Thousands of businesses, from restaurants to retailers to minor league baseball teams, have submitted business interruption insurance claims to try to recover lost income from COVID-related closures. Insurance companies have routinely denied their claims, generally stating that the losses are not covered because there was no physical loss or damage to the property. While courts have widely sided with insurance companies in litigation, there have been a few recent wins for businesses. These sporadic victories, however, do not constitute a turning of the tide in favor of policyholders, as rulings remain inconsistent in this hotly contested litigation arena.
Mixed results at the ballpark
The West Michigan Whitecaps, a minor league baseball franchise, litigated against Federal Insurance Co.’s denial of coverage for losses stemming from the club’s inability to use its ballpark. Alleging there was no physical loss or damage to trigger coverage, Federal Insurance Co. sought to dismiss the lawsuit. The court denied dismissal, stating that the ballpark was made unusable for its intended function due to the presence of the virus.
Yet, similar actions by the Everett Aquasox and the Asheville Tourists, minor league clubs in Washington state and North Carolina against Arch Insurance Co. were thrown out. The insurance company prevailed because the teams failed to allege any physical loss or damage that would trigger their policies. The lawsuits by both teams only alleged that stay-at-home orders and other government action forced the cancelation of the season, resulting in lost income. In addition, the policies explicitly excluded coverage for losses arising from a virus.
Five successes and a failure
Forced to close due to state shutdown orders last spring, Salon XL Color & Design Group LLC in Michigan successfully argued that coronavirus particles infected its premises and rendered them unusable for their intended purpose. In refusing to dismiss the claim against West Bend Mutual Insurance Co., a district court in Detroit ruled, “Salon XL has plausibly alleged that the COVID-19 particles have infected their property, exposed their staff and patrons, and therefore Salon XL has been unable to use its property for its intended purpose.” The court also noted the terms ‘damage’ and ‘loss’ in the contract were ambiguous, stating that ambiguities in an insurance contract are construed in favor of the insured.
Optical Services USA/CL, a New Jersey group of optometry practices, cited New Jersey case law in arguing property can sustain physical loss without experiencing structural alteration. The court disagreed that the plain meaning of “direct physical loss” must include physical loss or damage.
A California court preserved a suit against Endurance American Specialty Insurance Co. by Sunshone Hotel Investors, calling the circumstances that trigger business interruption coverage under the policy “at best ambiguous,” and finding that the investors were not responsible for $100,000 in clean-up costs.
An Illinois court ruled that a dental clinic could pursue its coronavirus claim against Cincinnati Insurance Co., ruling loss of use was a physical loss under the policy terms. Another Illinois judge allowed a multidistrict litigation action brought by restaurants, bars and theaters to go forward, clearing the way for them to pursue their claims of pandemic-related business losses against Society Insurance Co.
On the other hand, a Florida federal court dismissed a lawsuit by Town Kitchen, LLC for its failure to prove that a physical loss had occurred on its premises. The court ruled that the loss of use theory was not applicable as no physical repair or change was necessary to make the premises useable again.
Split in decisions in same court
There was a split in decisions in the Northern District of Ohio Federal Court alone. Santo’s Italian Café’s suit against Acuity Insurance Co. was dismissed for failure to prove any tangible or structural damage. However, Henderson Road Restaurant Systems, Inc. was allowed to pursue recovery against Zurich American Insurance Co. as the “direct physical loss” policy language was considered ambiguous, and because the policyholder had “lost” use of its property during the pandemic.
Lawsuits mount against Zurich Insurance
Global engineering firm AECOM has sued Zurich American Insurance Co. for losses stemming from having to shut down its 800 offices and construction sites, including 650 projects, globally, due to the coronavirus. Zurich has invoked the lack of physical loss or damage defense in its all-risk policy claim denial. Claiming damages in the millions of dollars, AECOM is suing the insurer for breach of contract and for violating the implied covenant of good faith and fair dealing, alleging that Zurich refused to pay COVID-related claims even though such coverage was not specifically excluded in the all-risk property insurance policies AECOM purchased.
All-risk policies should protect the insured from any risk not specifically excluded from coverage, AECOM argues. Further, the company says, the insurance industry has a standard “virus and bacteria” exclusion form, which Zurich did not include in its policies.
In an unrelated press release, Zurich has estimated that it will be hit with an estimated $750 million in pandemic claims for the year 2020. These include a $200 million lawsuit from Lifetime, Inc. resulting from loss of use of its fitness facilities, and a suit by TheWit Hotel and ROOF Bar in Chicago.
If your insurance company has denied or is challenging your claim for a COVID-19-related or other reason, contact us today. We have the experience and tenacity to make sure insurance companies keep the promises they made to you and your business.
Evan S. Schwartz
Founder of Schwartz, Conroy & Hack