All information in this COVID-19 Response Resource article is effective as of November 4, 2020.
In earlier articles this year on business interruption insurance coverage, we set forth various arguments that businesses could make in seeking insurance coverage for COVID-19-related interruptions to their operations. The vast majority of courts that have issued rulings over the past several months on whether business interruption insurance applies to losses from shutdowns or slowdowns because of the virus have determined there is no coverage. The typical rationale is that this insurance is meant to cover losses from tangible physical damage to the premises, such as a caved-in roof or other structural damage. But as a Pennsylvania court recognized just last week in denying an insurer’s request to dismiss a bar’s coverage lawsuit, “the law and facts are rapidly evolving in the area of COVID-19 related business losses,” and plausible cases for coverage can be made. Despite an initial heavy storm front of court decisions in favor of the insurance companies, there are small breaks in the clouds forming with a few courts now providing a ray of hope to insureds.
During August, the first glimmer was granted to a group of hair salon operators and restaurant owners in a lawsuit in the Western District of Missouri, Southern Division. The business owners sued their insurer for denying coverage under their “all risk” policies arising from business losses due to the COVID-19 shutdowns (which policies are designed to cover all risk of loss, except for risks expressly and specifically excluded). The parties agreed that the policies by their terms covered “accidental [direct] physical loss or accidental [direct] physical damage,” (defined as “Covered Cause of Loss,”) but the policies did not more deeply define these terms. Further, the policies did not include any “virus exclusion.”
The court denied the insurer’s motion to dismiss, and in so doing, made important legal conclusions regarding the interpretation of the policies. The court determined that the policies required the insurer to pay for actual loss of business income due to the necessary suspension of operations during the period of restoration, and that the covered suspension must be caused by direct loss to the property at a premises resulting from any covered cause of loss. Further, the policies covered the actual loss of business income and necessary extra expense caused by an action of a civil authority that prohibited access to the business as a result of a dangerous physical condition arising from a covered cause of loss. The policies further provided “ingress and egress” coverage, or losses above and beyond those caused by a civil authority acting to prevent access to the business. Finally, the court found that the policies required the insured to take all reasonable steps to prevent further damage to the property stemming from any covered cause of lReading these provisions together, the court rejected the insurer’s contention that the policies were only designed to cover physical alteration and damage to the property itself. Instead, it concluded that the businesses had adequately pled a “physical loss” under the policies. The court noted that the policies subtly distinguished “loss” from “damage,” and that according to a dictionary definition, loss could be defined as losing possession, or deprivation. The court held that such a deprivation had occurred during COVID-related business slowdowns, even absent any deleterious physical “damage” to the property itself.
Further, the court held that the plaintiffs had adequately pled their claim for civil authority coverage, rejecting the insurer’s contention that the businesses had been allowed to remain open, albeit for substantially reduced operation (take-out food from restaurants instead of in-house dining, etc.) and therefore their clientele had not been prevented access to the properties by a civil authority. Instead, the court held that as a result of the broad language of the stay-at-home orders issued by the governor of Missouri discouraging any visitation to restaurants and prohibiting in-house dining at those restaurants entirely, there was adequate evidence to proceed on the theory that access was prohibited to such a degree as to trigger civil authority coverage.
The court further held that due to the plaintiffs having claimed loss under both a theory of the direct danger of COVID-19 potentially contaminating their establishments, and as a result of the civil authorities prohibiting access, the plaintiffs were not barred from seeking ingress and egress coverage, despite the civil authority exception in that coverage provision. The court concluded on that matter that the plaintiffs had also adequately pled relief for ingress and egress coverage based on the “loss” theory above, aside from the civil authority losses also claimed.
The court also held that the plaintiffs had adequately pled a case for dependent property coverage, and for “sue and labor” coverage, under the same theory: because they had adequately pled the losses as above, the insureds had therefore plausibly pled their case for coverage under these provisions as well. In summary, by distinguishing “physical loss” from “physical damage” in the policy, the insurer must have meant that “loss” was different from “damage.”
In early October, 16 North Carolina restaurants prevailed against Cincinnati Insurance Company when a state court judge granted their motion for partial summary judgment, ruling that Cincinnati must replace their lost business income and related expenses under “all risk” property insurance policies they had purchased. Their policies defined “loss” to include “accidental physical loss or accidental physical damage,” but they did not define “physical damage” or “physical loss.” Drawing from multiple dictionary definitions of these terms, the court concluded that “direct physical loss” includes “the inability to utilize or possess something in the real, material or bodily world, resulting from a given cause.” According to the court, the business owners, their employees and customers lost their full range of rights of using the restaurants due to government orders suspending business operations and instituting stay-at-home orders. The court rejected Cincinnati’s position that the policies did not provide coverage unless there was some form of physical alteration to the property, stating that Cincinnati was conflating “physical loss” and “physical damage.” Finally, the court noted, the policies did not contain a virus exclusion, and no other policy exclusion applied to negate coverage.
There will certainly be more courts who come down on the side of no coverage, but sometimes all it takes is one court to articulate reasoned theories for a minority position for other courts to follow suit. By now, there are at least three courts that have done so. We’ll continue to monitor what can fairly be deemed a robust area of developing law. It is clear so far that policies with no virus exclusions are better potential candidates for coverage.
 Taps & Bourbon On Terrace, LLC v. Underwriters at Lloyds London, Court of Common Pleas of Philadelphia County, First Judicial District, No. 20093025.
 Studio 47, Inc., et al. v. Cincinnati Insurance Co., U.S. Dist. W. Mo., So. Div., Case No. 20-cv-03127-SRB, Doc 40.
 North State Deli, LLC, et al v. The Cincinnati Insurance Company, Durham County Superior Court Division, No. 29-CVS-02569.