the court dismissed a complaint filed by several D.C. restaurants seeking coverage for lost income and expenses caused by the COVID-19 shut-downs. In granting Defendant Erie Insurance Exchange’s Motion for Summary Judgment, the court reasoned that plaintiffs offered no evidence that COVID-19 was actually present on their insured properties at the time they were forced to close and the executive orders did not have any effect on the material or tangible structure of the insured properties.
Taking an opposite position by holding in favor of the policyholders, in Studio 417, Inc. v. The Cincinnati Insurance Company, Case No. 6:20-CV-03127, the US District court in Missouri denied the Cincinnati Insurance Company’s motion to dismiss relying on dictionary definitions to conclude that the complaint plausibly alleges a direct physical loss based upon the alleged causal relationship between COVID-19 and their alleged losses. The court supported its ruling that “direct physical loss” need not mean “actual physical damage” by citing to earlier decisions that did not involve disease or viruses. This decision may provide persuasive authority for the recovery of business interruption claims that can prove direct physical loss caused by COVID-19.
In Colorado, there is not yet a controlling decision on this issue. Many proponents of coverage cite Western Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52, 54 (Colo. 1968) for the proposition that there would be coverage under many policies. In that case, the Colorado Supreme Court has held that gasoline seeping onto the insured’s premises built up to the point where such infiltration and contamination of the foundation, walls and rooms of the church building rendered it uninhabitable. The fire department’s closure of the building due to the gasoline infiltration was found to constitute a “direct physical loss” sustained by the insured. However, this case is likely distinguishable from the current business interruption cases, in that there is no evidence of actual infiltration of COVID-19 into the businesses which prompted the closures of those particular businesses, so as to constitute a direct physical loss.
Of course, the economic impact and potential liability of insurance carriers and businesses have also led to the introduction of legislation in multiple states and at the federal level. Some of the legislation seeks to create some degree of coverage, while other legislation seeks to immunize businesses from liability.
The landscape on this issue is changing and insurance companies will need to keep up to date on the latest interpretations of policy language in each individual state.