The Rhode Island Superior Court denied the insurer's motion to dismiss a claim under Civil Authority coverage related to closures of business due to COVID-19. Atwells Realty Corp. v. Scottsdale Ins. Co., 2021 R.I. Super. LEXIS 40 (R.I. Super. Ct. June 4, 2021).
Atwells operated a nightclub. Executive Orders issued in March 2020 interrupted Atwells' business operations because Atwells could not lawfully operate its nightclub. Atwells filed a claim with its carrier, Scottsdale, under the policy's Business Income and Civil Authority coverages. Scottsdale denied coverage because the losses suffered by Atwells were not "direct physical damage to property" and losses due to a virus were excluded under the policy. Further losses under the Civil Authority provision were not covered because the policy required "damage to property within one mile of [Atwells'] premises from a covered loss, and the prohibition on access is taken in response to dangerous physical conditions."
Atwells sued and Scottsdale moved to dismiss. Scottsdale argued that Atwells failed to allege, and admitted, that there was no direct physical loss of or damage to the premises as required for Business Income Coverage. The court interpreted the provision to require that the loss of business income must have occurred during the "period of restoration," that is, while the premises was being repaired, rebuilt, or replaced. Because Atwells did not allege that its operations were suspended in order for it to repair the property such as a restoration effort to rid the premises of COVID-19, it did not plead facts sufficient for a prima facie case that coverage for the loss of business income exists under the policy. Instead, Atwells alleged it could have used its property for its ordinary functions but for the Executive Orders.
Scottsdale also argued there was no Civil Authority coverage because Atwells' could still access its property for some operations, such as carry out food. Atwells contended that the Executive Orders declared that the threat of COVID-19 was present everywhere in the state, including within one mile of its property and the dangerous physical conditions created by the virus were such that all access to the property was prohibited. Atwells further argued that COVID-19, a substance that could survive on surfaces, caused damage to property within one mile from its premises and that the Executive Orders shut down Atwells' business as a result of the virus being spread throughout the state, including the properties within one mile of Atwells.
The court agreed that substances that could not be seen but could survive in the air or on surface of property. Further, a substance that could make persons within a premises sick and the premises uninhabitable could be considered to cause direct physical loss of or damage to property. Therefore, Atwells' claim for Civil Authority Coverage could not be denied on a motion to dismiss.
Further, the virus exclusion did not eliminate Civil Authority Coverage. Scottsdale pointed to no language in the policy under which the virus exclusion would apply to other property that caused loss to the insured.
