Insurance Law Hawaii

Pennsylvania Trial Court Denies Insurer's Motion to Dismiss COVID-19, Business Interruption Claim

    The insured successfully alleged that the presence of virus particles in its gym constituted a loss, allowing it to survive the insurer's Motion to Dismiss the business interruption claims. Brown's Gym, Inc. v. The Cincinnati Ins. Co., No. 20-3113 (Pa. Ct. Cm Pl. July 13, 2021). 

    The insured contended that virus particles were present on its property and were sufficient to establish a claim of "direct physical loss" under the policy. The all risk policy did not include a virus exclusion, but did provide a separate "communicable disease or virus" exclusion for "crisis event response communication expense coverage." Therefore, the insured has a reasonable expectation that COVID-19 related damages would be covered, but excluded from the crises event response communication expense coverage. 

    

Eighth Circuit Affirms Dismissal of COVID-19, Business Interruption Claim

    In what appears be the first federal appellate decision on COVID-19 business interruption claims, the Eighth Circuit affirmed the district court's dismissal of the insured's claim based upon closure due to the pandemic. Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2021 U.S. App. LEXIS 19775 (8th Cir. July 2, 2021).

    After the Iowa governor declared a state of emergency and imposed restrictions on dental practices, the insured stopped performing non-emergency procedures in late March 2020. Oral Surgeons resumed procedures in May 2020 when restrictions were lifted. 

    Oral Surgeons submitted a claim to Cincinnati which was denied. The policy insured Oral Surgeons against lost business income sustained due to the suspension of operations "caused by direct 'loss' to property." The police defined "loss" as "accidental physical loss or accidental physical damage." Cincinnati denied the claim because there was no direct physical loss or physical damage to Oral Surgeons' property. Oral Surgeons sued and the complaint was dismissed. 

    On appeal, Oral Surgeons maintained that the COVID-19 pandemic and the related government-imposed restrictions on performing non-emergency dental procedures constituted a "direct 'loss' to property" because the insured was unable to fully use its office. The court determined there must be some physicality to the loss or damage of property, e.g., a physical alteration, physical contamination, or physical destruction. The policy did not cover mere loss of use when the insured's property suffered no physical loss or damage. This construction of the policy accorded with coverage of lost business income during the "period of restoration." Property that suffered physical loss or physical damage required restoration. That the policy provided coverage until property "should be repaired, rebuilt or replaced" or until business resumes elsewhere assumed physical alteration of the property, not mere loss of use. 

    The complaint did not allege any physical alteration of property. No facts were alleged to show that Oral Surgeons had suspended activities due to direct "accidental physical loss or accidental physical damage." The district court's judgment was affirmed. 

Civil Authority Claim Survives Motion to Dismiss

    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. 

 

        

Court Denies Motion to Dismiss Retailer's COVID-19, Business Interruption Claim

    The insured furniture retailer survived a motion to dismiss its business interruption claim after government orders caused disruption of the insured's operations due to COVID-19. Susan Spath Hegedus v. Ace Fire Underwriters Ins. Co., 2021 U.S. Dist. LEXIS 88041 (E.D. Pa. May 7, 2021).

    Plaintiff operated two locations in California. Plaintiff had an all-risk policy from Ace. When the pandemic struck, county and state orders shuttered plaintiff's business as non-essential. Plaintiff filed a claim for lost business income. Ace denied the claim because the losses did not arise from any direct physical loss or damage to property, and were barred by the policy's virus exclusion. Plaintiff filed suit and Ace moved to dismiss.

    The court found that plaintiff plausibly stated claims for coverage related to business income. The Business Income Additional Coverage portion of the policy required "direct physical loss of or damage to" property. This disjunctive language indicated the two phrases could not be synonymous, or they would be redundant. The allegations in plaintiff's complaint regarding its suspension of operations could plausibly constitute a "direct physical loss of . . . property at the described premises," because plaintiff lost the ability to physically operate its business. The phrase "direct physical loss of or damage to" was ambiguous as used in the policy. Therefore, the plaintiff's alleged loss of property that plausibly fell within the scope of the policy was sufficient to survive the motion to dismiss. 

    Addressing the virus exclusion, the court noted that the complaint alleged it was the government shutdown orders that caused the losses, not the virus. The complaint did not allege the presence of the virus at the premises. It alleged that the government orders caused its losses when its business operations were suspended. Regardless of what may have precipitated the closure order, the virus continued to exist. Accordingly, it was the order to shut down the business that forced the closure. The argument that the orders themselves caused the losses, or were at least the predominant cause of its losses, was also sufficient to defeat the motion to dismiss. 

Summary Judgment Granted to Hotel Chain in COVID-19 Claims

   

    A New Hampshire Superior Court granted a hotel chain summary judgment on its suit for coverage due to losses caused by COVID-19. Schleicher & Stebbins Hotels, LLC v. Starr Surplus Lines Ins. Cos., No. 217-2020-00309 (N.H. Super. Ct. June 15, 2021). 

    Government orders were issued restricting the operation of the hotels in March 2020. In April 2020, the hotels were deems as "lodging providers," meaning they had to restrict lodging to vulnerable populations and essential workers only. When the hotels were allowed to reopen they continued to face a number of restrictions. They could accept overnight reservations from in-state residents but not provide lodging to out-of-state visitors unless the visitors completed a fourteen-day quarantine.

    The policies required "direct physical loss of or damage to property" in order to recover business loss. Coverage was denied by the insurers because the properties were not physically damaged. The loss of revenue and closures were due to the governmental orders to slow the spread of the virus. 

    Cross-motions for summary judgment were filed. The hotels sought a declaratory ruling that "Any requirement under the policies of "direct physical loss or damage to property" was met where property is impacted by the coronavirus." The court rejected the insurers argument that "distinct and demonstrable" changes to property must be demonstrated and be capable of remediation, or result in dispossession. The court concluded that the term "direct physical loss of or damage to property" encompassed the kind of damage caused by the spread of SARS-CoV-2 to the hotels' property. The hotels' motion for summary judgment while the motions by all but one of the insurers was denied. 

    One of the hotels' insurers, Axis, survived the insured's summary judgment motion because its contamination exclusion barred coverage. The court agreed that SARS-CoV-2 was a "virus" that was 'dispersed" by persons with COVID-19. The other insurers' reliance on their Microorganism Exclusion was rejected. Competing views from other courts on whether a virus, such as SARS-CoV-2 was a "microorganism." The exclusion had to be construed narrowly and against the insurer. Therefore, the competing views meant that "a virus is not unambiguously understood to be a 'microorganism.'"

Claims that COVID-19 Present on Property Survive Motion to Dismiss

    Plaintiffs successfully argued against a motion to dismiss by alleging COVID-19 was present on their premises and required repairs and alterations to their properties. Legacy Sports Barbershop LLC v. Cont'l Cas. Co., 2021 U.S. Dist. LEXIS 102545 (N. D. Ill. June 1, 2021). 

    Plaintiffs operated a barbershop, barbering school and hair salon. They were insured by Continental. Plaintiffs alleged that the presence of COVID-19 required that they install a new air filtration system, build a new outdoor patio to accommodate patrons outside, install social distancing barriers and germ sanitation stations, and remove 60% of their workstations to allow for social distancing indoors. Coverage under the Business Income and Civil Authority provisions in the policy were denied by Continental.

    Plaintiff sued. Continental moved to dismiss because there was no "physical loss of or damage to" the properties. Continental also agued that any losses caused by a virus were excluded. The court found, however, that plaintiffs sufficiently alleged that the properties underwent a distinct, demonstrable, physical alteration, and therefore suffered "physical loss of or damage to" the properties. 

    Further, the applicability of the virus exclusion was not free from doubt. The policy did not specifically exclude from coverage damage caused by viruses, but instead excluded damage caused by the "presence growth, proliferation, spread or any activity of fungi, wet or dry rot or microbes." The exclusion said that "microbe" did not mean "microbes that were transmitted directly from person to person. Therefore, it was not clear whether "microbe" as defined in the policy included a virus such as SARS-CoV-2 because that virus could spread from person to person. Continental failed to establish that the claims were excluded from coverage at this stage.

Motion to Dismiss Beauty Salon's COVID-19 Claim Denied

    The insured beauty salon's claim for losses caused by shutdown orders due to COVID-19 survived the insurer's motion to dismiss based upon a Communicable Disease endorsement. Treo Salon, Inc. v. West Bend Mut. Ins. Co., 2021 U.S. Dist. LEXIS 88577 (S.D. Ill. May 10, 2021). 

    The insured's policy included an endorsement for Communicable Disease Business Income and Extra Expense Coverage. It provided coverage for any shutdown or suspension be due to an outbreak of communicable disease at an insured premises. The insured's beauty salon was ordered closed when the pandemic hit. 

    When coverage was denied, the insured filed a class action complaint seeking a declaratory judgment that its losses were covered by the Communicable Disease endorsement.  West Bend moved to dismiss arguing that coverage was triggered only if: (1) there was a communicable disease at the insured's premises; and (2) the business closed due to the outbreak. The insured did not establish that any governmental order was "due to" any outbreak on their premises. 

    The court noted that the case dealt with a specific and finite policy endorsement, not a traditional business interruption provision. Here, there was no doubt that the shutdown orders were in response to the outbreak of COVID-19. The issue was whether the shutdown due to an outbreak was at the insured premises. West Bend could not be certain that COVID-19 was not at the premises. The insured sufficiently pled a cause of action against West Bend and plausibly alleged that it was entitled to coverage. 

Restaurant's COVID-19 Claim Survives Motion to Dismiss

    The insurer's argument that the insured restaurants' claim for business interruption due to COVID-19 should be dismissed because there was no physical damage to the structure was rejected by the federal district court in Alabama. Serendipitous, LLC v. Cincinnati Ins. Co., 2021 U.S. Dist. LEXIS 86998 (N.D. Ala. May 6, 2021).

    Due to closure orders issued at the beginning of the coronavirus pandemic, restaurants could provide only curb pick up for months Later, they were allowed to seat customers, but at a restricted capacity.  The restrictions caused the restaurants to suffer business income losses, so the restaurants submitted a claim to Cincinnati for coverage. The claim was denied. The restaurants filed suit.

    Cincinnati moved to dismiss, arguing that the restaurants had not adequately pleaded a direct physical loss under the terms of the policy. The court focused on the word "loss" as used in the policy. "Loss" was defined in the policy as "accidental physical loss or accidental physical damage." Cincinnati argued that the term "loss" was unambiguous and that the restaurants failed to identify "physical" loss or damage to property needed to trigger coverage. The restaurants argued "loss" was ambiguous as used in the policy. Further, the "loss" or "damage" requirements in the definition of "loss" were disjunctive, so the words must have distinct meanings. 

    The court agreed that the alternative phases "accidental physical loss" and "accidental physical damage" in the definition of "loss" indicated that each phrase had a separate meaning. Otherwise, one of the phrases was superfluous. The distinction indicated that loss meant something other than damage. Further, when property was damaged so badly that it could not be used again, it typically was considered a loss. 

    The restaurants alleged that they were physically deprived of their property because of the COVID-19 virus. Civil orders restricting the restaurants' access to their property because of the widespread presence of a rapidly spreading, invisible, lethal virus that survives on surfaces such as restaurant tables were no different from civil orders restricting access to a restaurant after fire destroys part of a building. The restaurants alleged that civil authorities limited access to the restaurants because the virus was so prevalent in the community. Further, the restaurants had to close completely when an employee contracted the virus, whether or not the employee contracted CZOVID-19 at the restaurant, to disinfect the premises because the potential for spread of the highly contagious virus made the premises "dangerous" and unusable until the premises were disinfected. 

    Accordingly, Cincinnati's motion to dismiss was denied. 

 

Claim for Business Interruption Based on Government Orders Precluding Use of Property Survives Motion to Dismiss

    The court found that the insured hair salon and barbershop plausibly alleged an entitlement to coverage for lost business income when the government orders restricted use of the property as intended. Seifert v. IMT Ins. Co., 2021 U.S. Dist. LEXIS 103420 (D. Minn. June 2, 2021). 

    Plaintiff's business was ordered to close by two executive orders issued in response to the growing number of COVID-19 cases in Minnesota. The policy covered the loss of business income due to a "suspension of your 'operations' . . . caused by direct physical loss of or damage to property . . ." Plaintiff sought coverage for his business losses. IMT Insurance Company denied the claim. Plaintiff sued and IMT moved to dismiss. The motion was initially granted without prejudice and plaintiff filed an amended complaint. 

    Plaintiff did not allege any damage to his property, so only the phrase "direct physical loss of" was relevant. "Direct physical loss of" was a severing of an owner's possession of property, one which caused an immediate and materially perceptible inability to occupy and control property as intended. A qualifying loss could arise from an impairment of function and value to property, when legal regulations stymied a business's ability to lawfully provide its products. Further, a loss could arise if a building's function was seriously impaired and the property was rendered useless. If a government deemed a property dangerous to use and an owner was unable to lawfully realize the business property's physical space to provide services, Minnesota courts would find this to be a cognizable impairment of function and value. Plaintiff alleged a plausibly direct physical loss of property by alleging that executive orders forced a business to close because the property was deemed dangerous to use and its owner was thereby deprived of lawfully occupying and controlling the property to provide services within it. 

    The policy also included a virus exclusion that precluded coverage for any loss or damage caused by any virus that induced or was capable of inducing physical distress, illness or disease. Here, plaintiff alleged that his business would be open if not for the governmental orders. Thus he alleged a single cause of loss: the executive orders. The virus exclusion was intended to preclude coverage only where there was some direct or indirect contamination of the business premises, not whenever a virus was circulating in a community and a government acted to curb its spread by means of executive orders of general applicability. The losses, as alleged, were not precluded by the virus exclusion. 

COVID-19 Claim Survives Insurer's Motion for Judgment on the Pleadings

    The Federal District Court for the Easter District of Texas rejected the insurer's motion for judgment on the pleadings on the insured's claim for losses due to the coronavirus. Cinemark Holdings, Inc. v. Factory Mut. Ins. Co., 2021 U.S. Dist. LEXIS 90124 (E.D. Tex. May 5, 2021). 

    Cinemark operated the nation's third larges movie theater circuit. It held an "All Risks" policy from Factory Mutual. The policy expressly included coverage for physical loss or damage by a communicable disease. An additional coverage in the policy was issued for Interruption by Communicable Disease. Cinemark had paid over $3.7 million in premiums for its policies. 

    As a result of the COVID-19 pandemic, over 1700 Cinemark employees tested positive for, were exposed to, or displayed symptoms of COVID-19. Most of these employees were on Cinemark property just before testing positive. Cinemark was forced to close its theaters, incurring business income loss. A claim was filed with Factory Mutual. After months with no decision, Cinemark sued.

    Factory Mutual filed a Motion for Judgment on the Pleadings, alleging that Cinemark did not allege physical loss or damage, and that the policy's contamination exclusion barred the claim. Factory Mutual relied upon the court's prior decision, Selery Fulfillment, Inc. v. Colony Ins. Co., 2021 WL 963742 (E.D. Tex. March 15, 2021).

    The motion was denied. Cinemark stated plausible claims to defeat a Rule 12 (c) motion. Selery was distinguishable because there were no allegations that COVID-19 had entered the property, only that the pandemic prevented Selery from fully utilizing the property. Here, Cinemark alleged that COVID-19 was actually present and actually damaged the property by changing the content of the air. Further, Cinemark's policy was much broader that the one in Selery because it expressly covered loss and damage caused by "communicable disease." Both parties agreed that "communicable disease" encompassed COVID-19. Therefore, Cinemark met its burden to defeat the Rule 12 (c) motion.