The COVID-19 pandemic has caused a wave of business interruption lawsuits, particularly between policyholders and their insurance companies. Initially, the nationwide trend was in favor of insurance companies, but recent decisions confirm that policyholders are gaining traction.

Policyholder arguments gather steam in court

One of the pioneer lawsuits, for example, recently survived a summary judgment motion. In Cajun Conti LLC v. Certain Underwriters at Lloyd’s of London, No. 2020-02558 (La. Civ. Dist. Ct., Orleans Parish, Nov. 4, 2020), the policyholder, a restaurant group, sought a judgment declaring that its insurance company should cover losses related to an order entered by Louisiana’s governor banning gatherings of 250 people or more. This caused the restaurants to operate at 50 percent capacity and cease service by 9 p.m. On November 4, 2020, the Louisiana state court denied the insurance company’s motion for summary judgment after finding the following four issues of material fact:

(1) Whether COVID-19 constitutes direct physical loss or damage;

(2) Whether the policy interests necessitate a more liberal reading of prior case law;

(3) If COVID-19 constituted a physical loss or damage, whether COVID-19 impacts the environment;

(4) In the context of civil authority coverage, whether COVID-19-related damages to property at another location within one mile of any of the restaurants is a covered cause of loss.

Likewise, a Pennsylvania state court overruled the insurance company’s motion to dismiss a tavern’s complaint for business interruption coverage because “at this very early stage, it would be premature for this court [to] resolve the factual determinations put forth by defendant to dismiss plaintiff’s claims.” Taps & Bourbon on Terrace, LLC v. Those Certain Underwriters at Lloyd’s, London, No. 00375 (Pa. Ct. Com. Pl. Phila. Cnty. Oct. 27, 2020) (emphasis added). The complaint alleged that the tavern sustained business losses resulting from “the COVID-19 pandemic and . . . state and local orders mandating that all non-essential businesses be temporarily closed.” The order also recognized that “the law and facts are rapidly evolving in the area of COVID-19-related business losses.”

Interpretation of “physical loss of or damage to” property

One area of law that has developed is the interpretation of the phrase “physical loss of or damage to” property, which is commonly found in policies at issue in COVID-19 business interruption cases. Noting the import of the disjunctive “or” in the phrase “physical loss of or damage to” property, the court in Hill and Stout PLLC v. Mutual of Enumclaw Insurance Company, No. 20-2-07925-1 (Wash. Super. Ct. King Cnty. Nov. 3, 2020) held that the policy provided alternative means for coverage: (1) physical loss of property (the Physical Loss Option) and (2) damage to property (the Damage Option). The Washington state court found the Physical Loss Option ambiguous and, consequently, construed it in favor of the policyholder. Under this interpretation, the court concluded that a dental practice’s alleged inability “to see patients and practice dentistry” sufficed to trigger the Physical Loss Option for coverage under the policy.

The rationale in Hill and Stout is important, particularly in light of the recent pro-insurance company decisions that fail to recognize that the phrase provides for alternative means for coverage. Focusing solely on the Damage Option, many courts require a “distinct, demonstrable, physical alteration” of the property and reject loss of functionality to trigger business interruption coverage under similar policies. See, for example, Musso & Frank Grill Co. Inc. v. Mitsui Sumitomo Ins. USA Inc., No. 20STCV16681 (Cal. Sup. Ct. Los Angeles Cnty. Nov. 9, 2020) (“Losses from inability to use property do not amount to direct physical loss of or damage to property; ‘there must be a “distinct, demonstrable, physical alteration” of the property’[.]”); Water Sports Kauai, Inc. v. Fireman’s Fund Ins. Co., No. 3:20-cv-03750, 2020 U.S. Dist. LEXIS 209547 (N.D. Cal. Nov. 9, 2020) (rejecting as unpersuasive the policyholder’s argument that loss of use constitutes direct physical loss of or damage to covered properties because it lacks a “material” and “physical” alteration of the covered property). These courts unfortunately conflate distinct coverage triggers and functionally ignore the separate loss trigger.

Relatedly, allegations of the presence of physical particles of COVID-19 within a business sufficiently allege “physical loss of or damage to” covered property. See Dino Palmieri Salons, Inc. v. State Auto. Mut. Ins. Co., No. CV-20-932117 (Ohio Ct. Com. Pl. Cuyahoga Cnty. Nov. 17, 2020). In denying the carrier’s motion to dismiss, the Ohio trial court found: “[T]he cases on which Defendant relies to argue that this case should be decided at the Motion to Dismiss stage were either decided after the Court had the opportunity to consider evidence; or did not include allegations that plaintiffs’ losses were attributable to the physical presence of COVID-19; or involved policies with a specific virus exclusion; or did not involve a virus at all, or did not allege direct physical harm.” Id.

Virus exclusions

Also important in any analysis is causation; the novel coronavirus (SARS-CoV-2), the COVID-19 pandemic, and the state closure orders can be deemed as “separate things” that do not fall under the meaning of “virus” in the context of a policy exclusion. See Independence Barbershop, LLC v. Twin City Fire Ins. Co., No. 1:20-cv-00555 (W.D. Tex. Nov. 4, 2020). Although not the ultimate reason why the carrier’s motion to dismiss was denied (the Texas federal judge held that at least some coverage might be available under a limited virus coverage endorsement, which allowed for 30 days of business interruption coverage for property loss or damage caused by a virus), the court rejected the carrier’s “conflation of COVID-19 and the ‘virus’” because the COVID-19 pandemic and the state closure orders are separate and apart from the virus itself. Under this interpretation, allegations that business interruption losses were caused by the pandemic or state closure orders would not fall under the meaning of “virus” as it related to the limited virus coverage endorsement at issue.

The reasoning of Independence Barbershop conflicts with the recent decisions in West Coast Hotel Management, LLC v. Berkshire Hathaway Guard Insurance Company, No. 220CV05663VAPDFMX, 2020 WL 6440037, at *6 (C.D. Cal. Oct. 27, 2020) and Chattanooga Professional Baseball LLC v. National Casualty Company, No. CV-20-01312-PHX-DLR, 2020 WL 6699480, at *3 (D. Ariz. Nov. 13, 2020). In West Coast Hotel, the court determined that the virus exclusion precluded coverage and wrote, “[e]ven if Plaintiffs were to argue that their losses were caused solely by the Executive Orders and not ‘directly or indirectly’ by the virus, Plaintiffs have already admitted that the Orders were issued to ‘halt the physical spread of COVID-19.’” 2020 WL 6440037, at *6. Likewise, in Chatanooga Professional Baseball, the court observed “[t]here is no allegation in the complaint that absent the pandemic, the government would have been prompted to issue stay-at-home orders or otherwise inhibit access to the ballparks,” citing two other cases in support of its belief that “[s]imilar COVID-19 causation arguments have been consistently rejected.” 2020 WL 6699480, at *3. Using the interpretation suggested in Independence Barbershop, however, a virus exclusion does not necessarily bar coverage when a business shuts down to sanitize after it was visited by someone infected with the virus, or due to government closure orders to curb the spread of “a disease caused by a virus” because the pandemic and state closure orders can be distinguished from the virus itself.

These decisions reflect a growing body of case law supporting a policyholder’s right to receive pandemic-related or closure-order-related business interruption coverage. We will continue to track these developments and provide additional updates as warranted. To make sure that you receive timely updates, please subscribe to this blog by submitting your email address above.