State Supreme Courts Find No Coverage for COVID-19 Business Interruption Claims
On April 21, 2022, the Supreme Judicial Court of Massachusetts affirmed the dismissal of restaurant operators’ COVID-19 business interruption claim and concluded that “direct physical loss of or damage to” property “requires some ‘distinct, demonstrable, physical alteration of the property.’” An overview of the court’s opinion can be found here. The case is Verveine Corp., et al. v. Strathmore Ins. Co., et al.
On April 22, 2022, the Supreme Court of Iowa issued two decisions affirming the dismissal of businesses’ COVID-19 business interruption claims and holding that loss of use does not constitute “direct physical loss of or damage to” covered property. A summary of the Iowa opinions can be found here. The cases are Wakonda Club v. Selective Ins. Co. of Am. and Jesse’s Embers, LLC v. Western Agric. Ins. Co.
Courts Dismiss COVID-19 Business Interruption Claims
On April 22, 2022, the Eighth Circuit affirmed the dismissal of a putative COVID-19 business interruption class action brought by a restaurant owner and operator and a dental practice. The court held the plaintiffs failed to allege “that anything physical happened to [their] properties” and rejected the plaintiffs’ attempt to distinguish “between ‘loss of’ and ‘damage to’ property.” Order at 3-4. The case is Monday Rests. v. Intrepid Ins. Co.
On April 20, 2022, the Ninth Circuit affirmed the district court’s dismissal of several gentlemen’s clubs’ COVID-19 business interruption complaint against Beazley Underwriting Limited. The court found the claim was foreclosed by Inns by the Sea v. California Mutual Insurance Co., 286 Cal. Rptr. 3d 576 (Cal. Ct. App. 2021). Order at 3. The loss of use was not covered under the provisions for direct physical loss. Id. at 5. Additionally, the plaintiffs’ reliance on exclusions to invoke coverage “violates firmly established California law.” Id. The case is Rialto Pockets, Inc. v. Beazley Underwriting Ltd.
On April 15, 2022, the Ninth Circuit affirmed the district court’s dismissal of a casino’s COVID-19 business interruption complaint against AIG Specialty Insurance Company. The court found the casino failed to plausibly allege direct physical damage to the property. Order at 3. Even though the casino alleged that the coronavirus was present on its property, “it has not identified any direct physical damage to its property caused by the virus which led to the casino’s closure.” Id. Relying on Inns-by-the-Sea v. California Mutual Insurance Co., 71 Cal. App. 5th 688, 699 (2021), review denied (Mar. 9, 2022), the court held the casino likewise failed to plead it suffered a direct physical loss because its “argument that the presence of the virus rendered its property uninhabitable improperly ‘collapses coverage for ‘direct physical loss’ into ‘loss of use’ coverage.” Id. The reference to an “interruption” period also supported the proposition that loss of use requires a “distinct, demonstrable, physical alteration of the property.” Id. at 4. Finally, the plaintiff did not allege it was permanently dispossessed of its property, so the claim was not covered. Id. at 5. The case is Circus Circus LV, LP v. AIG Specialty Insurance Co.
On April 21, 2022, California’s Second District Court of Appeal affirmed the dismissal of a restaurant’s business interruption complaint related to COVID-19. The court said: “At this point, there is no real dispute. Under California law, a business interruption policy that covers physical loss and damages does not provide coverage for losses incurred by reason of the COVID-19 pandemic.” Order at 8. The court said it was reminded “insurers calculate and pool the risks of covered damage to property. To suddenly add non-physical losses caused by a pandemic would give policyholders more than they bargained for and dramatically affect the insurers’ financial obligations.” Id. at 9 n.2. Thus, the Court held the restaurant “did not suffer any physical alteration of its property, and its closure was not based on any physical loss or damage.” Id. at 10. Even if it had, the virus exclusion “clearly applied.” Id. The case is Musso & Frank Grill Co. v. Mitsui Sumitomo Insurance USA Inc.
On April 22, 2022, the Court of Appeal of California, Second Appellate District, affirmed the dismissal of a talent agency’s COVID-19 business interruption claim. The court concluded that “mere loss of use of physical property to generate business income, without any other physical impact on the property, does not give rise to coverage for direct physical loss,” and therefore found that the plaintiff’s allegations of loss of use due to closure orders and other pandemic-related limitations was insufficient to establish “direct physical loss or damage.” Opinion at 18. The court further “agree[d] with the majority of the cases finding that the presence or potential presence of the virus does not constitute direct physical damage or loss,” as the presence of the virus “does not render a property useless or uninhabitable, even though it may affect how people interact with and within a particular space.” Id. at 24-25. The case is United Talent Agency v. Vigilant Ins. Co.
On April 18, 2022, the district court for the District of Rhode Island granted Twin City Fire Insurance Company’s motion to dismiss a catering business’ COVID-19 business interruption claim. The court concluded that the plaintiff’s losses due to COVID-19 did not result from a covered cause of loss, and rejected the plaintiff’s argument that its COVID losses resulted from a “civil commotion.” Order at 6. Therefore, “because any losses incurred by [the plaintiff] do not pertain to a specified caused of loss, they have no claim.” Id. at 7. The case is M & N Food Serv., LLC v. Twin City Fire Ins. Co.
On April 20, 2022, the district court for the Middle District of Pennsylvania granted Cincinnati Casualty Insurance Company’s motion to dismiss a restaurant’s COVID-19 business interruption claim, adopted a magistrate judge’s report and recommendation and overruled objections to the report and recommendation. The court concluded that the plaintiff failed to show error in the magistrate’s determinations that the coronavirus does not cause direct physical loss and that government shutdown orders do not cause direct physical loss. Order at 1-2. The case is State Street Rest. Grp., Inc. v. Cincinnati Cas. Co., et al.
New Business Interruption Suits Against Insurers:
Several real estate managers sued Affiliated FM Insurance Company in New York state court (New York County) for breach of contract for losses related to COVID-19 business interruption. The plaintiffs allegedly had an “all-risk” policy with business interruption, civil or military authority, communicable disease, and ingress/egress coverage. Complaint ¶¶ 3, 56–57. They claim the coronavirus was physically present in their properties when the civil authority orders were issued closing the properties. Id. ¶ 66. The presence of the virus constitutes physical loss and physical damage, according to the plaintiffs. Id. ¶ 67. The case is Broadwall Management Corp. v. Affiliated FM Insurance Co.
For further information, please contact:
Laura Foggan, Partner, Crowell & Moring
