By far the largest development in insurance coverage over the past year and a half has been the deluge of litigation over business interruption coverage for companies that have lost substantial amounts of money due to the impact of the SARS-CoV-2 virus, the COVID-19 pandemic, and related orders by state and local authorities shutting down so-called "non-essential" businesses. Thousands of companies across the United States made claims for lost income under their property insurance policies beginning in Spring 2020. Insurance companies uniformly denied coverage, and, as everyone knows, the policyholder lawsuits quickly followed. Now, hardly a day goes by without reports of decisions by state and federal courts, mostly on motions to dismiss filed by insurers. A large number of decisions make absolute statements impossible, but the general perception in the legal community is that policyholders have not had great success. At first glance, the raw numbers from case-tracking sites such as the University of Pennsylvania Law School's Covid Coverage Litigation Tracker[1] would seem to bear that out, but a closer look reveals more. Of note is the discrepancy between state and federal cases, with federal courts dismissing around 90% of the lawsuits before them, whereas outcomes are more balanced (albeit still in favor of insurers) in state courts.[2]
Two questions present themselves. First, why do the litigation results currently look so lopsided, and second, can policyholders turn things around? In our view, there are two primary reasons for the seeming lack of success by policyholders to date:
- As noted by Professors Erik W. Knutsen and Jeffrey W. Stempel, the insurance industry's "media blitz" in the early days of the pandemic may have primed judges to be skeptical of claims;[3]
- Early lawsuits, often brought by plaintiff's lawyers with less experience in coverage issues, relied on untenable theories of coverage and/or involved policies with express "virus" exclusions.
These two factors seem to have caused (mostly federal) courts early on to rule against policyholders. The resulting momentum has carried on from there, with later (again, mostly federal) courts simply citing earlier decisions in a sort of judicial "echo chamber," despite differences in the way later claims have been pleaded. However, more recently, policyholders have become more sophisticated in alleging and arguing coverage, and they have begun to obtain more favorable results, particularly in state courts. State appellate level decisions also should have more of an impact on coverage, because in diversity cases federal courts are bound to follow state law under the Erie doctrine.[4]
Early COVID-19 Cases Are Not a Good Indicator of Coverage in the Future
According to Penn's Covid Coverage Litigation Tracker, 775 policies that have been litigated have an "express virus exclusion."[5] Despite creative attempts by policyholders to get around this type of exclusion,[6] most courts have found that policies with such exclusions do not cover business interruption losses due to COVID-19. These policies account for many, but by no means all, of the court decisions against insureds.
Putting the policies with express virus exclusions to one side, most property policies involved in litigation to date provide coverage for business interruption losses due to "physical loss or damage to" property caused by a covered cause of loss. In other words, the property at issue – either the insured's own property or, for "civil authority" and similar coverages, property nearby the insured's property – must suffer some sort of "physical loss or damage."
In many early cases, policyholders only alleged that government orders, by themselves, caused "physical loss or damage" to the insureds' properties. Specifically, that the orders caused policyholders to suffer a loss of use of their properties. They did not allege that the SARS-CoV-2 virus was physically present in any affected properties. Most courts have found that government shutdown orders, by themselves, do not cause any "physical loss or damage" to property. The federal Eighth Circuit's recent decision in Oral Surgeons, P.C. v. Cincinnati Insurance Company[7] is emblematic of these early cases and the courts' rejection of this sole theory of coverage. The early COVID-19 cases, then, are not reliable indicators of coverage for business interruption losses caused by the virus and related government shutdown orders.
More Recent Cases Provide Road Maps for Pleading Claims Successfully
Policyholders have responded to the early losses in two ways. First, they allege that the virus was present in their properties and physically altered the properties. The federal courts have resisted these allegations, and sometimes make the factual determination that the virus cannot physically alter property.[8] This is despite the fact that under Federal Rule of Civil Procedure 12(b)(6), the plaintiff's allegations must be taken as true on a motion to dismiss.[9] Here we see the effect of the judicial echo chamber and the insurance industry's proactive effort to shape the narrative.[10]
Policyholders have had more success in state courts. For example, in the recent decision in the case Nevada Property 1 LLC v. Factory Mutual Insurance Company,[11] the policyholder alleged that the virus was in its property and that "[t]he scientific community has confirmed that SARS-COV-2 virions and Covid-19 alter the conditions of properties and buildings such that the premises are physically damaged and no longer safe and habitable for normal use."[12] The court held that this factual allegation was sufficient to plead that the property had suffered "physical loss or damage" and denied the insurer's motion to dismiss.[13] Cases such as Nevada Property point the way for policyholders to plead their claims successfully, at least in state courts.
The second way policyholders have pleaded "physical loss or damage" is to allege that the presence of the virus, combined with government shutdown orders, caused the insureds to physically lose the use of their properties because the virus and the orders prevented the insureds from using the properties as intended. They point out that "physical loss or damage" is in the disjunctive, and thus can be satisfied by "physical loss" or "physical damage." "Physical loss," therefore, must be different from "physical damage," and an insured can suffer a physical loss of property without it being altered, damaged or destroyed. Some state and federal courts have agreed with this argument, but again more federal courts than not have so far rejected it.[14]
State Appellate Courts Will Ultimately Decide the Coverage Issues
Insurance coverage disputes almost always present questions of state law. Federal courts hearing cases under diversity jurisdiction are bound to follow state law, or they must predict how state high courts would rule on an issue in the absence of binding precedent.[15] Thus, it ultimately will be up to state appellate courts to decide whether and to what extent property policies cover business interruption losses due to the SARS-CoV-2 virus, the COVID-19 pandemic, and related government shutdown orders. To date, no state appellate courts have issued decisions on COVID-19 business interruption losses. Assuming the state appellate courts apply the law in the same way that state trial courts have to date, the tide should turn more in favor of policyholders.[16] Federal courts will then be forced to follow the state court rulings notwithstanding the federal court's earlier incorrect Erie guesses, thereby swinging the pendulum back to favor policyholders.
[1] https://cclt.law.upenn.edu/ (last accessed September 3, 2021).
[2] Id.
[3] Erik S. Knutsen and Jeffrey W. Stempel, Infected Judgment: Problematic Rush to Conventional Wisdom and Insurance Coverage Denial in a Pandemic, 27 Conn. Ins. L. J. 185 (2020). See also Mark Miller, Who Is Winning the COVID-19 Insurance Coverage Fight?, Mondaq (May 18, 2021) https://www.mondaq.com/unitedstates/ insurance-laws-and-products/1069670/who-is-winning-the-covid-19-insurance-coverage-fight (last accessed Sept. 3, 2021).
[4] See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938).
[5] https://cclt.law.upenn.edu/ (last accessed September 3, 2021).
[6] For example, arguing a form of "regulatory estoppel" similar to that used with some success against the so-called "absolute" pollution exclusion. See, e.g., Richard P. Lewis, et al., Here We Go Again: Virus Exclusion for COVID-19 and Insurers, Corporate Counsel (Apr. 7, 2020) https://www.law.com/corpcounsel/2020/04/07/here-we-go-again-virus-exclusion-for-covid-19-and-insurers/ (last accessed Sept. 3, 2021).
[7] 2 F.4th 1141 (8th Cir. 2021). The court noted that the appeal presented "only the question whether the COVID-19 pandemic and the related government-imposed restrictions constitute direct 'accidental physical loss or accidental physical damage' under the policy"; the insured did not allege the virus was physically present in its property. Id. at 1145 n.2.
[8] See, e.g., Sandy Point Dental, PC v. Cincinnati Ins. Co., 488 F. Supp. 3d 690, 693 (N.D. Ill. 2020).
[9] Id. at 692.
[10] See Knutsen and Stempel, 27 Conn. Ins. L. J. at 249.
[11] Case No. A-21-831049-B (Nev. Dist. Ct. slip op. Aug. 16, 2021).
[12] Id.
[13] Id. The pleading standards under Nevada's Civil Procedure Rule 12(b)(5) are substantially similar to those under Federal Rule 12(b)(6). See id.
[14] Compare In re: Society Ins. Co. COVID-19 Bus. Interruption Prot. Ins. Litig., MDL No. 2964, 2021 WL 679109, *9 (N.D. Ill. Feb. 22, 2021), and Ungarean v. CNA, Civil Div. No. GD-20-006544, 2021 Pa. Dist. & Cnty. Dec. LEXIS 2, *14-16 (Mar. 22, 2021) (both finding that "physical loss or damage" is ambiguous and reasonably can be interpreted to include physical loss of use of property without physical alteration), with Oral Surgeons, 2 F.4th at 1144 (finding "physical loss or damage" requires property to be physically altered, contaminated or destroyed).
[15] Erie R.R., 304 U.S. at 78.
[16] We may end up with a split in jurisdictions, with some state courts finding coverage for COVID-19 business interruption losses, and others not. This would not be unusual, as similar splits exist regarding coverage for other types of losses, including long-tail toxic torts and environmental pollution.
Editor's Note: These views are the author's own.