We have previously provided two updates¹ on the business interruption landscape that has resulted from the COVID-19 pandemic. There were certain regulatory actions proposed several months ago, but those have been tabled or terminated. Here we provide an update on the status of certain COVID-19 business interruption lawsuits that are being followed as potential bellwethers to understand how courts will interpret policy language for purposes of COVID-19.

As of now, six rulings have been handed down from courts in New York, Texas, Michigan, Washington D.C., Missouri, and New Jersey. The majority of rulings have been in favor of insurers as courts in New York, Texas, Michigan, and Washington D.C. have all ruled to dismiss the claims of the plaintiffs. Below is a summary of the cases and rulings.

The first ruling occurred in New York, pertaining to the case of Social Life Magazine, Inc. vs. Sentinel Ins. Co., Ltd., where U.S. District Judge Valerie Caproni denied a preliminary injunction requested by a magazine publisher to force its insurer to pay for financial losses caused by a COVID-19 closure order.²

Courts in Texas, Michigan, and Washington D.C. followed with verdicts similar to this ruling. Cases in Texas³ and Michigan were dismissed on the grounds that there was no direct physical damage.⁴ The case in Washington D.C. was dismissed on the grounds that there was no direct physical loss.⁵

While the majority of rulings have been in favor of insurers, a recent ruling in the case of Studio 417, Inc., et al. vs. The Cincinnati Insurance Company within the Western District court in Kansas City, Missouri was favorable for the insured. On August 12th, Judge Stephen R. Bough denied the insurer’s motion to dismiss and ruled that the plaintiffs’ case was plausible to proceed into the discovery phase.⁶  The plaintiffs within the case had purchased “all-risk” property insurance policies from the defendant. All-risk policies cover all risks of loss, except for risks that are expressly and specifically excluded. All plaintiffs held separate all-risk policies that the plaintiffs and defendant agreed contain the same relevant language. The plaintiffs also alleged their all-risk policies had five types of coverage that had been triggered by COVID-19:

• Business Income – Coverage that would pay the plaintiffs’ for loss of income during the “period of restoration.”
• Civil Authority – Coverage granted when authorities prohibit access to the business. The plaintiffs advocated this coverage applied due to the area-wide closure orders in March 2020.
• Ingress and Egress – Coverage granted to pay if the entry or exit of the businesses were hampered.
• Dependent Property – Coverage granted if plaintiffs lost income because of a supply chain issue.
• Sue and Labor – Coverage granted for the cost of taking all reasonable steps to protect the property from further damage.

Judge Bough ruled that for all five types of claims, the plaintiffs made plausible claims for coverage.

The policies provide that the defendant would pay for “direct ‘loss’ unless the ‘loss’ is excluded or limited.” A “Covered Cause of Loss” was defined to mean “accidental [direct] physical loss or accidental [direct] physical damage” but the all-risk policies failed to define “physical loss” or “physical damage.” The all-risk policies issued by the defendant did not include “any exclusion for losses caused by viruses or communicable diseases.”

Judge Bough ruled that the plaintiffs have a claim for “direct physical loss.” This is due to the policies failing to define a “direct physical loss.” In lieu of a definition, the court must, “rely on the plain and ordinary meaning of the phrase.” By the definitions provided in the Merriam-Webster dictionary in lieu of the contract definition, Judge Bough ruled that the plaintiffs have a claim for a direct physical loss.⁷

The Kansas City, Missouri ruling should be of note to owners with business interruption claims as Judge Bough provides further legal commentary on the aforementioned New York case of Social Life Magazine, Inc. vs. Sentinel Ins. Co., Ltd. The New York case was cited by the defendant to add precedent to their defense that, “COVID-19 does not cause direct physical loss.”⁸  Judge Bough’s commentary within the ruling states that within the case of Studio 417, Inc., et al. vs. The Cincinnati Insurance Company, the plaintiffs, “…have plausibly alleged that COVID-19 particles attached to and damaged their property, which makes their premises unsafe and unusable.”⁹

One day later, a ruling in New Jersey, by Bergen County Superior Court Judge Michael N. Beukas, ruled against a motion by Franklin Mutual Insurance Company to dismiss a lawsuit filed by Optical Services USA for lost income due to the state of New Jersey’s COVID-19 shutdown. Optical claims that the state’s civil authority order forced Optical to close its business. Optical alleged that the closure triggered a physical loss of property and resulted in lost income. This claim has differed from prior business interruption lawsuits that have claimed business interruption losses due to the presence of COVID-19 on the property. Optical’s business owner’s policy includes a virus exclusion, but both the insurer and the plaintiffs agreed that the virus exclusion does not apply to the Civil Authority coverage. The judge explained within his comments that, “the term ‘physical’ can mean more than material alteration or damage…,” ruling that the burden is on the insurer to show why the loss is not covered by Optical’s business owner’s policy.¹⁰

¹https://www.rubinbrown.com/article/8053/COVID-19-Business-Interruption-and-the-Impact-to-Your-Business.aspx?articlegroup=1117
²https://www.insurancejournal.com/magazines/mag-features/2020/07/20/576038.htm
³The judge also ruled that in the event of direct physical damage, the virus exclusion within the policy would have nullified the application of coverage.
⁴https://www.insurancejournal.com/news/southcentral/2020/08/16/579218.htm https://www.insurancejournal.com/magazines/mag-features/2020/07/20/576038.htm
⁵https://www.insurancejournal.com/news/national/2020/08/07/578232.htm
⁶https://www.kansascity.com/news/business/article244908447.html
⁷Ruling on August 12th, 2020, Studio 417, Inc., et al., vs the Cincinnati Insurance Company
⁸Ruling on August 12th, 2020, Studio 417, Inc., et al., vs the Cincinnati Insurance Company
⁹Ruling on August 12th, 2020, Studio 417, Inc., et al., vs the Cincinnati Insurance Company
¹⁰https://www.claimsjournal.com/news/east/2020/09/21/299442.html

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