By March 16, 2020, Americans were only beginning to fully appreciate the dangers of COVID-19 and the extent of its potentially disruptive impact.  On that date, all 50 states had reported at least one coronavirus case, New York City closed the country’s largest school system, and S&P took a 12% tumble. But March 16, 2020, also happened to mark the beginning of the ongoing dust-up between insurers and policyholders as to whether COVID-related losses are covered under “business interruption” (BI) coverage provisions in many commercial property insurance policies.

On that day, Cajun Conti, LLC, owner of a French Quarter bistro in New Orleans, filed suit against Lloyd’s in Orleans Parish Civil District Court (No. 2020-02558) seeking a declaratory judgment of coverage for any COVID-related business interruption the restaurant would face. Since then, at least 1,538 lawsuits over the availability of BI coverage have been filed in state and federal courts throughout the country according to the University of Pennsylvania Carey Law School’s “COVID Coverage Litigation Tracker” service.^[1] The actual number of cases may be somewhat higher or lower, as many state court systems do not use especially robust or open electronic filing systems (complicating tracking efforts), but, regardless, the extent of litigation has been remarkable.

A large majority of these cases have been brought in federal court based on diversity jurisdiction. Many of the insurer-defendants have filed early motions to dismiss for failure to state a claim. In federal courts, insurers have prevailed in obtaining either full or partial dismissals in 173 of the 188 motions to dismiss filed and adjudicated to date. Policyholders have fared much better in state court, where courts have denied roughly 49% of known motions to dismiss to date. Collectively, though, insurers are currently enjoying an 80% success rate on motions to dismiss across state and federal courts.

Importantly, roughly two-thirds of the successful motions to dismiss noted above have involved policies that feature exclusion for losses resulting from communicable diseases like viruses or bacteria. Such exclusions, which were added to policies by carriers in the early 2000s as a response to the SARS outbreak of that period, generally provide something to the effect that: “[The insurer] will not pay for loss or damage caused by or resulting from any virus, bacterium, or another microorganism that induces or is capable of inducing physical distress, illness or disease.” ISO form CP 01400706). The figures above suggest that the presence of such exclusions in a policy has precluded a considerable portion of plaintiffs from moving forward with BI claims for COVID-related losses. On the other hand, an appreciable number of BI coverage cases brought in the past year have involved policies that either did not contain such exclusions or contained virus exclusions that were arguably ambiguous as applied to the facts of a given loss.

Another hurdle for policyholders seeking BI coverage for COVID-19 related losses has been alleging a “direct physical damage or loss” as required under many of the policies. BI insurance generally only applies where a business has to suspend operations due to a “physical loss or damage” resulting from specific perils, such as fire, theft, vandalism, or natural disasters. While some courts construe the phrase “physical loss/damage” to mean the loss or impairment of covered property’s “use” or habitability, others adopt a more narrow approach, interpreting “physical loss” to mean some type of tangible harm or alteration to property’s physical integrity or condition. Policyholders have an uphill battle in jurisdictions applying the latter approach. For example, the first substantive BI coverage litigation order this year involved a luxury magazine publisher seeking BI coverage for lost revenues it sustained due to COVID-19. The insured sought a preliminary injunction on the grounds that it would not be able to meet its planned print run without proceeds from its insurance policy, but U.S. District Judge Valerie Caproni denied the motion, pointing out that the virus “damages lungs. It doesn’t damage printing presses.” Social Life Magazine, Inc. v. Sentinel Insurance. Co. Ltd., No. 20 C 3311 (S.D.N.Y. 2020), ECF No. 25, Ex. B at 5:3-4.

A more recent decision in favor of an insurer also underscores the preclusive effect of both policy virus exclusions and “physical loss” requirements well. In Kessler Dental Associates, P.C. v. The Dentists Insurance Company, No. 2:20-cv-03376-JDW, Dkt. No. 18 (E.D. Pa. Dec. 07, 2020), U.S. District Judge Joshua D. Wolson granted an insurer’s motion to dismiss claims for BI and Civil Authority coverage brought by Kessler Dental, Phoenixville, PA dental practice. Kessler Dental’s policy provided that the insurer would pay for “direct physical loss of or physical damage to covered property, subject to all limitations and exclusions….” Id. at 2. The policy further excluded from coverage any “loss or damage, including economic loss, caused by” any “virus, bacteria or another microorganism that cause or could cause physical illness, disease or disability….” Id. at 3. The Kessler court determined that this exclusion unambiguously “applies to Covid-19, which is caused by a coronavirus that causes physical illness and distress.” Id. at 6.

The Kessler court went on to state that the insurer’s motion to dismiss was due to be granted even in the absence of the virus exclusion because of the BI coverage part’s “direct physical loss of or physical damage” requirement. According to the court, this provision made clear that “there must be some sort of physical damage to the property” to trigger BI coverage. Id. at 9. Construing the plain meaning of the undefined term “physical damage”, the Kessler court stated: “[P]hysical damage to property means ‘a distinct, demonstrable, and physical alteration’ of its structure. Allegations of physical damage to a building from ‘sources unnoticeable to the naked eye must meet the highest threshold.’” Id. at 9 (internal quotations and citations omitted).

Finally, the Kessler court also noted that the plaintiff did not even “allege that COVID-19 was present on its premises or that it made the structure unusable.” Id. This omission has proven to be another common fatal flaw courts have perceived in complaints filed to date. For example, a similar result was reached by a case from the U.S. District Court for the Western District of Pennsylvania, 1 S.A.N.T., Inc. v. Berkshire Hathaway, Inc. No. 2:20-cv-0862 (W.D. Pa. Jan. 17, 2021). There, the court held that a restaurant that had limited its operations to take-out orders did not sustain a “direct, physical loss” required under the policy. The court held that it was beyond “reasonable question” that the policy “presuppose[d] that the request for coverage stems from an actual impact to the property's structure, rather than the diminution of its economic value because of governmental actions that do not affect the structure.” Id. The court noted that the insured did not allege “that someone has been infected, that COVID-19 was present in the building or that the building even closed because of the ubiquitous presence of the virus (it remained open for takeout operations)….” In other words, a growing number of courts are rejecting the notion that mere allegations of the coronavirus’ “ubiquity” or physical nature are sufficient to survive motions to dismiss. It appears plaintiffs who can prove the virus was detected on the premises, or that staff, customers, and the like became infected, generally fare better in the early stages of coverage litigation for this reason.

From the policyholder perspective, the more pro-insured decisions over COVID coverage matters have come from courts in Missouri, North Carolina,^[2] Nevada, Virginia,^[3] and Washington.^[4] At least one state or federal court in these jurisdictions has rejected insurer motions to dismiss in BI coverage cases, concluding that insureds have alleged: “plausible” claims to support a “direct physical loss.”

The first pro-insured decision came from the U.S. District Court for the Western District of Missouri. In Studio 417, Inc. v. Cincinnati Insurance Company, No. 6:20-cv-03127-SRB (W.D. Mo. Aug. 12, 2020), a hair salon and group of restaurants brought a proposed class action against Cincinnati Insurance Company seeking coverage for BI and related coverage parts (e.g., Civil Authority coverage), each of which required a showing of a “direct physical loss/damage.” The plaintiffs alleged that the coronavirus constituted a “physical substance” that is both “active on inert physical surfaces” and “emitted into the air”, qualities that “render[] physical property … unsafe and unusable” and forced the plaintiffs to “suspend or reduce business” at their premises given the “likelihood” that persons infected with COVID-19 had entered their premises in the preceding months. U.S. District Judge Stephen R. Bough denied the insurer’s motion to dismiss and permitted the parties to proceed with discovery, holding that the plaintiffs arguably suffered a “direct physical loss” as set forth in relevant policy provisions. The term “loss” was not defined in the policies, but the court noted that the ordinary meaning of the term encompasses “the act of losing possession” and “deprivation”. According to the court, the plaintiffs sufficiently alleged that the virus had a physical presence at the plaintiffs’ premises and rendered it unsafe and unusable.

More recently, a Nevada state-court judge cited Studio 417 with approval in denying a motion to dismiss filed by Starr Surplus Lines Insurance Company in a BI coverage case initiated by JGB Vegas Retail Lessee LLC, the owner of Las Vegas’ Grand Bazaar open-air mall. JGB Vegas Retail Lessee LLC v. Starr Surplus Lines Insurance Co., No. A-20-816628 (Clark Cnty., Nev. Dist. Ct. Nov. 30, 2020). The insured alleged certain “known facts about the coronavirus, including that it spreads through infected droplets that ‘are physical objects that attach to and cause harm to other objects’ based on its ability to ‘survive on surfaces’ and then infect other people.” Id. at 3. The complaint further alleged that: (a) it was “highly likely that the novel coronavirus that causes COVID-19 has been present on the premises of the Grand Bazaar Shops, thus damaging the property JGB had leased to its tenants”; and (b) “because the presence of COVID-19 at or near the Grand Bazaar Shops and [Nevada] Governor Sisolak’s March 20, 2020 Order restricting and prohibiting access to non-essential business, the Grand Bazaar Shops were forced to close and the few restaurants that remained open were severely limited in their operations, resulting in significant losses.” Id. at 3-4.

Citing Studio 417 and other state and federal cases that have allowed policyholders to proceed with claims for BI coverage,^[5] Judge Mark Denton of Nevada’s Clark County District Court ruled that the Complaint “sufficiently allege[d] losses stemming from the direct physical loss and/or damage to property from COVID-19 to trigger Starr’s obligations under [applicable BI and civil authority coverage parts].” The court further held that a “Pollution and Contamination” exclusionary clause in the policy did not unambiguously exclude coverage for the insured’s loss for the purposes of the motion to dismiss, as the insured’s interpretation of the exclusion as only applying to “traditional environmental and industrial pollution and contamination” rather than a “naturally-occurring, communicable disease” appeared “reasonable.” Id. at 5.

Ultimately, the presence of clearly worded virus exclusions and “physical loss/damage” coverage requirements in relevant policies have remained difficult for policyholders seeking BI coverage to overcome. The Cajun Conti case from New Orleans, which kicked off the wave of BI coverage litigation, recently culminated in the first-ever bench trial over such a case. Despite the fact that the policy at issue in Cajun Conti contained no virus exclusion, the trial resulted in a judgment in the insurer’s favor. While the court did not include a written legal opinion along with its February 10, 2021 judgment, the outcome suggests that the court agreed with the main argument the insurer brought at trial—that the virus itself causes no property damage within the meaning of relevant policy provisions. As COVID-related BI coverage litigation continues into 2021, insurers will no doubt continue relying on the plain language of relevant coverage parts, exclusions, and/or limitations as bars to BI coverage, while insureds will likely advocate for potential policy ambiguities with respect to policy language should be construed in the insured’s favor. The merits of these competing coverage positions must be carefully evaluated on a case-by-case basis, examining the facts of a given loss, the policy language at issue, and specific governing law.

[1] https://cclt.law.upenn.edu/.

[2] North State Deli LLC v. The Cincinnati Ins. Co., No. 20-CVS-02569 (N.C. Super. Ct., Durham Cty. Oct. 7, 2020).

[3] Elegant Massage, LLC v. State Farm Mut. Auto. Ins. Co., No. 2:20-cv-265 (E.D. Va., Dec. 9, 2020).

[4]  Perry St. Brewing Co., LLC v. Mut. of Enumclaw Ins. Co., No. 20-2-02212-32 (Wash. Super. Ct., Spokane County, Nov. 23, 2020).

[5] Namely: Optical Servs. USA/JCI v. Franklin Mut. Ins. Co., No. BER-L-3681-20, 2020 WL 5806576 (N.J. Super. L. Aug. 13, 2020); Blue Springs Dental Care, LLC v. Owners Ins. Co., No. 20- cv-00383, 2020 WL 5637963 (W.D. Mo. Sept. 21, 2020).