December 1, 2020

Courts Side with Insurers in Denying Coverage for COVID-19 Business Interruptions

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myCOI began reporting on cases working their way through the courts related to COVID-19 insurance coverage back in April. Since that time, hundreds of companies have filed lawsuits related to physical property loss of use. Now courts are issuing their verdicts and most favor insurance companies in denying coverage. In this article, we detail how the courts are justifying their decisions as they write new COVID-19 caselaw. 

Defining “Physical Loss” 

In 10E LLC v. Travelers Indemnity Co. of Connecticut et al., local restaurant owners sought coverage for lost income due to mandated shutdowns in March for COVID-19. 10E’s owners argued that their inability to use the property represented a “direct physical loss or damage” stated in the terms of its commercial insurance policy. 

The court sided with the insurance company’s motion to dismiss the lawsuit. Citing other California insurance cases as precedent, the court held that a physical loss only occurs when a property experiences a “distinct, demonstrable, physical alteration.” Because the property remained economically valuable, the court deemed a loss, as covered by the policy, had not occurred.  

The case Gavrilides Management Co. et al. vs. Michigan Insurance Co. challenged the definition of “physical loss” differently. Many restaurants remained open thanks to drive-thru or carryout options. Gavrilides sought coverage because patrons could not use their dine-in services, which they believed met the physical loss requirement. The judge disagreed stating that the property had not shown any physical alteration to the premises. 

Losses from Government Mandates

Pappy’s Barber Shops Inc. et al. v. Farmers Group Inc. et al. argued that government-mandated closures of its shops created a loss warranting coverage under the lost income, extra expense, or civil authority clauses. While the policy had a virus exclusion, Pappy’s stated the clause did not apply. The barber shops connected their losses to government-ordered precautionary measures to stop COVID-19’s spread rather than the presence of coronavirus on their premises.

The judge ruled in favor of the insurance company stating that government orders forcing businesses to cease operations did not meet the policy’s definition of “direct physical loss or damage to property.” 

Diesel Barbershop, LLC v. State Farm Lloyds challenged the same issue differently. The lawsuit argued that their policy did not require a tangible or complete physical loss to trigger coverage. The plaintiffs stated that a partial loss applied, which was the result of the governmental orders. 

The court conceded that other judgments found loss of property use, without physical damage, sufficient to trigger coverage, but “the line of cases requiring tangible injury to property … more persuasive[.]”

Applying the Virus Exclusion

A dental practice confronted the virus exclusion head on in Mauricio Martinez v. Allied Insurance Co. of America. The dentist filed a claim for lost income and decontamination costs following a forced closure of his Florida office in March. The insurance company denied the claim due to a clause excluding losses or damage caused by any “virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”

Despite the closure occurring because of Florida’s declared state of emergency for COVID-19, the court found the virus exclusion barred coverage. Even though it was the Governor’s executive order that narrowed dental services to emergency procedures only, the court found that the order was the result of COVID-19. Therefore, the dental office’s damages also resulted from COVID-19, a virus, and therefore the insurance policy did not apply. 

Coronavirus as a “Physical Substance”

And now for some good news. In Studio 417, Inc. v. Cincinnati Ins. Co., the court sided with Missouri hair salons. The plaintiffs alleged that customers, employees, and visitors likely infected with COVID-19 also infected the properties. They stated COVID-19 represented a “physical substance” whose presence rendered the physical property unsafe and unusable. 

The insurance company moved to dismiss the case citing the salons’ failure to meet the “physical alteration of property” threshold. The insurer stated that COVID-19 does not hurt properties, it hurts people. 

The court denied the motion using a broader definition for physical loss. The court defined “physical” as having a material existence and “loss” as the act of losing possession or deprivation. Finding these definitions met, the court agreed that COVID-19 is a physical substance that lives on and remains active on surfaces. As a result, it deprived plaintiffs of their property and should trigger coverage. 

For More Information

As more cases hit courtrooms, the legal arguments and judgments will continually change. myCOI will monitor the major verdicts and share the most noteworthy updates likely to impact our clients’ businesses. Rest assured, myCOI does not just track COIs. We also watch the legal landscape. It is just another way we work to keep our customers protected.

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