As the Covid-19 public health crisis continues, the insurance industry has closed ranks behind the position that commercial property policies are “not designed” to cover pandemic-related losses, including business interruption. But the justifications advanced by insurance companies for this assertion often collapse under scrutiny of 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.
Recent court decisions, including a Missouri federal court decision rejecting this insurers’ argument, demonstrate the importance to insureds of filing properly-pleaded complaints using knowledgeable coverage counsel. Policyholders should keep this case, and other decisions discussed below, in mind when analyzing their insurance programs for potential Covid-19 coverage, deciding when and how to submit a claim, and drafting dispute-related documents.
Among other things, the following should be scrutinized in complaints:
- Specific “physical loss or damage” trigger language.
- Coverage language of business interruption and “additional” coverages.
- Language permitting, or purporting to prohibit, the cumulative stacking of sublimits.
- Exclusions that purport to bar coverage for virus-related loss.
Studio 417 Decision Opens Door to Recovery
In a decision of national significance, a Missouri federal court Aug. 12 rejected insurers’ argument that the virus’s presence does not constitute “physical loss of or damage to property,” and denied an insurer’s motion to dismiss. In so doing, the court left the door open for broad recovery under multiple coverages in the policies at issue.
While a few other decisions appear to have come out the other way, those cases are distinguishable for important reasons—at the very least, the conflicting judicial results underscore that insureds should not take insurers’ word for what are a difficult, contentious set of issues.
In Studio 417 Inc. v. The Cincinnati Insurance Co., in the Western District of Missouri, four restaurants and a hair salon sued for coverage for loss resulting from closing or reducing their operations due to the likely presence of Covid-19 onsite, as well as state orders requiring the suspension of business.
The businesses had each purchased an “all-risk” property policy covering all risks of loss except as specifically excluded. They sought coverage under provisions pertaining to business income, civil authority, ingress and egress, dependent property, and sue and labor—all potentially offering broad coverage for pandemic-related losses.
Cincinnati Insurance asserted that there was no “accidental physical loss or accidental physical damage” triggering coverage. Permutations of “trigger” language appear in nearly all commercial property insurance policies, so judicial interpretation of its meaning has implications for policyholders everywhere.
As many insurers have asserted elsewhere, Cincinnati argued that only “tangible, permanent, physical alteration of property” triggers coverage, and it sought to dismiss the insureds’ claims. But the court correctly found that the policy language itself does not contain any such requirement.
The court focused on the “plain and ordinary meaning” of the phrase “physical loss,” undefined in the policies, finding that it was broad enough to encompass deprivation of use of property caused by natural phenomena like virus. It also concluded that this reading gave all policy terms independent meaning, as contract law requires—“loss” must be distinct from “damage” and thus denotes 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” trigger requirement.
Some Insurers Have Prevailed, but Facts, Policy Language Is Key
Some insurers have prevailed in other recent cases, but their precedential effect is limited to the specific facts pleaded and policy language at issue (and they may also be subject to appeal). Indeed, the importance of factual and policy-related distinctions among claims was key to the U.S. Judicial Panel on Multidistrict Litigation’s rejection of proposals to consolidate Covid-19 coverage cases into a single proceeding.
In Diesel Barbershop LLC v. State Farm Lloyds, a Texas federal court dismissed a coverage action brought by barbershops affected by state and county closure orders, agreeing with the insurer that covered loss entails the “distinct, demonstrable physical alteration of  property” and that Covid-19 did not qualify.
But the relevant trigger language referenced only “accidental direct physical loss.” While there are good arguments that pandemic-related loss should qualify, a court could find that other variants of trigger language are broader, including the “accidental physical loss or accidental physical damage” or “physical loss of, or damage to property” language found in many other policies.
Additionally, the insureds did not allege that the virus or disease likely or actually damaged property. Ultimately, epidemiological expertise may be necessary for this issue.
Finally, the policies contained a virus exclusion which the court found was broad enough to encompass the closure orders. Policyholders should note, however, that exclusions are construed narrowly and in favor of coverage, and insurers must prove their applicability—and many exclusions that insurers have invoked in the Covid-19 context, when read carefully, are inapplicable.
Similarly, in 10E LLC v. Travelers Indemnity Co., a California federal court sided with the insurer. But in that case, the policyholder, a restaurant, argued only that public health restrictions caused “physical damage” by “labeling the insured property as non-essential.” The policy also contained a virus exclusion. A Florida federal court decision, Malaube LLC v. Greenwich Ins. Co., turned on similar issues.
Other recent decisions have similarly involved complaints that did not allege that viral particles made insured premises unsafe and unusable, including Social Life Magazine Inc. v. Sentinel Ins. Co. Ltd. (S.D.N.Y.) and Gavriledes Mgmt. Co. LLC v. Michigan Ins. Co. (Ingham County, Mich.).
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Benjamin D. Tievsky is counsel in Pillsbury Winthrop Shaw Pittman LLP’s exclusively policyholder-side Insurance Recovery group. He represents insureds in coverage matters involving property damage and business interruption, general liability, environmental exposures, cyber liabilities, and director and officer claims.