(Article from Insurance Law Alert, July/August 2020)
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In contrast to the rulings discussed above, a Missouri federal district court declined to dismiss a COVID-19-related coverage suit against a property insurer, finding that the allegations sufficiently stated claims for coverage under several policy provisions. Studio 417, Inc. v. The Cincinnati Ins. Co., 2020 WL 4692385 (W.D. Mo. Aug. 12, 2020).
Hair salons and restaurants sought coverage under policies that covered “accidental [direct] physical loss or accidental [direct] physical damage,” unless otherwise excluded. The policies did not define physical loss or physical damage and did not include a viral or communicable disease exclusion. The court concluded that the policyholders adequately alleged a direct physical loss because the complaint alleged that COVID-19 “is a physical substance” that “live[d] on” and was “active on inert physical surfaces” and “attached to and deprived Plaintiffs of their property, making it ‘unsafe and unusable.’” The court emphasized that the policy covered physical loss or physical damage and reasoned that it “must give meaning to both terms.” The court noted that in other cases, courts have required a “tangible alteration” in order to establish physical loss, but explained that those cases were decided on summary judgment or were factually distinguishable. Here, on the insurer’s motion to dismiss, the court accepted as true the policyholders’ assertion that the virus is a physical substance that was likely on their premises and caused them to suspend operations.
Based on the same reasoning, the court declined to dismiss coverage claims pursuant to provisions for civil authority coverage, ingress and egress coverage, dependent property coverage, and sue and labor coverage.
A New Jersey trial court also denied an insurer’s motion to dismiss COVID-19-related coverage claims, citing the lack of legal authority in this context and the absence of a developed factual record. Optical Services USA/JC1 v. Franklin Mutual Ins. Co., No. BER-L-3681-20 (N.J. Super. Ct. Bergen Cty. Aug. 13, 2020) (Oral Transcript). There, the operative policy covered business interruption losses resulting from direct covered loss, defined as “the fortuitous direct physical loss as described in Part 1(c).” The policy further stated that covered loss means “fortuitous direct physical damage to or destruction of covered property by a covered cause of loss.” The insurer argued that the complaint failed to allege direct physical damage because it expressly admitted that “there is no known instance of COVID-19 transmission or contamination within the premises of plaintiffs’ businesses.” In contrast, the policyholders contended that the loss of “physical functionality and the use of their business” by virtue of the government mandates constitutes a covered loss. Declining to rule as a matter of law, the court noted the lack of controlling New Jersey authority in this context and the absence of discovery in this matter. The insurer did not contend that a virus exclusion in the policy applied.