State Supreme Courts reject COVID-19 business interruption claims
The Massachusetts Supreme Judicial Court and the Iowa Supreme Court became the first state high courts to decide whether businesses can recover COVID-19-related business losses.
Insurers who denied damage liability claims related to several businesses forced to close during the pandemic were vindicated by recent rulings in two state supreme courts.
The Massachusetts Supreme Judicial Court and the Iowa Supreme Court became the first state high courts in the country last week to decide whether businesses can recover COVID-19-related business losses under their insurance policies.
Falling in line with a number of federal jurisdictions that have weighed in on the issue, both state supreme courts held that the mere loss of use of a business does not constitute “direct physical loss or damage to” within the meaning of the insurance policy provisions. Therefore, coverage is not triggered and the insurance companies are off the hook from such payments, the court opinions said.
“We conclude that ‘direct physical loss of or damage to’ property requires some distinct, demonstrable, physical altercation of the property. … Every appellate court that has been asked to review COVID-19 insurance claims has agreed with this definition for this language or its equivalent,” Justice Scott L. Kafker wrote on behalf of the Massachusetts Supreme Judicial Court last Thursday.
The Iowa court followed suit on Friday in Wakonda Club v. Selective Insurance Co. of America, rejecting the private golf club’s argument that loss of use of its restaurant during shutdown orders is enough to trigger recovery.
“This case is one of hundreds around the country addressing business interruption insurance coverage for businesses impacted by similar government proclamations and orders stemming from the COVID-19 pandemic,” wrote Justice Dana Oxley on behalf of the unanimous Iowa Supreme Court. “This case presents our first opportunity to address whether the mere loss of use of business property constitutes ‘direct physical loss of or damage to property’ to trigger coverage under the business interruption endorsement to an all-risk commercial property insurance policy like the one involved here.”
Federal appellate courts that have addressed similar language include: the U.S. Court of Appeals for the Second Circuit in 10012 Holdings v. Sentinel Ins.; the Fourth Circuit in Uncork & Create v. Cincinnati Ins.; the Fifth Circuit in Terry Black’s Barbecue Dallas v. State Auto. Mut. Ins.; the Sixth Circuit in Santo’s Italian Cafe v. Acuity Ins.; the Seventh Circuit in Sandy Point Dental v. Cincinnati Insurance; the Eighth Circuit in Oral Surgeons v. Cincinnati Ins.; the Ninth Circuit in Mudpie v. Travelers Cas. Ins. Co. of Am.; the Tenth Circuit in Goodwill Indus. of Cent. Okla. v. Philadelphia Indem. Ins.; and the Eleventh Circuit in Gilreath Family & Cosmetic Dentistry v. The Cincinnati Ins.
Massachusetts
The Verveine Corp., which operates three restaurants in and around Boston — Coppa, Toro, and Little Donkey — filed claims for lost business income with Strathmore Insurance Co. property and liability policies — one covering Toro and Coppa and the other covering the Little Donkey.
As COVID-19 shutdown orders prohibited any in-person dining at restaurants and bars, the three restaurants lost significant revenue. Toro and Coppa offered takeout services, but the Little Donkey had to suspend its operations, although the kitchen was used to prepare meals for front-line workers, the opinion said.
After the shutdown orders were amended, the restaurants filed a claim with Strathmore under “Building and Personal Property Coverage Form,” which says the insurance company will pay for direct physical loss of or damage to covered property at the insured’s premises, and under “Business Income (and Extra Expense Coverage Form),” which says the insurance company will pay for the actual loss of business income sustained due to a “necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration,’” the opinion said.
Strathmore denied the claims, citing the lack of any “physical loss or damage to” the properties.
The restaurants sued Strathmore for breach of contract and for unfair and deceptive practices. The Little Donkey also brought a commercial negligence claim against its insurance broker, Commercial Insurance Agency, for failing to procure a policy that would have covered damages resulting from the COVID-19 virus, the opinion said.
Suffolk Superior Court Judge Janet L. Sanders granted both Strathmore’s and Commercial’s motions to dismiss, finding that the insurance policies in question did not cover the restaurants’ losses, the opinion said.
The restaurants appealed and the Massachusetts Supreme Judicial Court transferred the case from the appellate court. On Thursday, the state high court upheld the superior court’s order granting summary judgment in favor of the insurance companies.
“The allegations in the complaint do not support recovery under this definition,” Kafker wrote. “Although caused, in some sense, by the physical properties of the virus, the suspension of business at the restaurants was not in any way attributable to a direct physical effect on the plaintiffs’ property that can be described as loss or damage. As demonstrated by the restaurants’ continuing ability to provide takeout and other services, there were not physical effects on the property itself. It is only these effects that would trigger coverage under either the property or the business interruption coverage forms.”
More than 30 years ago, Massachusetts considered the definition of “physical loss or damage,” in HRG Dev. v. Graphic Arts Mut. Ins.
The Massachusetts Court of Appeals held that an “all-risk insurance policy did not cover the ‘loss’ of certain equipment owned by the insured due to a title defect after the rightful owner reclaimed it.” In defining the scope of “physical loss or damage,” the appellate court found that the term could not “fairly … be construed to mean physical loss in the absence of physical damage,” the opinion said.
“Therefore, the proper interpretation of the rule from HRG Dev. Corp. is that coverage was excluded not because the cause was purely legal, but rather because the effect — the loss of legal ownership — was not direct physical loss or damage, even if it indirectly resulted in loss of possession to the rival claimant or interruption to the insured’s business,” Kafker wrote.
“The plaintiffs’ interpretation ignores that the loss itself must be a ‘direct physical’ loss, clearly requiring a direct, physical deprivation of possession,” Kafker continued about the current case. ”The plaintiffs were not deprived of possession of their property, and indeed continued to inhabit and use it for other purposes. Although they could not use it for in-person or indoor dining but rather for takeout services, ‘[w]ithout any physical altercation to accompany it, this partial loss of use does not amount to a ‘direct physical loss.’ Sandy Point Dental.”
Iowa
The Wakonda Club also made a claim with Selective under its business interruption provision for lost profits when in-person dining restrictions went into effect in early 2020. Selective denied the club’s claim, finding that the policy did not afford coverage as there was no “direct physical loss of or damage” to the Wakonda Club’s property, the opinion said.
The Wakonda Club sued Selective, asserting claims for breach of contract and bad-faith denial of insurance coverage. To the club’s knowledge, there was no coronavirus present on its premises nor were any employees or members of the club infected at the time of the shutdown orders, the opinion said.
Polk County District Court Judge Clene Gogerty sided with Selective’s motion for summary judgment and the Wakonda Club appealed. On Friday, the Iowa Supreme Court upheld the lower court’s ruling.
“We conclude Selective was entitled to summary judgment because there was no ‘direct physical loss of’ Wakonda Club’s property, so Wakonda Club’s losses are not covered under the policy,” Oxley wrote. “Our holding is premised on our pre-COVID-19 insurance law and is consistent with the vast majority of other courts around the country construing similar policy language involving business interruption coverage during the COVID-19 pandemic.”
While no Iowa state court addressed the meaning of the phrase “direct physical loss of or damage to property,” in 2015, the U.S. District Court for the Southern District of Iowa in The Phoenix Insurance v. Infogroup held that a data provider was not forced to leave its building due to “imminent physical damage from flooding or contamination from air or water pollution,” and the court concluded that the “mere loss of use does not constitute physical loss or damage under the Extra Expense Clause,” the opinion said.
“While our decision today rests upon our interpretation of Iowa law and the specific language of the provisions at issue, we note that every federal appellate court [that] has addressed the same or very similar language has likewise held that the mere loss of use of property due to government orders made in response to the COVID-19 pandemic does not constitute ‘direct physical loss’ of the insured’s property,” Oxley wrote. “Likewise, federal district courts interpreting Iowa law have held the same. And, to date, all state appellate courts that have addressed the issue also hold that loss of use due to government orders in response to the COVID-19 pandemic does not result in physical loss of property.”
The U.S. District Court for the Southern District of Iowa has considered at least three cases: Gerleman Mgmt. v. Atl. States Ins., holding that the insured party failed to allege direct physical loss of or damage to insured property as a result of the pandemic and government orders; Palmer Holdings & Invest. v. Integrity Ins., holding that restaurant operators failed to allege “direct physical loss of or damage to property” as a result of COVID-19 shutdown orders, as required for coverage under business income and extra expense provisions of the policy; and Whiskey River on Vintage v. Ill. Cas., with a similar holding for coverage under business income and extra expense provisions, the opinion said.
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