Business interruption cases head to court
Insurers have prevailed in numerous business interruption lawsuits for pandemic-related losses.
In the last two years, businesses across the country have brought lawsuits against their insurers seeking coverage for losses related to the COVID-19 pandemic. According to the University of Pennsylvania Carey Law School’s COVID Coverage Litigation Tracker, over 2,300 suits have been filed seeking business income coverage since March 2020, in state and federal courts.
We are now seeing these cases make it to state high courts.
Was there physical damage?
For example, in Verveine Corp. v. Strathmore Ins. Co., (2022), the Massachusetts Supreme Judicial Court has affirmed the lower court’s dismissal of the restaurant corporation Verveine Corp’s complaint, holding that the plaintiffs’ losses were not “direct physical loss of or damage to” their property within the meaning of the insurance policies.
The Court relied in part on precedent from the Massachusetts Appeals Court in HRG Dev. Corp. v. Graphic Arts Mut. Ins. Co., (1988), and concluded that “‘direct physical loss of or damage to’ property requires some ‘distinct, demonstrable, physical alteration of the property.’” The Court noted the support of other courts across the country in this conclusion. The Court found that this interpretation was supported by the “period of restoration” provision of the policy, which outlines that coverage ends when a property is “repaired, rebuilt or replaced.” With this definition, the Court found that the plaintiff’s claim failed.
The Court first noted that “[a]lthough 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 insureds’ property that could be described as loss or damage.” The Court then noted that even if the suspension of the business was caused by the “presence” of the virus on the surfaces and in the air at the restaurants, that would not amount to physical loss or damage to the property. The Court reasoned that while instances, where harmful substances, saturate or ingrain into the materials of the building, would be sufficient, but harmful airborne substances like COVID-19 dissipate quickly on their own and can be removed by simple cleaning will not constitute physical loss or damage.
Iowa Supreme Court decisions
The Iowa Supreme Court ruled on two companion cases on the same day, Wakonda Club v. Selective Insurance of America, (Iowa 2022), and Jesse’s Embers LLC v. Western Agricultural Insurance Company, (Iowa 2022). Plaintiff golf and country club Wakonda alleged that the loss of use of their club due to a government order satisfied the “direct physical loss or damage” requirement of the policy. The Iowa Supreme Court affirmed the trial court’s dismissal of the case on the grounds that the loss of use wasn’t “physical.” The court noted that the plaintiffs “affirmatively disavowed any knowledge that the COVID-19 virus was ever on its premises or carried by any of its employees or members,” with the result that the plaintiffs had not alleged any “physical invasion, however minor,” such as the presence of a harmful substance on the premises.
This finding suggested that the presence of COVID-19 on the premises could constitute a direct, physical loss. The Court distinguished pre-covid cases involving asbestos fibers, contaminated oats, contaminated carbon dioxide, and methamphetamine fumes, holding that “[t]he mere loss of use of property, without more, does not meet the requirement for a direct physical loss of property.”
In the companion case, Jesse’s Embers, the plaintiff alleged that the loss of use of the premises due to the government order satisfied the “direct physical loss of or damage to property” requirement of the policy, and the closure also satisfied the “damage to property” of others requirement for civil authority coverage. The Court affirmed the trial court’s grant of summary judgment to the insurers on the first theory for the reasons stated above in the Wakonda case.
The Court also affirmed the grant of summary judgment to the insurers on the civil authority coverage issue. The Court noted that the civil authority coverage is only triggered when there is “damage to property,” and concluded that the order was issued to lower the risk of transmission of COVID-19 by “limiting the number of people gathered in one place,” not, “in response to dangerous physical conditions resulting from property damage at a premises located within one mile of” the plaintiff’s premises.
Civil authority coverage doesn’t apply
Most recently, the Wisconsin Supreme Court ruled in June, in a bypass appeal, reversed a contrary trial court order, and held that “the presence of COVID-19 does not constitute a physical loss of or damage to property because it does not ‘alter the appearance, shape, color, structure, or other material dimension of the property,’” (quoting Sandy Point Dental, PC v. Cincinnati Ins. Co., 7th Cir. 2021).
Hence, any losses caused by the presence of COVID on the premises, or as the plaintiff in this case alleged, the “potential presence of Covid-19” are not covered losses. The Court explicitly disagreed with that reasoning, noting that the district court’s interpretation ignored the language in the policy distinguishing a loss of use from a direct physical loss, and is inconsistent with the Wisconsin Supreme Court’s previous interpretations of “physical loss.” In addition, to restore property is to bring it back to its former or original state, “not to alter its condition, as the district court’s proposed measures would.”
The covered property was still there, was unharmed, and was not physically lost or damaged. The Court held civil authority coverage inapplicable “[b]ecause Colectivo has identified no physical loss of or damage to its property or a surrounding property.” The Court also found the contamination provision inapplicable because 1) Colectivo did not cease operations because of Covid contamination, but instead because of local orders; 2) the orders did not prohibit access to the covered property; and 3) the orders did not “prohibit Colectivo from producing its products” but rather only prevented in-person dining. This ruling overturned a rare policyholder win, and unanimously joined the state supreme courts above in finding that the restaurants were not entitled to COVID-19 business interruption coverage. That case is Colectivo Coffee Roasters, Inc. v. Soc’y Ins., (2022).
Supreme Court offers no goodwill
Recently, the U.S. Supreme Court refused to consider a COVID-19 business interruption case, denying certiorari to Goodwill Industries in litigation it filed against Tokio Marine Holdings Inc. unit Philadelphia Indemnity Co. Goodwill unsuccessfully argued in its petition to the high court that the coverage issue should be considered by the Oklahoma Supreme Court. The decision had previously been dismissed by the 10th U.S. Circuit Court of Appeals in Denver, which ruled that the business income provision in the policy unambiguously covered any losses stemming from physical alteration or tangible dispossession of property. Neither of which occurred in this case. The policy included a virus exclusion.
Goodwill argued that the U.S. Supreme Court should take the case, noting that the Oklahoma Supreme Court was preparing to consider two COVID-19 business interruption cases, and pointed to Erie Railroad Co. v. Tompkins, a 1938 case that held that federal courts are not entitled to create their own common law for issues that fall properly within state law. The Goodwill petition states that state courts have dismissed more than 50% of COVID-19 coverage cases, while federal courts have dismissed them at a rate of more than 90%. The petition stated that the 10th Circuit and other federal courts “have ignored Erie and dismissed cases without regard to extant or imminent state court rulings.”
In the few rare cases where a policyholder has netted a win, the facts were very specific and involved exclusions and additional coverages, ambiguous policy provisions, and the actual presence of the COVID-19 virus on business property.
For example, in Schleicher & Stebbins Hotels LLC et al. v. Starr Surplus Lines Insurance Co. et al. (2020), a New Hampshire state court rejected the insurer’s argument that “‘distinct and demonstrable” changes to property must be readily perceptible by one of the five senses, be incapable of remediation, or result in dispossession.” The ruling cited an earlier decision by the New Hampshire Supreme Court that held that “‘physical loss,’ when used in an insurance agreement, includes ‘not only tangible changes to (an) insured property, but also changes. . . that exist in the absence of structural damage,’ provided only that such changes be both ‘distinct and demonstrable.’”
In North State Deli, LLC v. Cincinnati Insurance Co., (2020), the court initially found in favor of the insured because the policyholder had an “all-risk” policy. The court concluded that “loss” means “the inability to utilize or possess something” and ruled that “in the context of the Policies,” therefore, “direct physical loss” describes the scenario where business owners lost the full range of rights and advantages of the use of their property, which was precisely the loss caused by the government orders.
Although the number of business interruption cases across the country has increased since the height of the pandemic, plaintiffs have had little luck securing victories in court. By interpreting the language of insurance policies as plain and practical, insurers have been given significant leeway in lawsuits.
Hannah E. Smith, J.D., (hsmith@alm.com) is the managing editor of the Insurance Law Coverage Center.
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