As the COVID-19 public health crisis continues to surge globally, insurers have closed ranks behind the position that commercial property policies are “not designed” to cover pandemic-related losses, including business interruption. But the various justifications they advance for this assertion often collapse under scrutiny of the relevant policy language. Insurers have taken an early stand on the threshold issue of whether the actual or threatened presence of coronavirus and/or COVID-19 can even trigger coverage as a matter of law, telling both their insureds and the courts that the virus’s presence does not constitute “physical loss of or damage to property,” the event typically required for property policies to respond.
In a decision of national significance on this issue—and a resounding victory for the policyholder plaintiffs—a Missouri federal court rejected this argument in an August 12, 2020, denial of an insurer’s motion to dismiss the policyholders’ claims in Studio 417, Inc. v. The Cincinnati Insurance Co. While the very next day, a Texas federal court appears to have come out the other way on this issue, granting the insurer’s motion to dismiss in Diesel Barbershop, LLC v. State Farm Lloyds, that case is distinguishable for important reasons. At the very least, the conflicting judicial results underscore that insureds should not take insurers’ word for what has already proven to be a difficult, contentious set of issues.
Studio 417, Inc. v. The Cincinnati Insurance Co. is a coverage action brought in the U.S. District Court for the Western District of Missouri by five Missouri businesses—four restaurants and one hair salon—that suffered loss of income from closing or reducing their operations due to the likely presence of COVID-19 onsite, as well as state governmental orders requiring the suspension of business at various establishments. The businesses had each purchased an “all-risk” property policy from The Cincinnati Insurance Company, which covered all risks of loss except those specifically excluded. The businesses sought coverage under the policies’ Business Income, Civil Authority, Ingress and Egress, Dependent Property, and Sue and Labor clauses—provisions that, as we have previously discussed, may offer broad coverage for pandemic-related losses.
Cincinnati denied coverage, asserting that the virus did not cause “accidental physical loss or accidental physical damage” required to trigger coverage under these provisions. Permutations of such “trigger” language appear in nearly all commercial property insurance policies (e.g., “physical loss or damage,” “physical loss of, or damage to property,” etc.), and so judicial interpretation of its meaning can have implications for policyholders everywhere.
As many insurers have asserted elsewhere, Cincinnati argued to the court that only “tangible, permanent, physical alteration of property” could trigger coverage, and it sought to dismiss the insureds’ claims. But the court correctly found that the policy language itself simply does not set forth such a requirement. The court focused on the “plain and ordinary meaning” of the phrase “physical loss,” which was undefined in the policies. Referring to dictionary definitions, as representative of a reasonable insured’s understanding of the terms, the court found that “physical loss” was broad enough to encompass deprivation of use of property caused by natural phenomena such as virus. The court found this reading consistent with canons of contract interpretation, under which all policy terms must be given independent meaning—“loss” as used in the policy must be distinct from “damage” and thus must denote something other than structural damage. This conclusion was consistent with Missouri and national precedent under which loss of use of property satisfies the “physical loss” prong of all-risk trigger language.
The insurer in Diesel Barbershop made the same argument as Cincinnati had made in Studio 417, but prevailed in the U.S. District Court for the Western District of Texas. That case involved barbershops that suffered losses as a result of state and county closure orders. The insureds sought coverage under their policies’ “Civil Authority” clause, providing business interruption coverage when access to insured property is prohibited by governmental order as a result of damage offsite. The court agreed with the insurer, however, that such damage must entail the “distinct, demonstrable physical alteration of [] property,” and COVID-19 did not qualify.
The Diesel Barbershop decision, however, can be distinguished in at least two important ways. First, the relevant “trigger” language under the policies at issue provided coverage only for “accidental direct physical loss,” as opposed to the arguably broader “accidental physical loss or accidental physical damage” trigger of the Studio 417 policies or the “physical loss of, or damage to property” language found in many other policies. Additionally, the insureds in Diesel Barbershop appear to have alleged only that COVID-19 caused loss of use of their property, not that the virus or disease likely or actually damaged property. Second, unlike the policies at issue in Studio 417, the policies in Diesel Barbershop contained an exclusion for, inter alia, “virus … capable of inducing physical distress, illness or disease,” subject to an anti-concurrent causation clause—the court found that this exclusion was broad enough to encompass the governmental orders, and this was an alternate ground for the court’s dismissal of the case.
While these two cases resulted in different outcomes, they demonstrate the contentiousness of the threshold “trigger” issue in the COVID-19 context, and are illustrative of different approaches taken by courts. The decisions also demonstrate the importance to insureds of filing properly-pleaded complaints with the assistance of knowledgeable coverage counsel. Policyholders should keep these decisions in mind when analyzing their insurance programs for potential COVID-19 coverage, deciding when and how to submit a claim, and drafting pleadings or other dispute-related documents. Among other things, the following should be scrutinized with the assistance of competent coverage counsel:
- The specific “physical loss or damage” trigger language.
- The coverage language of business interruption and “additional” coverages such as “Civil Authority,” “Ingress and Egress,” “Dependent Property” (also known as “Contingent Business Interruption”), and “Sue and Labor” (also known as “Protection and Preservation of Property”), as well as other relevant provisions such as the “Extended Period of Indemnity.”
- Language permitting, or purporting to prohibit, the cumulative stacking of sublimits.
- Exclusions that purport to bar coverage for virus-related loss.
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