The ongoing COVID-19 pandemic has impacted the United States economy in a profoundly negative manner. Retail stores, restaurants and other direct-customer-facing businesses have been especially hard hit. Throughout the U.S., most states and municipalities have at various points throughout the pandemic issued “shut down” orders to businesses in order to mitigate the spread of the virus. Businesses complied and suffered tremendous losses as a result. As we forecasted, many businesses subsequently filed claims with their commercial liability insurers, typically claiming that their losses are covered under the “business interruption” or the “civil authority” provisions of their policies. Those provisions are generally intended to provide coverage as follows:
- Business Interruption Coverage: covers loss of business income sustained due to suspension of business operations due to “direct physical loss” or “direct physical damage”; and
- Civil Authority Coverage: covers loss of business income sustained when access to the insured property is prohibited by order of a civil authority as a result of “direct physical loss” or “direct physical damage” to properties adjacent to the insured property which prevent the insured from accessing the property.
By and large, insurers disagreed that the COVID-19 pandemic and resulting shutdown orders caused losses that were covered under either of those coverage provisions, and denied these claims. Many businesses responded by filing declaratory judgment actions seeking judicial determinations that their insurers improperly denied coverage. In a previous client alert, we reported that businesses started filing suit against their insurers as a result of coverage denials in March 2020; since then, more than 800 cases have been filed across the country.
To date, however, courts have largely disagreed with insured businesses, finding that COVID-19 does not cause “direct physical loss” or “direct physical damage” under either coverage provision. Other suits have been decided in favor of insurers because the policies specifically included virus exclusions, and courts have held that COVID-19 is within the scope of the exclusion. However, there have been notable exceptions in the Western District of Missouri (where the insured business alleged the presence of COVID-19 on its property) and some state courts in New Jersey, North Carolina, and Pennsylvania. This client alert provides an overview of the COVID-19 decisions that have emerged, and the reasoning behind them. Finally, we also summarize the status of the plaintiffs’ attempts to centralize dozens of COVID-19-related lawsuits into a multi-district litigation (MDL).
REQUIREMENT TO SHOW PHYSICAL DAMAGE OR LOSS
As noted above, most insureds sought coverage under the business interruption or civil authority clauses of their insurance policies. Both clauses typically require the insured to show that their property or surrounding properties have suffered direct physical loss or damage. To date, most courts have dismissed COVID-19 business interruption suits under both coverage provisions, finding that the presence of COVID-19 does not qualify as physical loss or damage. We examine each of these in more detail below.
Business Interruption Coverage For an insured to recover for a business interruption, most commercial liability policies require a showing of physical damage or loss to the insured’s property. In the context of COVID-19, most courts have concluded that the presence of COVID-19 virus particles does not constitute physical loss or damage within the meaning of the policy.[1] Judge Valerie E. Caproni in the Southern District of New York succinctly summed up the gist of those decisions as follows: “[the virus] damages lungs. It doesn’t damage printing presses.” Transcript at 5:3-4, Social Life Magazine, Inc. v. Sentinel Ins. Co., No. 20 Civ. 3311 (VEC) (S.D.N.Y. May 14, 2020).
Civil Authority Coverage Insureds impacted by COVID-19 business closures argue that their business interruption is covered under the civil authority provisions in their policies. Such provisions typically cover income losses arising from restrictions to access of insured premises by a government or civil authority. However, civil authority coverage also requires a showing of physical loss or damage that prevents access to the insured’s property, albeit usually to properties that neighbor the insured’s property rather than the insured’s property itself. To date, courts considering civil authority coverage have also dismissed insureds’ claims, holding that the presence of COVID-19 by itself or an order from a civil authority standing by itself does not rise to the level of physical loss or damage within the meaning of civil authority coverage.[2] Courts have come to these decisions even in the face of arguments that the COVID-19 virus can linger on surfaces for up to 28 days.[3]
In at least one case, an insured argued that an “ingress/egress” coverage extension — which provides coverage where the insured cannot access the property — should provide coverage for COVID-19 business interruption losses.[4] However, like civil authority coverage, ingress/egress coverage typically requires a showing that physical loss or damage to neighboring property prevents access to the insured’s property, and courts have found that no coverage exists under that provision because insureds are unable to make that showing.[5]
COURTS’ APPLICATION OF THE VIRUS EXCLUSION
A few of the cases decided also involved virus exclusions, which were added to general liability policies in the wake of the SARS outbreak in the early 2000s. Typically, as the following example illustrates, virus exclusions are very broadly-worded:
[L]oss or damage caused “directly or indirectly” by “[a]ny virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”[6]
Where the virus exclusion is present, most courts — with at least one exception (see below) — have held that it operates to bar recovery for COVID-19-related business shutdowns.[7] Attempts to plead around the virus exclusion, including arguing that the business interruption was caused by the civil authority order and not COVID-19 itself, have been unsuccessful.[8] Urogynecology Specialist of Florida, LLC v. Sentinel Ins. Co. case is one of the exceptions.[9] There, the court ruled that it does not logically align to “group” COVID-19 with an exclusion which precludes coverage for other “pollutants” such as “fungi, wet rot, dry rot, bacteria or virus.”[10]
PHYSICAL DAMAGE OR LOSS: NOTABLE EXCEPTIONS
To date, two federal district courts (the Western District of Missouri and the Eastern District of Virginia) and two states (New Jersey and North Carolina) appear to have been the only federal courts to deny an insurer’s motion to dismiss based on the court’s determination of “physical loss” or “damage.”
The Western District of Missouri first considered the issue in Studio 417 v. The Cincinnati Insurance Company[11] (and later in Blue Springs Dental v. Owners Ins. Co.,[12] which followed the same rationale), the plaintiffs asserted that they were entitled to coverage under the business interruption and civil authority provisions of their insurance policy. For either coverage provision to apply, the plaintiffs needed to show “physical loss” or “physical damage,” but the policy did not define either term. See 2020 WL 4692385, at *4. The court held that, under a plain-meaning reading of the policy, “physical loss” can be interpreted to mean something intangible — such as COVID-19 — that renders a property unsafe or unstable to enter. See id., at *4-6. In support of its conclusion, the court noted that other courts have found that similar “intangible” conditions constitute physical loss to property, such as asbestos in the air, or where plaintiffs were able to show that a premise is unsafe to inhabit. See id., at *6.
The court also held that the plaintiff adequately alleged that neighboring businesses suffered “physical loss or damage” sufficient to trigger civil authority coverage under the policy for the same reason — that COVID-19 was also present at neighboring properties. See id., at *7. In addition, the court held that coverage was triggered even though the plaintiffs’ business was able to operate in a limited fashion, because the policy did not specify whether “all” or “some” access to the business needs to be prohibited to trigger civil authority coverage. See id.
It is important to note that the plaintiff in Studio 417 alleged that COVID-19 particles were “likely” present in the physical space. See id., at *6. The court focused on this allegation to distinguish Studio 417 from other cases in which no such allegation was made. As the case moves forward, the plaintiff may need to introduce evidence that COVID-19 was actually present on its property; it remains to be seen whether the plaintiff will be able to do so.
More recently, in Elegant Massage, LLC v. State Farm Mut. Auto. Ins. Co.,[13] the court analyzed Virginia case law and determined that “direct physical loss” has been interpreted in a number of different ways — from structural damage to rendering a property uninhabitable due to “invisible noxious gasses or toxic air particles.” See 2020 WL 7249624, at *8-9. The court determined that the meaning of “physical loss” was ambiguous, construed the term in favor of the insured, as required by state law where insurance policy terms are ambiguous, and denied the motion to dismiss on that ground. See id. at *10. The court also declined to apply the virus exclusion, because the plaintiff alleged that the governmental orders — and not the virus itself — caused their loss. See id. at *13.
Finally, New Jersey and North Carolina state courts have held that virus particles can constitute “physical loss” within the meaning of insurance policies.[14] A Pennsylvania court also declined to dismiss a case, noting the rapidly evolving law and holding that “[a]t this very early stage, it would be premature...[to] resolve the factual determinations put forth by defendant [regarding physical loss or damage].”[15]
MULTI-DISTRICT LITIGATION (MDL)
Plaintiffs have sought to centralize the resolution of hundreds of COVID-19-related business interruption cases in a multi-district litigation (“MDL”) (MDL No. 2942). (An MDL is a special procedure which applies where cases with “one or more common questions of fact are pending in different” federal courts across the country.[16] The purpose of an MDL is efficiency — to “promote the just and efficient conduct of [the] actions” — by centralizing all such actions in one district court before the same judge (or panel of judges)).[17]
On August 12, 2020, the MDL panel largely rejected plaintiffs’ attempt to consolidate such cases, finding that there was no commonality between the various defendants and that the cases involved different insurance policies with varying coverage provisions and exclusions. See Order Denying Transfer and Directing Issuance of Show Cause Orders at 2-3, In Re: Covid-19 Business Interruption Protection Insurance Litigation, No. 2942 (J.P.M.L. Aug. 12, 2020), ECF No. 772. However, the MDL panel did state that centralizing litigation filed against individual insurers may be beneficial, and directed certain insurers to show cause as to why suits against them would not benefit from centralization. See id. at 4-5. Show cause orders were entered in five newly-created insurer-specific MDLs in August 2020.[18]
On October 2, and 3, 2020, the multi-district panel denied the show cause orders in four of the newly-created MDLs: the Lloyds MDL, the Cincinnati MDL, the Hartford MDL, and the Travelers MDL. Although the MDL panel held that centralization was a close call, it found that because the policy types, policy forms, and claims at issue were sufficiently different that the suits would not benefit from centralization.[19] The Society MDL was the lone exception. There, the policy forms used in each of the actions was identical, which tipped the balance in favor of centralization.[20]
CONCLUSION
Insureds face challenges showing that the presence of COVID-19 itself can be a cause of direct physical loss or damage, particularly in cases where the insurance policy contains a virus exclusion. However, where the policy has favorable language and the insured can show that presence of the virus on the insured property is likely, there is some chance that commercial liability insurance policies will cover COVID-19 business interruption losses. Goodwin continues to monitor the status of COVID-19 business interruption insurance cases, and will provide further Client Alerts to update readers on new judicial developments.
To view copies of the cases cited in this Client Alert, click here. To view an index of the cases, click here.
[1] See, e.g., El Novillo Rest. v. Certain Underwriters at Lloyd's, London, No. 1:20-CV-21525-UU, 2020 WL 7251362, at *6 (S.D. Fla. Dec. 7, 2020) (holding that conclusory allegations of loss are insufficient to show direct physical loss under the policy); Promotional Headwear Int’l v. The Cincinnati Ins. Co., No. 20-CV-2211-JAR-GEB, 2020 WL 7078735, at *7-9 (D. Kan. Dec. 3, 2020) (allegation that COVID-19 was “likely” present on property insufficient to show direct physical loss); 4431, Inc. v. Cincinnati Ins. Cos., No. 5:20-CV-04396, 2020 WL 7075318, at *12-13 (E.D. Pa. Dec. 3, 2020) (finding no physical loss where plaintiff was still able to access and use property); T & E Chicago LLC v. The Cincinnati Ins. Co., No. 20 C 4001, 2020 WL 6801845, at *4-5 (N.D. Ill. Nov. 19, 2020) (holding that “[t]he Court agrees with the courts that have found that loss of use of property without any physical change to that property cannot constitute direct physical loss or damage to the property”); Brian Handel D.M.D., P.C. v. Allstate Ins. Co., No. CV 20-3198, 2020 WL 6545893, at *3 (E.D. Pa. Nov. 6, 2020) (holding that plaintiff did not plead physical loss or damage where the “plaintiff’s property remained inhabitable and usable, albeit in limited ways”); Uncork & Create LLC v. Cincinnati Ins. Co., No. 2:20-CV-00401, 2020 WL 6436948, at *5 (S.D.W.V. Nov. 2, 2020) (holding that the plaintiff could not show physical damage or loss because “the pandemic impacts human health and human behavior, not physical structures”); Hillcrest Optical, Inc. v. Cont'l Cas. Co., No. 1:20-CV-275-JB-B, 2020 WL 6163142 (S.D. Ala. Oct. 21, 2020) (holding that temporary inability to use property does not constitute direct physical loss); Harvest Moon Distributors, LLC v. S.-Owners Ins. Co., No. 620CV1026ORL40DCI, 2020 WL 6018918, at *6 (M.D. Fla. Oct. 9, 2020) (holding that partial loss of sales alone — without alleging that COVID-19 actually caused the loss — did not constitute direct physical loss); Turek Enterprises, Inc. v. State Farm Mut. Automobile Ins. Co., No. 20-11655, 2020 WL 5258484, at *6-8 (E.D. Mich. Sept. 3, 2020) (holding that plaintiff must allege that property suffered “some tangible damage to the Covered Property”); Malaube, LLC v. Greenwich Ins. Co., No. 20-22615-Civ-WILLIAMS/TORRES, 2020 WL 5051581, at *4-8 (S.D. Fla. Aug. 26, 2020) (concluding that the plaintiff could not demonstrate physical loss when it alleged only that “the restaurant merely suffered economic losses – not anything tangible, actual, or physical”); Rose’s 1, LLC v. Erie Ins. Exchange, 2020 CA 002424 B, 2020 D.C. Super. LEXIS 10, at *6 (D.C. Super. Ct. Aug. 6, 2020) (plaintiff must allege actual loss to show physical loss or damage).
[2] See, e.g., Kessler Dental Assocs., P.C. v. Dentists Ins. Co., No. 2:20-CV-03376-JDW, 2020 WL 7181057, at *4 (E.D. Pa. Dec. 7, 2020) (“Civil Authority coverage applies only if there is direct physical loss or physical damage to other property . . . and if a civil authority prohibits access to the covered property”) (internal quotations omitted); Order at 9-10, Selane Products, Inc. v. Continental Cas. Co., No. 2:20-cv-07834-MCS-AFM (C.D. Cal. Nov. 24, 2020), ECF No. 35 (holding that conclusory allegations of direct physical loss do not support civil authority coverage); Water Sports Kauai, Inc. v. Fireman’s Fund Ins. Co., No. 20-CV-03750-WHO, 2020 WL 6562332, at *8 (N.D. Cal. Nov. 9, 2020) (“In the absence of any allegation that any specific neighboring property to [plaintiff’s] property had actual coronavirus exposure, [civil authority] coverage has not plausibly been triggered”); Henry's Louisiana Grill, Inc. v. Allied Ins. Co. of Am., No. 1:20-CV-2939-TWT, 2020 WL 5938755, at *5-6 (N.D. Ga. Oct. 6, 2020) (holding that civil authority order did not constitute physical damage to property and therefore did not trigger coverage under policy); Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., No. 20-cv-03213-JST, 2020 WL 5525171, at *3-4 (Sept. 14, 2020) (holding that COVID-19 did not constitute a direct physical loss to property required to trigger civil authority coverage under the policy); Pappy’s Barber Shops v. Farmers Group, Inc., No. 20-CV-907-CAB-BLM, 2020 WL 5500221, at *6 (S.D. Cal. Sept. 11, 2020) (same); 10E LLC v. The Travelers Indem. Co. of Conn., No. 2:20-cv-04418-SVW-AS, 2020 WL 6749361, at *2-3 (C.D. Cal. Nov. 13, 2020) (same).
[3] See Sandy Point Dental, P.C. v. The Cincinnati Ins. Co., No. 20 CV 2160, 2020 WL 5630465, at *2 (N.D. Ill. Sept. 21, 2020).
[4] See Promotional Headwear Int’l, 2020 WL 7078735, at *10.
[5] See id.
[6] Mauricio Martinez, D.M.D., P.A. v. Allied Ins. Co. of Am., No. 2:20-cv-00401-FtM-66NPM, 2020 WL 5240218, at *2 (M.D. Fla. Sept. 20, 2020).
[7] See id. (holding that virus exclusion applied where exclusion precluded coverage for “[a]ny virus, bacterium or other microorganism that induced or is capable of inducing physical distress, illness or disease.”); see also AFM Mattress Co., LLC v. Motorists Com. Mut. Ins. Co., No. 20 CV 3556, 2020 WL 6940984, at *4 (N.D. Ill. Nov. 25, 2020) (holding that virus exclusion applied because civil authority orders were issued due to COVID-19); , No. CV-20-00785-PHX-JJT, 2020 WL 6827742, at *4 (D. Ariz. Nov. 20, 2020) (holding that the virus exclusion applies to the civil authority provision, noting that complaint acknowledged that civil authority orders were put into place to “address the current coronavirus pandemic”); Order at 10, Goodwill Indus. of Cent. Oklahoma, Inc. v. Philadelphia Indem. Ins. Co., No. CV-20-511-R (W.D. Okla. Nov. 9, 2020), ECF No. 24 (finding that pursuant to the “plain, unambiguous” meaning of the virus exclusion, “COVID-19 clearly qualifies as a ‘virus’ that caused [the plaintiff] to close its doors, which bars coverage under the Virus [Exclusion]”); Order Granting Motion to Dismiss at 12-15, West Coast Hotel Mgmt. v. Berkshire Hathaway Guard Ins. Cos., No. 2:20-cv-05663-VAP-DFM (C.D. Cal. Oct. 27, 2020), ECF No. 34 (holding that plainly-worded virus exclusion was enforceable and precluded coverage for COVID-19-related loss); Boxed Foods Co., LLC v. California Capital Ins. Co., No. 20-CV-04571-CRB, 2020 WL 6271021, at *3-4 (N.D. Cal. Oct. 26, 2020), (Oct. 27, 2020) (holding that virus exclusion is not limited to damage caused directly to property, and applies to preclude civil authority coverage); Seifert v. IMT Ins. Co., No. CV 20-1102 (JRT/DTS), 2020 WL 6120002, at *4 (D. Minn. Oct. 16, 2020) (holding that virus exclusion extends to all losses where virus is part of the causal chain).
[8] See, e.g., Diesel Barbershop, L.L.C. v. State Farm Lloyds, No. 2:20-CV-461-DAE, 2020 WL 4724305, at *6 (W.D. Tex. Aug. 13, 2020) (holding that COVID-19 was the reason why the shutdown order was issued).
[9] No. 6:20-cv-1174-Orl-22EJK, 2020 WL 5939172 (M.D. Fla. Sept. 24.2020).
[10] See id. at *3.
[11] No. 20-cv-03127-SRB, 2020 WL 4692385 (W.D. Mo. Aug. 12, 2020).
[12] No. 20-cv-00383-SRB, 2020 WL 5637963 (W.D. Mo. Sept. 21, 2020).
[13] No. 2:20-CV-265, 2020 WL 7249624 (E.D. Va. Dec. 9, 2020).
[14] Order at 7, North State Deli, LLC v. The Cincinnati Ins. Co., No. 20-CVS-02569 (N.C. Super. Ct. Oct. 9, 2020) (holding that the term “physical loss” would be “rendered meaningless” if interpreted identically to “physical damage”); Transcript, Optical Servs. USA/JCI v. Franklin Mut. Ins. Co., No. BER-L-3681-20, 2020 N.J. Super. Unpub. LEXIS 1782, at *26 (N.J. Super. Ct., Bergen Cty., Aug. 13, 2020) (denying motion to dismiss, finding that “[s]ince the term “physical” can mean more than material alteration or damage, it is incumbent on the insurer to clearly and specifically rule out coverage in the circumstances where it was not to be provided”) (citation omitted).
[15] Order at 1, Taps & Bourbon on Terrace, LLC v. Underwriters at Lloyds London, No. 00375 (C.P., Philadelphia Cty., Oct. 26, 2020).
[16] See 28 U.S.C. § 1407(a).
[17] See id.
[18] See In re: Certain Underwriters of Lloyd’s London, COVID-19 Business Interruption Protection Insurance Litigation, No. 2961 (J.P.M.L. Aug. 12, 2020) (“Lloyds MDL”); In re: Cincinnati Insurance Company COVID-19 Business Interruption Protection Insurance Litigation, No. 2962 (J.P.M.L. Aug. 12, 2020) (“Cincinnati MDL”); In re: Hartford COVID-19 Business Interruption Protection Insurance Litigation, No. 2963 (J.P.M.L. Aug. 12, 2020) (“Hartford MDL”); In re: Society Insurance Company COVID-19 Business Interruption Protection Insurance Litigation, No. 2964 (J.P.M.L. Aug. 12, 2020) (“Society MDL”); In re: Travelers COVID-19 Business Interruption Protection Insurance Litigation, No. 2965 (J.P.M.L. Aug. 16, 2020) (“Travelers MDL”).
[19] See Order Denying Transfer, Lloyds MDL, ECF No. 107; Order Denying Transfer, Cincinnati MDL, ECF No. 136; Order Denying Transfer, Hartford MDL, ECF No. 248; Order Denying Transfer, Travelers MDL, ECF No. 76.
[20] See Transfer Order, Society MDL, ECF No. 88.
