Ohio Supreme Court sides with insurers on COVID-19 business-interruption issue
The court found that the COVID-19 government shutdown order does not constitute a 'direct physical loss.'
In a long-awaited decision, the Ohio Supreme Court has joined many other state and federal courts in concluding that a temporary business closure due to a COVID-19 government shutdown order does not constitute a “direct physical loss” triggering business interruption insurance coverage.
According to the opinion, plaintiff Neuro-Communication Services argued that the company is entitled to recover lost income after COVID-19 shutdown orders forced it to cease almost all operations in the first few weeks of the pandemic. The defendant insurers, Cincinnati Insurance, Cincinnati Casualty, and Cincinnati Indemnity moved to dismiss the suit, or in the alternative, to have the federal court certify a question of state law to the Ohio Supreme Court.
In January 2021, Judge Benita Y. Pearson of the U.S. District Court for the Northern District of Ohio, asked the state Supreme Court to take up the issue in Neuro-Communication Services v. The Cincinnati Insurance Co.
At the time, the Ohio Supreme Court’s potential decision on the issue was hotly anticipated, as no other state high court had yet weighed in on the issue. Since then, however, six other state high courts have issued COVID-19 business interruption rulings.
Neuro owns and operates an audiology practice in northeast Ohio and held an “all-risk” commercial insurance policy which provided coverage for a “direct loss” to the property. The federal court determined that the question of whether this provision covers a claim based on COVID-19 business shutdowns is a question for Ohio law with no controlling precedent, according to the opinion.
The Ohio governor declared a state of emergency on March 9, 2020, which led to several orders restricting Neuro’s business activities. In a March 17, 2020, order, the director of the Ohio Department of Health stated that “all non-essential or elective surgeries and procedures that utilized personal protective equipment should not be conducted.” A second order on March 22, 2020, stated that, “all individuals currently living within the State of Ohio to stay at home” and stated that “all persons may leave their homes or place of residence only” to participate in permitted activities, businesses or operations.
Neuro submitted a claim for coverage under the “Building and Personal Property Coverage Form” of their policy seeking coverage for lost revenue between the time of the shutdown and May 4, 2020, the date the business resumed operations.
“Cincinnati denied Neuro’s claim,” stated Justice Jennifer Brunner, in her written opinion for the court. “It stated that the general-coverage provision does not cover the claim, because the claim ‘does not involve direct, physical loss to property at Neuro’s premises caused by a covered cause of loss.’”
“Similarly, it stated that the claim does not fall within the extensions for business income and extra expense, because those provisions require that there be ‘direct physical loss or damage’ to covered property and there was ‘no evidence of any such physical loss or damage,’” Brunner stated.
Neuro filed a suit in U.S. District Court for the Northern District of Ohio, which alleged that Cincinnati breached the business income extension as well as the extra expense, civil authority, and extended business income extensions by refusing to provide coverage for its claim, according to the opinion. Neuro further sought to certify a class of insureds, nationwide, who hold similar policies and who were denied coverage for losses related to the pandemic.
The Ohio Supreme Court granted certification of Cincinnati’s question of state law on whether “the general presence in the community, or on surfaces at a premises, of the novel coronavirus known as SARS-CoV-2, constitute direct physical loss or damage to property” or “does the presence on a premises of a person infected with COVID-19 constitute direct physical loss or damage to property at that premises?”
“We agree with Cincinnati,” stated Brunner. “The definition of the term ‘loss’ is clear: for coverage to be provided, there must be loss or damage to covered property that is physical in nature.”
“Such loss or damage does not include a loss of the ability to use covered property for business purposes,” Brunner concluded.
Brunner cited a 6th Circuit opinion in Santo’s Italian Café, L.L.C. v. Acuity Ins. Co. which held that a loss of use is simply not the same as a physical loss.
“It is one thing for the government to ban the use of a bike or a scooter on city sidewalks,” said the 6th Circuit opinion, “it is quite another for someone to steal it.”
“Neuro also cites court decisions issued before the COVID pandemic that it argues stand for the proposition that a direct physical loss does not require a physical alteration of property,” stated Brunner. “We are not persuaded that these cases are analogous to the present case.”
“Moreover, although the decisions cited by Neuro either reject or do not apply the principle that direct physical loss requires a physical alteration of property, the cases all involved an entirely different degree of harm,” said Brunner. “In each case, the property at issue was rendered uninhabitable due to a condition that was hazardous to human health. As a practical matter, the condition made the properties wholly inaccessible.”
Brunner further stated that direct physical loss or damage to property does not arise from ”the general presence of COVID in the community, the presence of COVID on surfaces at a premises, or the presence on a premises of a person infected with COVID.”
Brunner concluded that the Ohio Supreme Court reached a conclusion which is “consistent with the clear trend in the law in other jurisdictions.” In a 4th Circuit decision, Uncork & Create, L.L.C. v. Cincinnati Ins., Co., the court cited decisions in US Courts of Appeals for the Second, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth and Eleventh Circuits, which are consistent with this trend.
Brunner noted that a few courts have reached conclusions which would have sided with Neuro including Vermont in Huntington Ingalls Industries, Inc. v. Ace Am. Ins. Co., and Pennsylvania in Ungarean v. CNA & Valley Forge Ins. Co.
But, Brunner stated, many of the decisions on which Neuro relies are from trial courts subject to appellate review. At least two of Neuro’s cited cases have since been vacated, according to Brunner.
Justice Maureen O’Connor, Justice Sharon L. Kennedy, Justice Patrick F. Fisher, Justice Patrick Dewine, and Justice Melody J. Stewart concurred in Brunner’s opinion answering no to the certified question. In a dissenting opinion, Justice Michael P. Donnelly held that the state’s high court should only answer certified questions of federal law if “there is a question of Ohio law that may be determinative of the proceeding and for which there is no controlling precedent in the decisions of this Supreme Court.”
“This court already has a well-established body of jurisprudence on basic contract interpretation,” stated Donnelly. “The federal courts can seek guidance there to resolve the dispute between the parties to this case. I would dismiss this certified question of state law as having been improvidently accepted, and I therefore dissent.”
“We are disappointed in the court’s ruling on behalf of our many clients and Ohio business owners,” said counsel to Neuro, Nicholas A. DiCello, partner with Spangenberg Shibley & Liber. “The policy before the Court did not contain a commonly used virus exclusion form.”
“Absent a virus exclusion, our clients understood they would be covered,” said DiCello. “At a minimum, we believed the policy was ambiguous, and ambiguities are to be interpreted in favor of coverage. Nevertheless, the court received a comprehensive briefing and heard substantial argument, and we respect its ruling.”
John Ellison and Richard Lewis of Reed Smith, who authored an amicus brief filed by nonprofit United Policyholders in the case, said this case “well demonstrates some of the inappropriate major hurdles that policyholders had to clear in litigating claims for loss from loss or damage from SARS-CoV-2 and COVID-19 and consequent orders of civil authorities.
Ellison and Lewis said the conclusion that Neuro’s premises were not wholly uninhabitable was “a factual finding on a bare record.”
“It is also simply nonsense,” they said. ”It is akin to saying a location is not uninhabitable, it is just unsafe if you don’t want to develop asbestosis or risk getting hit by a falling rock or later develop brain damage from lead dust.
“United Policyholders hopes that other state supreme courts, the ultimate arbiters of a state law issue will be more reticent in accepting the newly created arguments of the insurance industry, which should not undo industry understanding and court decisions prior to March 2020 finding loss or damage from events rendering property unfit or unsafe for use,” concluded Ellison and Lewis.
“We thank the court for its careful consideration of this case and are pleased its decision joins those from state supreme courts in Iowa, Massachusetts, Oklahoma, South Carolina, Washington and Wisconsin and all federal appeals courts to date ruling that business closures and restrictions related to the COVID-19 pandemic do not constitute direct physical loss or damage to property required to trigger coverage under our property insurance policy,” a Cincinnati Insurance Companies spokesperson said in a statement.