Nearly 1,500 lawsuits have been filed by policyholders against insurers to resolve disputes over insurance coverage for COVID-19-related business losses.
For those unfamiliar with insurance dispute trends, it’s important to put the extent into perspective. The average hurricane will result in around 50 to 100 cases being filed in the first year. The same number of cases for COVID-19-related losses were filed each week from April to August 2020.
So far, decisions in favor of insurers have been overwhelmingly made with a rate of around 75%. However, in the past few months, there have been some key policyholder decisions that should give insurers food for thought.
An overview of the numbers
The University of Pennsylvania’s Carey Law School has maintained a COVID Coverage Litigation Tracker since the beginning of the pandemic, which provides us with a wealth of data to analyze.
The weekly submissions peaked from mid-March to the end of August 2020 and then subsided towards the end of the year.
The industries that these cases came from are all industries impacted by government stay-at-home orders, with 38% of all cases filed by policyholders in the food and beverage industry.
The vast majority of plaintiffs are claiming cover under a Business Interruption (BI) policy. And there are mainly three sections of coverage within a BI policy that plaintiffs seek coverage: business income, additional expenses, and civil authority.
Given the number of cases filed and the fact that some judgments are beginning to take hold, there are a number of arguments in common with both plaintiffs and defendants.
Virus Policy Exclusions
Some of the plaintiffs’ BI policies contain clear virus exclusions. In these cases, the insurers often manage to submit early termination applications.
Of the 86 cases in which an application for rejection was approved so far, 65 contained a virus exclusion in the policy.
Prominent cases include Chattanooga Professional Baseball LLC d / b / Chattanooga Lookouts et al. v. Philadelphia Indemnity Insurance Co. et al. where in November an Arizona federal judge granted the motion for dismissal, citing virus exclusion. Meanwhile, also in November, a California Supreme Court judge dismissed plaintiff’s case in Musso & Frank Grill Co. Inc. v Mitsui Sumitomo Insurance USA Inc. and included virus exclusion as a factor in the judgment at.
However, the presence of a virus exclusion in a policy has not always worked when an insurer has filed an early release application. In Urogynecology Specialist from Fla. LLC v Sentinel Ins. Co. The judge ruled the virus exclusion was not clear enough to prevent coverage requested by the plaintiff.
While the policy excluded claims caused by “the presence of fungus, wet rot, dry rot, bacteria or viruses”, the judge ruled that the denial of coverage for COVID-19 “does not logically coincide with the other pollutants” the “Policy necessarily” expects and intends to refuse coverage for this type of business loss. “
What is a “direct physical loss”?
For policies that do not include a virus exclusion, the next line of reasoning is precisely what constitutes “direct physical loss” and this is an issue that is before the courts to rule.
Most BI policies require “physical loss or damage to property” in order to cover an insured’s damage. For example, if a hurricane damages a restaurant’s premises to the extent that it cannot be reopened until repairs have been completed, it is a direct physical loss (structural damage) caused by an insured event (inclement weather) .
Insurers therefore rely heavily on the definition of the term “physical” which they argue is physical damage or a change of ownership rather than just economic loss that is not accompanied by physical damage.
Most decisions made in favor of insurers whose insurance policies do not include virus exclusions are based on this definition of “direct physical loss”.
In the very first COVID-19 insured event to reach a judge, Gavrilides Management Company et al. v. Michigan Ins. Back in July 2020, the Michigan State Court judge ruled in favor of the insurer, dismissing the policyholder’s argument that the loss of use of property caused by state restrictions was a direct physical loss.
The judgment therefore concluded that the loss of use of or access to a building in and of itself does not constitute “direct physical loss or damage”.
Policyholders have of course developed arguments to counteract this. They claim that virus particles caused physical property damage or that no structural changes to a property are required to suffer direct physical loss. Key decisions related to these cases are discussed below.
Previous decisions and important cases
So far, most cases have only reached the phase before discharge, in which the insurers contest around 25% of all cases with applications for early termination. And the insurers are ahead here with a success rate of almost 75%.
Of the few cases where the motion to dismiss has been denied, we now have some clear precedents that will no doubt have an impact on future litigation strategies.
Studio 417 v Cincinnati Insurance Co.,
One of the first rulings in favor of a policyholder came in August 2020 when a federal judge in Missouri allowed the lawsuit to be brought. In this case, the plaintiffs, a group of hair salons and restaurants, argued that the physical presence of COVID-19 virus particles on their premises damaged their property and, as per their guidelines, was a direct physical loss.
The court ruled that “loss” can be defined as “loss of use” as the trigger in the guidelines is “direct physical loss of or damage to” insured property.
It should be noted, however, that this decision only allowed the discovery to proceed and did not determine the coverage issue as to whether the plaintiff’s argument actually constituted a direct physical loss.
Optical Services USA / JCI v Franklin Mutual Insurance,
In this case, which was negotiated in September 2020, a group of New Jersey opticians made a different argument than Studio 417 because they did not claim that there were physical COVID-19 particles on their premises. Instead, they argued that it was not necessary to establish cover and that New Jersey case law claims that structural changes to a property are not required to suffer physical loss.
The plaintiffs cited judgments in two similar cases. In Gregory Packaging Inc. v Travelers Property Casualty Co. of America, 2014, a New Jersey federal court ruled that ammonia gas discharge into a building made the property “temporarily unavailable” and therefore constituted direct physical loss. And in Wakefern Food Corp. against Liberty courage. Fire. Ins. Co., 2009, where a court ruled in favor of a grocery store seeking cover after a power failure due to a network failure.
The court concluded that the definition of “physical” in the insurance policy should be broader than just “material alteration or damage” to property based on the cited case law and found that plaintiffs were entitled to an exhibition-oriented discovery had.
North State Deli, LLC v The Cincinnati Insurance Co.,
This case is the most important to date because, in contrast to the cases mentioned above, it was more of a declaratory judgment than an application for rejection.
A group of restaurants in North Carolina brought declaratory actions against the Cincinnati Insurance Company and the Cincinnati Casualty Company, which had been denied coverage of their COVID-19-related BI claims.
The insurers contested the original claim on the grounds that the loss of physical use and access to the policyholders’ restaurants does not constitute a direct physical loss for the purposes of the insurance policies.
The North Carolina State Court, however, examined the guidelines alongside the dictionary definitions of “physical” and ruled in favor of the plaintiffs that “the common meaning of the term” direct physical loss “includes the inability to use or possess anything in the real, tangible or tangible physical world that results from a specific cause without other conditions intervening. “
The decisions at both Optical Services USA / JCI and North State Deli, LLC are significant for two reasons. First, the plaintiffs did not make clams that the COVID-19 virus was physically present on their business premises. Second, and most importantly, the judgments support a broader definition of the term “direct physical loss” that goes beyond the mere structural change of a property.
Both judgments will no doubt influence plaintiffs’ strategies as more cases come to court. However, the success of these strategies remains to be seen.
This blog post is not offered as legal advice and should not be relied on as such. You should seek advice from a lawyer in certain situations.
Gary Markham is the founder of the AI-enabled legal tech company LSG for predictive analytics, which provides insurers with software for litigation and panel counsel management at the corporate level.
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