Cinemark theater. Photo: Melanie Bell
In a rare ruling, Cinemark theaters won the chance to keep litigating against its insurance company, seeking losses under a $500 million policy for business interruption from COVID-19.
U.S. District Judge Amos Mazzant of the Eastern District of Texas ruled that Cinemark Holdings Inc.'s allegations that COVID-19 entered its facilities—infecting 1,700 employees and physically changing the content of the air—were enough to survive Factory Mutual Insurance Co.'s arguments that the case should face an early dismissal.
Insurance law attorneys may want to learn from the case, since the language that Cinemark used to describe the "physical loss or damage" to its properties has allowed the company to survive a litigation hurdle that has tripped up many businesses across the country. Judges in many states have sided with insurance companies, tossing COVID-19 business interruption lawsuits before they even get to discovery.
A couple of allegations by Cinemark seem to have swayed the court here: that COVID-19 was present in its facilities and the virus had physically changed the air.
The theater's attorney, Michael Levine, said he had studied the virus for a year with a team of experts and he learned about the damage-causing process.
"The manner in which the presence of the virus physically affected the property and renders it unusable or uninhabitable—that is what constitutes the physical loss under most of the policies," said Levine, partner in Hunton Andrews Kurth in Washington, D.C. "It's the manner in which the presence of the virus damages the property with respect to the indoor air by changing the content of the air and by affecting the character of surfaces by changing it to dangerous or potentially lethal."
Unlike dust that can be wiped away, the virus is invisible, and can come back and spread in a space after it's cleaned away, he explained. As long as a business keeps using a facility, there will be continuous damage to the indoor air and surfaces, he said.
"It's an understanding of that process, of what is going on at the viral level or microscopic level, and to be able to articulate it in a way that courts can understand and appreciate," Levine explained.
Factory Mutual's attorney, Tom Cook, partner in Zelle in Dallas, declined to comment.
$3.7 Million Premiums
Mazzant, the Eastern District judge, explained the background of the case in a May 5 order in Cinemark Holdings v. Factory Mutual Insurance.
Cinemark, the third-largest theater chain in the United States, paid $3.7 million for an "all risks" insurance policy from Factory Mutual Insurance. It covered "physical loss or damage by a communicable disease," said the order.
When the virus upended life in the United States, and so many Cinemark employees got sick, the company closed its theaters and incurred business income loss, the order said.
Cinemark filed a claim with Factory Mutual on April 20, but the insurer did not respond or state a coverage position. The theater sued the insurer in November 2020.
During the litigation, Factory Mutual argued the claims should be dismissed in a motion for judgment on the pleadings, the order said. It argued Cinemark didn't allege a physical loss or damage, and there was a contamination exclusion that should bar the claims.
Cinemark disagreed, countering that the policy did cover physical loss or damage caused by communicable diseases.
Mazzant found that Cinemark had alleged plausible claims and it would defeat Factory Mutual's dismissal arguments.
The court explained that this case is different than another recent business interruption case that the judge did dismiss. There, a company alleged that a government shutdown order caused a loss or damage to its property. That policy holder did not allege COVID-19 had entered its property. A covered physical loss required a physical alteration of the property, the judge ruled in the previous case, Selery Fulfillment v. Colony Insurance.
Mazzant wrote that Cinemark's case is different.
"Unlike Selery, Cinemark alleges that COVID-19 was actually present and actually damaged the property by changing the content of the air," said the order. "Cinemark's policy is much broader than the one in Selery and expressly covers loss and damage caused by 'communicable disease.'"
Insurance defense attorney Matthew Kolodoski, who wasn't involved in the Cinemark case, said that Cinemark's insurance policy language is different than most property policies, which means the case may not make "a watershed decision." But there are still lessons for insurance counsel.
"In my mind, the key takeaway from this decision is that it underscores the importance for attorneys representing both policyholders and insurance carriers to look to the specific policy language at issue, even at the initial pleading stage of the case," said Kolodoski, partner in Thompson Coe in Dallas.
Angela Morris
Angela Morris is ALM Media's Texas litigation reporter. She covers lawsuits in all levels of Texas state and federal courts. Based in Austin, Morris earned journalism and government degrees from the University of Texas at Austin in 2006, and since then, has worked primarily as a reporter and writer, but also has skills in videography, photography and podcasts. Follow her on Twitter at @AMorrisReports.