(Article from Insurance Law Alert, September 2020)
For more information, please visit the Insurance Law Alert Resource Center.
In recent weeks, courts in Florida, California, Michigan and Illinois have issued decisions in coverage cases involving alleged COVID-19-related losses, all of which resolved the disputes in the insurers’ favor.
Two Florida federal district courts dismissed coverage claims for business losses arising out of government orders aimed at reducing the spread of COVID-19. In Martinez v. Allied Ins. Co. of Am., 2020 WL 5240218 (M.D. Fla. Sept. 2, 2020), the court ruled that a virus exclusion expressly excluded such coverage. In ruling on the insurer’s motion to dismiss, the court accepted as true the policyholder’s allegation that his business incurred losses as a result of government orders that limited his ability to provide dental services during the pandemic. The court concluded that coverage was nonetheless unavailable based on an exclusion for loss or damage caused “directly or indirectly” by “[a]ny virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”
In Malaube, LLC v. Greenwich Ins. Co., 2020 WL 5051581 (S.D. Fla. Aug. 26, 2020), the court dismissed a restaurant’s COVID-19-related coverage claims based on a lack of “physical loss or damage” to property. The restaurant alleged that state emergency orders limited its use of its facilities, resulting in significant business losses. The court deemed this allegation insufficient to satisfy the “physical loss or damage” requirement, rejecting contentions that physical loss does not require structural alteration and may encompass loss of use. Emphasizing the absence of allegations of physical harm or the presence of COVID-19 on the premises, the court noted that “the restaurant merely suffered economic losses–not anything tangible, actual, or physical.” Finally, the court held that even accepting the restaurant’s argument that physical loss or damage could include property that is substantially unusable, coverage would still be unavailable because the restaurant continued to operate takeout and delivery services during the relevant time period.
Four federal district courts in California likewise rejected policyholders’ claims for coverage based on COVID-19-related losses. In 10E, LLC v. Travelers Indem. Co. of Conn., 2020 WL 5359653 (C.D. Cal. Sep. 8, 2020), the court dismissed a restaurant’s suit seeking coverage for COVID-19-related losses, finding that the complaint failed to allege “direct physical loss of or damage to property,” as required by the policy’s civil authority provision. The court reasoned that losses arising from an inability to use property do not constitute direct physical loss of or damage to property; physical loss or damage requires a “distinct, demonstrable, physical alteration.” The court declined to address the applicability of a virus exclusion or whether the government orders “prohibit[ed] access” to the covered property, as required by the civil authority provision.
Finding the analysis and holding in 10E, LLC persuasive and applicable, another California district court dismissed a suit seeking coverage for lost income allegedly caused by COVID-19-related government orders. Pappy’s Barber Shops, Inc. v. Famers Group, Inc., 2020 WL 5500221 (S.D. Cal. Sept. 11, 2020). In addition to ruling that the policyholder’s complaint failed to allege “direct physical loss” as required by the business income, extra expense and civil authority provisions, the court also concluded that the government orders did not “prohibit access” to the insured property, a prerequisite to civil authority coverage. In so ruling, the court distinguished between a prohibition on the operation of business and a prohibition on access to a place of business.
A third California court dismissed a retailer’s coverage suit. Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 2020 WL 5525171 (N.D. Cal. Sept. 14, 2020). Mudpie alleged that its compliance with government closure orders resulted in substantial business losses because its storefront became “useless and/or uninhabitable.” It sought coverage under civil authority, business income and extra expense provisions. Travelers denied coverage based on the lack of requisite “direct physical loss of or damage to” property and a virus exclusion, arguing that “direct physical loss” requires a “distinct, demonstrable, physical alteration of the property.” The court rejected this interpretation, explaining that “direct physical loss of” property (as distinguished from “direct physical loss to” property) contemplates the “permanent dispossession of something.” Nonetheless, the court ruled that Mudpie did not suffer direct physical loss of property because it was not permanently dispossessed of its storefront or inventory.
Additionally, the court rejected Mudpie’s assertion that loss of functionality or access to property constitutes a direct physical loss of property. In so ruling, the court distinguished cases frequently cited by policyholders in this context, see, e.g., Gregory Packing, Inc. v. Travelers Prop. Cas. Co. of Am., 2014 WL 6675934 (D.N.J. Nov. 25, 2014), emphasizing that decisions that equated loss of use with physical loss involved an “intervening physical force which ‘made the premises uninhabitable or entirely unusable.’” The court noted that its conclusion was supported by a policy provision excluding coverage for “loss or damage caused by or resulting from . . . loss of use or loss of market.” The court also distinguished Studio 417, Inc. v. Cincinnati Ins. Co., 2020 WL 4962385 (W.D. Mo. Aug. 12, 2020) (discussed in last month’s Alert), which, unlike the present case, involved allegations that COVID-19 particles were present on and caused damage to property.
Finally, the court held that Civil Authority coverage was unavailable because Mudpie failed to “establish the ‘requisite causal link between damage to adjacent property and denial of access’ to its store.” The court explained that the government orders were preventative in nature, and were not based on any alleged damage to adjacent property.
In Plan Check Downtown III, LLC v. AmGuard Ins. Co., No. 2:20-cv-06954 (C.D. Cal. Sept. 15, 2020), the court dismissed with prejudice a restaurant’s complaint against its property insurer seeking business interruption coverage, rejecting the assertion that “physical loss of or damage to property” could include changes in what activities can occur in the restaurant’s space. Reasoning that this interpretation would be a “major expansion of insurance coverage,” the court sided with the “[w]eight of California law” in holding that some tangible alteration is required in order to satisfy the “physical loss of or damage to” requirement for coverage. AmGuard Insurance, Co. is represented by Simpson Thacher in this matter.
A Michigan federal district court similarly dismissed COVID-19 coverage claims in Turek Enterprises, Inc. v. State Farm Mutual Auto. Ins. Co., 2020 WL 5258484 (E.D. Mich. Sept. 3, 2020). A chiropractic office, suing State Farm on behalf of itself and all others similarly situated, sought coverage for business losses incurred in the wake of government-mandated closures and restrictions. The policyholder did not allege that the virus was present on the covered premises, but asserted that it lost income when it suspended operations in compliance with government orders. State Farm denied coverage based on the lack of “direct physical loss.” The court ruled that the undefined term “direct physical loss” was unambiguous, required tangible damage and did not encompass loss of use of property. The court distinguished Studio 417, which involved allegations that COVID-19 particles were present on and caused damage to property and different policy language (“accidental physical loss or accidental physical damage”).
Additionally, the court rejected the policyholder’s assertion that it sustained tangible loss because of alleged deterioration during the several months that its business was suspended, including the expiration of medication and depreciation of assets. Finally, the court ruled that even if the policyholder had alleged direct physical loss, coverage would still be precluded by a virus exclusion. In so ruling, the court rejected the policyholder’s contention that the government orders, rather than the virus, were the proximate cause of the alleged losses. The court stated: “Plaintiff’s position essentially disregards the Anti-Concurrent Causation Clause, which extends the Virus Exclusion to all losses where a virus is part of the causal chain.” The court also noted that actual viral contamination was not required by the exclusion, emphasizing that the exclusionary language applies to any “[v]irus, bacteria or other microorganism that induces or is capable of inducing physical distress, illness, or disease.”
Citing to several of the aforementioned rulings, An Illinois federal district court dismissed a dentist’s suit seeking business interruption and civil authority coverage. Sandy Point Dental, PC v. The Cincinnati Ins. Co., No. 20 CV 2160 (N.D. Ill. Sept. 21, 2020). The court deemed the absence of allegations of “demonstrable physical alternation to the property” fatal to its coverage claims given the policy’s “direct physical loss” requirement. Further, the court noted that civil authority coverage was unavailable for the independent reason that access to the insured premises was never “prohibited.”