COVID-19 Business Interruption Insurance Litigation: The State of Play as of August 2020

Following the outbreak of COVID-19, executive orders forced businesses across the United States to close or severely restrict operations in order to prevent the spread of the coronavirus. Faced with enormous financial losses, business owners have turned to their business interruption insurance policies to seek coverage for lost income and extra expenses resulting from the pandemic. Insurers have generally responded with blanket denials of coverage, citing policy requirements for physical loss or damage to property and/or explicit exclusions for losses caused by viruses or disease. Some policies also provide related “civil authority” coverage for loss of income caused by governmental action that results in a loss of access to property, but those policies typically require that there be physical damage to property in the immediate vicinity of the insured’s premises.^[1] In prior alerts, we have reported on COVID-19-related insurance litigation and regulatory issues.^[2]  In this alert, we provide an update on COVID-19-related legislation and coverage litigation in the business interruption area and we highlight several recent decisions that, while not uniform in their results, have tended to favor the insurers.

As reported in previous alerts, a number of states have proposed legislation that would force insurers to cover COVID-19-related claims despite any contrary provisions in their policies. To date, bills have been introduced in California,^[3] Louisiana,^[4] Massachusetts,^[5] Michigan,^[6] New Jersey,^[7] New York,^[8] Ohio,^[9] Pennsylvania,^[10] Rhode Island,^[11] South Carolina^[12] and the District of Columbia.^[13] The proposed legislation is largely stalled, however, because of vigorous opposition by the insurance industry and widespread criticism that the bills raise concerns about legislative interference with private contracts and potential constitutional issues.^[14]

In the meantime, business owners have turned to the courts. Over 1,000 COVID-19-related insurance coverage lawsuits have been filed across the country in state and federal courts.^[15] For months, more than 250 federal cases were awaiting determination on whether they would be consolidated in a nationwide multidistrict litigation. On August 12, after hearing oral arguments, the federal Judicial Panel on Multidistrict Litigation decided not to consolidate the cases, finding that they “share only a superficial commonality” and no common defendant, and that the cases could not be consolidated efficiently.^[16] Most of these cases will now proceed in the federal courts in which they were first filed, with insurers likely to move promptly to dismiss or for summary judgment. At the same time, other state and federal courts are beginning to reach decisions on business interruption coverage claims.

To meet policy requirements for “direct physical loss or damage to property,”^[17] policyholders challenging the denial of coverage generally rely on one of two theories. One is that the virus itself causes physical damage to property, by contaminating surfaces and lingering in the air. The other is that the executive orders restricting access to property cause physical loss by preventing business owners from using their properties for their intended purposes.^[18] To this point in the pandemic, a growing number of decisions have reached the merits of these arguments.

Social Life Magazine, Inc. v. Sentinel Insurance Company Limited^[19]

In late April 2020, luxury lifestyle publication Social Life Magazine filed a federal lawsuit challenging its insurer’s denial of coverage for alleged COVID-19-related losses. The policy covered “direct physical loss of or damage to Covered Property.”^[20] The magazine claimed COVID-19 caused damage to its main office and interrupted the production of its publication. In its complaint, the magazine alleged that as a result of COVID-19, it “lost access to, use of and/or functionality of plaintiff’s property covered by the policy.”^[21] Further, because its equipment is “specialized and industrial in nature,” its employees could not work from home to produce the magazine.^[22]

At a telephone hearing held on May 14, the court denied the magazine’s request for a preliminary injunction, ruling that even if coronavirus was present in the office, the policy’s property damage requirement was not met. Any losses were caused by the state governor’s shutdown order and not “any particular damage to [the] specific property.”^[23] The court expressed sympathy for the plaintiff and other small businesses, but observed, “New York law is clear that this kind of business interruption needs some damage to the property to prohibit you from going. … [T]his is just not what’s covered under the insurance policies.”^[24] The lawsuit was voluntarily dismissed on May 22.

Gavrildes Management Co., LLC v. Michigan Ins. Co.^[25]

In early July, in a suit brought by the operator of a local café, a Michigan state court issued a similar ruling. The plaintiff, citing the Michigan governor’s shutdown orders aimed at slowing the spread of COVID-19, argued that its policy’s requirement of “physical loss of or damage to the property” was met because customers could not dine indoors at its restaurants.

On July 1, via Zoom conference, the court granted summary judgment to the insurer, reasoning that “physical loss of or damage” must be something with “material existence … something that is tangible” or “alters the physical integrity of the property.”^[26] The governmental orders restricting access to the property did not meet this standard.

Rose’s 1, LLC, et al. v. Erie Insurance Exchange^[27]

This month, the District of Columbia Superior Court granted summary judgment dismissing a complaint filed by several well-known D.C. restaurants. Like the plaintiff in Gavrildes Management Company, the restaurants sought coverage for lost income and expenses caused by executive orders restricting the use of their properties as dine-in restaurants. They alleged that the “loss of use of their properties” due to the pandemic and the government’s shutdown order met their policy’s requirement for a “direct physical loss” because they “lost the ability to operate the Insured Properties as dine-in restaurants.”^[28]

In an order issued on August 6, after the restaurants moved for summary judgment, the Superior Court granted the insurer’s cross-motion for summary judgment. The court reasoned: “Plaintiffs offer no evidence that COVID-19 was actually present on their insured properties at the time they were forced to close. And the mayor’s orders did not have any effect on the material or tangible structure of the insured properties.”^[29] Distinguishing many of the cases the plaintiffs cited as precedent, the court explained that “none … stand for the proposition that a governmental edict, standing alone, constitutes a direct physical loss under an insurance policy.”^[30]

Studio 417, Inc. v. The Cincinnati Insurance Company^[31]

Lest insurers declare complete victory prematurely, a federal District Court in Missouri on August 12 ruled in favor of policyholders, denying an insurer’s motion to dismiss. The complaint — initially filed by an owner and operator of hair salons, later joined by local restaurants — alleged that the plaintiffs’ premises “likely have been infected with COVID-19” and that the plaintiffs therefore “suffered direct physical loss to property.”^[32] In moving to dismiss, the insurer argued that the policies were designed to provide coverage only for tangible physical loss, such as in a fire or storm.^[33]

The court rejected the insurer’s arguments. Noting that the policies did not define direct physical loss and that plaintiffs “allege a causal relationship between COVID-19 and their alleged losses,” the court relied largely on dictionary definitions to conclude that the complaint “plausibly alleges a direct physical loss based on the plain and ordinary meaning of the phrase.”^[34] The court cited a number of pre-COVID-19 decisions that did not involve disease or viruses to support its ruling that “direct physical loss” need not mean “actual physical damage,”^[35] and it distinguished both Social Life Magazine and Gavrildes Management Company.^[36]

Given the growing number of decisions favoring insurers,^[37] policyholders are likely to try to modify their theories, in an effort to state a basis for coverage and distinguish their claims from the ones rejected in the decisions noted above. A complaint recently filed in the New York State court is illustrative.

Abruzzo DOCG d/b/a Tarallucci e Vino, et al. v. Acceptance Indemnity Ins. Co., et al.^[38]

On August 4, a group of New York City restaurants, cafés and bars filed a complaint challenging their respective insurers’ denial of coverage for losses resulting from restrictions mandated by city and state executive orders. Each of the plaintiffs had an all-risk commercial property insurance policy with business interruption coverage that required “direct physical loss of or damage to” insured property.[39] The plaintiffs claim they suffered loss or damage from “physical, detrimental alterations” they were forced to make to their properties in order to comply with executive orders issued by the city and state.^[40] With respect to the initial shutdown orders, the plaintiffs claim:

The restrictions … detrimentally altered and directly and physically impaired Plaintiffs’ properties. Dining rooms were physically blocked off or reconfigured as staging areas for take-out, delivery, or other drastically reduced services. Collectively, vast amounts of square footage in Plaintiffs’ properties were rendered fully or partially nonfunctional for their intended purposes.^[41]

The restaurants that remained open for take-out or delivery service through the shutdown executive orders had to “physically manipulate tables [and] chairs,” “install plexiglass or other makeshift barriers,” and place markers throughout the property to encourage six feet of separation by customers as they entered the properties to pick up their orders.^[42]

With respect to the more recent directives from the city and state, which permitted limited outdoor dining as of June 22, the plaintiffs claim:

Restaurants reopening for outdoor dining service must make a number of detrimental physical changes to their outdoor spaces, including (i) moving each table at least six feet away, …or erecting physical barriers where distancing is infeasible, (ii) physically demarcating six feet of spacing in any customer lines, and (iii) providing physically separate entrances and exits for customers and employees, where possible.^[43]

As these excerpts show, the plaintiffs’ theory of property damage in this latest complaint relies largely on the physical alterations to their property that were required in order to comply with governmental restrictions, rather than on loss of access to the property. Whether other plaintiffs will follow suit, and whether this approach gains any traction with the courts, remains to be seen. The outcome is likely to depend on, among other things, (i) whether physical alterations that are not themselves caused by the virus, but rather are made voluntarily by an insured in order to facilitate continued operations, are held to constitute “direct” physical damage, and (ii) whether the nature and extent of the alterations are sufficient to constitute physical damage or loss (e.g., are the alterations permanent, irreversible structural changes or simply the temporary rearrangement of tables and chairs or installation of plexiglass dividers?). Ultimately, it may not matter that the plaintiffs’ premises were rendered “nonfunctional for their intended purpose” if the court finds, as the courts did in Social Life and Gavrildes, that even a complete loss of access is not enough to overcome the physical damage hurdle. Kramer Levin continues to monitor this action and others, as well as COVID-19-related legislative developments throughout the country.

^[1] _{See Randy Paar, The Elements of a Business Interruption Claim, 2 No. 7 E-Commerce & Tech. 13 (Apr. 30, 2002).} 

^[2] _{E.g., Litigation Issues in the Midst of COVID-19, Mar. 25, 2020, https://www.kramerlevin.com/en/perspectives-search/covid-19-update-litigation-issues-in-the-midst-of-covid-19.html; The Insurance Industry in the Time of COVID-19: Transactional Considerations and Regulatory Developments, Apr. 23, 2020, COVID-19 Webinar Series, https://www.kramerlevin.com/images/content/5/9/v2/59986/Kramer-Levin-s-COVID-19-Webinar-Series-Insurance-Industry-in.pdf.}

^[3] _{A.B. 1552, 2020 Reg. Sess. (Cal. 2020). California’s bill, unlike most others, would permit insurers to decline coverage where the policy contains an explicit exclusion for viruses.}

^[4] _{H.B. 858, 2020 Reg. Sess. (La. 2020); S.B. 477, 2020 Reg. Sess. (La. 2020).}

^[5] _{S.D. 2655, 191st Gen. Court (Mass. 2020).}

^[6] _{H.B. 5739, 100th Assemb. Reg. Sess. (Mich. 2020).}

^[7] _{A. 3844, 219th Assemb. Reg. Sess. (N.J. 2020).}

^[8] _{A. 10226, 2020 Reg. Sess. (N.Y. 2020); S.B. 8211, 2020 Reg. Sess. (N.Y. 2020).}

^[9] _{H.B. 589, 133rd Assemb. Reg. Sess. (Ohio 2020).}

^[10] _{H.B. 2372, 2020 Reg. Sess. (Pa. 2020); S.B. 1114, 2020 Reg. Sess. (Pa. 2020); S.B. 1127, 2020 Reg. Sess. (Pa. 2020); H.B. 2759, 2020 Reg. Sess. (Pa. 2020).}

^[11] _{H. 8079, 2020 Reg. Sess. (R.I. 2020); H. 8064, 2020 Reg. Sess. (R.I. 2020).}

^[12] _{S.B. 1188, 123rd Assemb. Reg. Sess. (S.C. 2020).}

^[13] _{A provision forcing business interruption insurance payments was included in the Coronavirus Omnibus Emergency Amendment Act of 2020 but was ultimately withdrawn. See Hailey Ross, DC backs off plan to force insurers to pay certain business interruption claims, S&P Global (May 5, 2020), https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/dc-backs-off-plan-to-force-insurers-to-pay-certain-business-interruption-claims-58457431.}

^[14] _{See Elizabeth Blosfield, Proposed N.J. Bill Would Require Insurers to Pay COVID-19 Business Interruption Claims, Insurance Journal (Mar. 19, 2020), https://www.insurancejournal.com/news/east/2020/03/19/561643.htm.}

^[15] _{Hunton Andrews Kurth, COVID-19 Complaint Tracker, https://www.huntonak.com/en/covid-19-tracker.html.}

^[16] _{MDL No. 2942, Order Denying Transfer and Directing Issuance of Show Cause Orders, at 2-3 (Aug. 12, 2020).}

^[17] _{See Randy Paar, The Elements of a Business Interruption Claim, 2 No. 7 E-Commerce & Tech. 13 (Apr. 30, 2002) (“[T]ypical ‘all risk’ policy language provides insurance ‘against all risks of direct physical loss or damage to the property described in Paragraph 1 from any external cause.’”).}

^[18] _{This is sometimes alleged in an effort to avoid a viral exclusion in the policy.}

^[19] _{Case No. 1:20-cv-03311 (S.D.N.Y.).}

^[20] _{Complaint ¶ 16.}

^[21] _{Id. ¶ 19.}

^[22] _{Id. ¶ 21.}

^[23] _{Transcript of Teleconference Order to Show Cause, at 8.}

^[24] _{Id. at 15.}

^[25] _{Case No. 20-000258-CB.}

^[26] _{The videoconference can be viewed at https://www.youtube.com/watch?v=Dsy4pA5NoPw&feature=youtu.be.}

^[27] _{Case No. 2020 CA 00424 B.}

^[28] _{Complaint ¶¶ 98-99. The “income protection coverage” provided by the plaintiffs’ policies covered “loss of ‘income’ and/or ‘rental income’ you sustain due to partial or total ‘interruption of business’ resulting directly from ‘loss’ or damage to property on the premises described in the ‘Declarations’ from a peril insured against.” Id. ¶ 90. The term “peril insured against” was defined as any “direct physical ‘loss’, except ‘loss’ as excluded or limited in [the] policy.” Id. ¶ 95.}

^[29] _{Order Denying Plaintiff’s Motion for Summary Judgment and Granting Defendant’s Cross-Motion for Summary Judgment, at 5.}

^[30] _Id.

^[31] _{Case No. 6:20-cv-03127.}

^[32] _{Amended Complaint ¶ 60. The plaintiffs’ policies provided business interruption coverage for loss of income sustained “due to the necessary ‘suspension’ of your ‘operations’ … caused by direct ‘loss’ to property at a ‘premises’ caused by or resulting from any Covered Cause of Loss.” “Covered Cause of Loss” was defined as “accidental physical loss or accidental physical damage.” Order dated Aug. 12, 2020 (Dkt. #40), at 2.}

^[33] _{Id. at 7.}

^[34] _{Id. at 8.}

^[35] _{Id. at 9-10, citing Hampton Foods, Inc. v. Aetna Cas. & Sur. Co., 787 F.2d 349 (8th Cir. 1986) (finding physical loss based on risk of building collapse from windstorm or heavy snow); Mehl v. The Travelers Home & Marine Ins. Co., Case No. 16-CV-1325-CDP (E.D. Mo. May 2, 2018) (spider infestation may be direct physical loss); Port Auth. of New York and New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226, 236 (3d Cir. 2002) (acknowledging that asbestos contamination may constitute physical loss but denying coverage where building “continue[d] to function” and “ha[d] not lost its utility”); Prudential Prop. & Cas. Ins. Co. v. Lilliard-Roberts, CV–01–1362–ST, 2002 WL 31495830 (mold damage may be direct physical loss); General Mills, Inc. v. Gold Medal Ins. Co., 622 N.W.2d 147, 152 (Minn. Ct. App. 2001) (finding physical loss where food product was contaminated by pesticide).}

^[36] _{Id. at 12. Regarding Social Life Magazine, the court stated: “Defendant argues that ‘Social Life famously states that the virus damages lungs, not printing presses.’ . . . But the present case is not about whether COVID-19 damages lungs, and the presence of COVID-19 on premises, as is alleged here, is not a benign condition.” Regarding Gavrildes Management Company, the court found the case “distinguishable, in part, because the court recognized that ‘the complaint also states a[t] no time has Covid-19 entered the Soup Shop of the Bistro . . . and in fact, states that it has never been present in either location.’”}

^[37] _{In recent days, at least two other courts have ruled in favor of insurers on similar grounds, without citing any of the cases discussed above. See Diesel Barbershop, LLC v. State Farm Lloyds, Case No. 5:20-cv-461 (W.D. Texas), Order dated Aug. 13, 2020 (Dkt. #29) (policy covering “accidental direct physical loss to Covered Property” required a “distinct, demonstrable physical alteration of the property”; claim was also barred by virus exclusion); The Inns By The Sea v. California Mutual Insurance Company, Case No. 20CV001274 (Cal. Super. Ct.), Order dated Aug. 6, 2020 (plaintiff’s allegations failed to show its business income loss was caused by “direct physical loss of or damage to property”).}

^[38] _{Case No. 514089/2020.}

^[39] _{Complaint ¶ 19.}

^[40] _{Id. ¶ 1.}

^[41] _{Id. ¶ 5.}

^[42] _{Id. ¶ 6.}

^[43] _{Id. ¶ 12.}