In a decision that could have far-reaching implications, several business insurance policyholders beat an insurance company motion to dismiss their lawsuit seeking coverage for losses due to COVID-19-related closures. The businesses operate salons and restaurants. They sued The Cincinnati Insurance Company for improperly denying their business interruption claims, on behalf of themselves a class of similar insureds. The Missouri Federal Court denied Cincinnati’s motion to dismiss, ruling that the insureds “pled enough facts to proceed with discovery,” the August 12 decision is a rare win for business insurance policyholders seeking coronavirus related business interruption coverage.
This proposed class action was brought by Missouri hair salon company Studio 417 and four restaurant operators – Grand Street Dining, LLC, GSD Lenexa, LLC, Trezomare Operating Company and V’s Restaurant, Inc. – with locations in Missouri and Kansas. The plaintiffs purchased “all-risk” property insurance policies, which cover businesses for both property damage and liability. A “covered cause of loss” is defined as “accidental [direct] physical loss or accidental [direct] physical damage.” The terms “physical loss” and “physical damage” are not defined in the policies. Importantly, the Cincinnati polices do not exclude losses caused by viruses or communicable diseases.
Defining “direct physical loss”
Under its policies, Cincinnati had agreed to cover loss of business income resulting from the necessary suspension of operations when the suspension was caused by a direct physical loss to property. Like many insurance companies embroiled in similar situations this year, Cincinnati argued that its policies only cover business interruption losses caused to physical damage to property, not for economic losses caused by efforts to protect the public from a deadly virus. The insurance company argued that direct physical loss “requires actual, tangible, permanent, physical alteration of property” and that the policies are “designed to indemnify loss or damage to property,” such as from a fire or storm. COVID-19, according to Cincinnati, “does not damage property; it hurts people.”
The plaintiffs argued that their policies expressly cover “physical loss” or “physical damage.” “This necessarily means that either a ‘loss’ or ‘damage’ is required, and that ‘loss’ is distinct from ‘damage,’” they argued. The plaintiffs said that Cincinnati’s focus on an actual physical alteration ignores the “physical loss” option and that the defendant could have defined the terms “physical loss” and “physical damage” but failed to do so. Because the policies do not explicitly define direct physical loss, the Court said it must “rely on the plain and ordinary meaning of the phrase.” Citing Merriam-Webster, the Judge defined (1) “direct” as “characterized by close logical, causal, or consequential relationship”; (2) “physical” as “having material existence: perceptible especially through the senses and subject to the laws of nature”; and (3) “loss” as “the act of losing possession” and “deprivation.” Applying these definitions, the Court ruled that plaintiffs adequately alleged a direct physical loss. The plaintiffs not only alleged a causal relationship between COVID-19 and their losses, the Court said, but further alleged the virus “is a physical substance,” that “lives on” or is “active on inert physical surfaces” and is also “emitted into the air.” COVID-19 allegedly attached to and deprived the plaintiffs of their property, making it “unsafe and unusable, resulting in direct physical loss to the premises and property.”
Other Coverage Under the Policy
In addition to business income coverage, the policies provide for other coverages, including “civil authority,” “ingress and egress,” “dependent property” and “sue and labor” coverage. The Court held that the plaintiffs plausibly stated claims for coverage in all of these areas. Notably, under the “civil authority” category, Cincinnati argued that civil authority coverage “requires that access to plaintiffs’ premises be prohibited by an order of civil authority.” That wasn’t the case, according to Cincinnati, pointing out that closure orders allowed restaurant premises to remain open for food preparation, take-out and delivery, and that access to salon premises was not prohibited.
But the Court determined that plaintiffs adequately alleged that their access was prohibited. Studio 417 was ordered to suspend operations and the restaurants were not allowed to provide indoor dining. “At the motion to dismiss stage, these allegations plausibly allege that access was prohibited to such a degree as to trigger the civil authority coverage,” the Court said. “This is particularly true insofar as the policies require that the ‘civil authority prohibits access,’ but does not specify ‘all access’ or ‘any access’ to the premises.”
Insurance companies around the country have been denying Covid-19 business interruption claims, and courts so far have largely sided with them. But the Studio 417 case has provided a path for retailers and other businesses to show that the virus has a physical presence and has caused loss to property.
If your insurance company has denied your business interruption claim for COVID-19-related losses or for another reason, contact us today for a free consultation.
Evan S. Schwartz
Founder of Schwartz, Conroy & Hack