As the COVID-19 business interruption cases are decided, many are keeping score. So far, the tally is in favor of the insurance industry, with a number of cases being dismissed for lack of direct physical loss of or damage to covered property by a covered peril.
Most of the cases filed seeking coverage have been met with motions to dismiss by the insurance company. As many of you know, a motion dismiss seeks to throw the case out of court because, on its face, the complaint does not state a cause or action. Basically, the court is saying that the allegations of the complaint, even if true, cannot as a matter of law, lead to coverage. Some courts allow the policyholder to file an amended complaint and some do not. It depends on the specific facts and allegations.
But not all courts have granted the insurance companies’ motions to dismiss. In a recent case, a Missouri federal court denied the motion. In this blog post I examine why.
In Studio 417, Inc. v. The Cincinnati Insurance Co., No. 20-cv-03127-SRB (W.D. Mo. Aug. 14, 2020), a group of hair salons and restaurants sued under their “all-risk” property insurance policies for losses arising from the coronavirus pandemic. The policies covered all risks except those expressly and specifically excluded. The policies included a “Building and Personal Property Coverage Form and Business Income (and Extra Expense) Coverage Form.”
A “Covered Cause of Loss” “[was] defined by the policies to mean accidental [direct] physical loss or accidental [direct] physical damage.” The phases “physical loss” and “physical damage” were not defined in the policy. Both “Business Income” and “Civil Authority” coverage was provided. The “Business Income” coverage required that the suspension of operations be caused by direct loss to property at a premises caused by or resulting from a covered cause of loss. The “Civil Authority” coverage required a civil authority order that prohibited access to the covered property when a covered cause of loss causes direct damage to property other than the covered property and the civil authority action was taken because of dangerous physical conditions resulting from damage or continuation of damage from the covered cause of loss that caused the damage.
“Ingress and Egress Coverage,” “Dependent Property Coverage” and “Sue and Labor Coverage” was provided and described by the court. The policies did not contain a virus or pandemic exclusion.
In denying the motion to dismiss, the court held that the policyholders had adequately stated a claim for direct physical loss. The court focused on the lack of definition of “physical loss” and relied on the plain and ordinary meaning of the phrase. Using dictionary definitions, the court stated that “direct” meant a close, logical, causal or consequential relationship, “physical” meant material existence and “loss” meant the act of losing possession or deprivation. The allegations in the complaint, held the court, sufficiently alleged direct physical loss because of the causal relationship between COVID-19 and the alleged losses, that COVID-19 is a physical substance that lives on surfaces and is emitted into the air and that COVID-19 allegedly attached to and deprived the policyholders of their property making it unsafe and unusable and therefore resulting in direct physical loss to the premises and property.
The court also gave meaning to all the words in the policy and stated that the insurance company conflated loss and damage. The policies provided coverage for accidental physical loss or accidental physical damage and the court determined that both terms had to be given meaning. It also noted that under Missouri law, the all-risk phraseology had been held to be ambiguous. Thus, the court focused on cases finding that physical loss does not mean physical damage.
The court also distinguished cases requiring physical tangible alteration to show physical loss as either factually distinct and resolved at summary judgment. The court also distinguished other COVID-19 cases granting motions to dismiss, stating that as alleged here, COVID-19 is not a benign condition.
Notably, what this decision is about is that the allegations in the complaint (here an amended complaint) were sufficient to survive a motion to dismiss. Merely alleging that COVID-19 particles attached to and damaged property, which allegedly made the premises unsafe and unusable, was enough for this court.
Yet the court made the following important statement:
The Court emphasizes that Plaintiffs have merely pled enough facts to proceed with discovery. Discovery will shed light on the merits of Plaintiffs’ allegations, including the nature and extent of COVID-19 on their premises. In addition, the Court emphasizes that all rulings herein are subject to
further review following discovery. Subsequent case law in the COVID-19 context, construing similar insurance provisions, and under similar facts, may be persuasive. If warranted, Defendant may reassert its arguments at the summary judgment stage.
No doubt, in this case and in any others like it, summary judgment motions will be made. Thus, unlike the cases where the complaints have been dismissed with prejudice, in this case this decision is merely a preliminary decision that will not bind the court on future motions seeking dispositive rulings. The burden of proof remains on the policyholder to provide sufficient evidence that its property policy covers its alleged COVID-19 losses. This will not be easy to prove.