(Article from Insurance Law Alert, January 2021)
For more information, please visit the Insurance Law Alert Resource Center.
Courts across the country continue to dismiss suits seeking insurance coverage for COVID-19-related business losses, largely on the basis that the policyholder has not alleged the requisite “direct physical loss of or damage to property” and/or that a virus exclusion bars coverage. In the past month, more than two dozen courts have dismissed such claims.
However, an Ohio federal district court ruled in the policyholder’s favor, finding that the phrase “direct physical loss of or damage to” was ambiguous and must be construed in favor of coverage. Henderson Road Rest. Sys., Inc. v. Zurich Am. Ins. Co., 2021 WL 168422 (N.D. Ohio Jan. 19, 2021).
The restaurant operator sought coverage for losses incurred after it was forced to shut down several of its restaurants, and restrict operations to take-out services for the few that remained open. Zurich denied coverage, arguing that the restaurants did not suffer direct physical loss of or damage to property because, among other things, the parties had stipulated that there was no physical alteration or structural damage to any insured property. In addition, Zurich argued that coverage was barred by a microorganism exclusion.
The court disagreed and granted the policyholder’s summary judgment motion. The court deemed the phrase “direct physical loss of or damage to real property” ambiguous, holding that use of the disjunctive “or” suggests that physical loss can mean something different than damage to real property. Construing this ambiguity in the policyholder’s favor, the court reasoned that physical loss could include the inability to use property for its intended purpose. In so ruling, the court distinguished cases involving “physical loss to” verbiage, suggesting that physical loss “to” property may be different than physical loss “of” property.
In addition, the court rejected the insurer’s contention that there was no physical loss “of” property because the policyholder was still able to conduct take-out service at its restaurants. The court emphasized that the insured properties were used almost exclusively for in person dining and that the insurer failed to assert facts demonstrating that the policyholder could have reasonably transitioned to take-out. The court also rejected the notion that the loss of property must be permanent, noting that the word “loss” is not limited to permanent disposition.
Notably, in another Ohio decision, in which the policyholder likewise argued that identical policy language was ambiguous, the court dismissed the coverage claims, ruling that the complaint failed to allege a threshold claim of “direct physical loss of or damage to” property. Santo’s Italian Café LLC v. Acuity Ins. Co., 2020 WL 7490095 (N.D. Ohio Dec 21, 2020). Recognizing that “differing interpretations of Ohio contract law by different courts threaten to undermine the uniform application of that law to similarly situated litigants,” and the lack of controlling Ohio precedent, a different federal district court in Ohio certified the following question of law to the Ohio Supreme Court: “Does 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?” Neuro-Communication Servs., Inc. v. Cincinnati Ins. Co., No. 4:20-CV-1275 (N.D. Ohio Jan. 19, 2021).
The court in Henderson Road also ruled that the microorganism exclusion did not bar coverage, explaining that the loss was caused by the government orders, not by the presence or spread of microorganisms at insured premises. The court emphasized that the parties had stipulated that none of the insured premises were closed as a result of the known presence of COVID-19 particles. Additionally, the court rejected Zurich’s contention that the anti-concurrent language (stating that the exclusion applies “regardless of any other cause or event . . . that contributes concurrently or in any sequence to the loss”) operated to exclude coverage, explaining that “this argument is dependent on a finding that Microorganisms caused, at least in part, damage to Plaintiffs’ property”—a finding contrary to the parties’ stipulation.
However, the court dismissed the policyholder’s bad faith claim, finding that Zurich had a reasonable basis for denying coverage, particularly in light of the “growing consensus of courts” that have rejected COVID-19-related business interruption claims.
A Pennsylvania federal district court also recently denied an insurer’s motion to dismiss on the pleadings, notwithstanding the policyholder’s failure to allege direct physical loss or damage. In Humans & Resources, LLC v. Firstline National Ins. Co., 2021 WL 75775 (E.D. Pa. Jan. 8, 2021), the court agreed with the insurer that the complaint “did not allege facts which plausibly suggest that Plaintiff’s forced suspension of its operations and resulting loss of business income was caused by a direct physical loss of or damage to property.” In addition, the court ruled that a virus exclusion would have barred coverage in any event, rejecting the policyholder’s regulatory estoppel argument. Notwithstanding these findings, the court declined to dismiss the suit, citing Pennsylvania’s reasonable expectations doctrine. The court explained that the doctrine applies even where the expectations are in direct conflict with the unambiguous terms of the policy. The court concluded that dismissal was not warranted because the policyholder alleged that it purchased the policy with a reasonable expectation of coverage for the business interruption losses at issue.
However, even after Humans & Resources, Pennsylvania federal courts have dismissed other COVID-19-related coverage suits raising similar reasonable expectations arguments.