Insurance Law Hawaii

COVID-19 Business Interruption Claim under Environmental Policy Survives

    The court determined there was coverage for business interruption due to COVID-19 under an Environmental policy. Sunstone Hotel Investors, Inc. v. Endurance American Spec. Ins. Co., 2022 U.S. Dist. LEXIS 11147 (C.D. Cal. June 15, 2022).

    Sunstone was a real estate investment trust that had an interest in 20 hotel properties with 10,000 guest rooms across the United States. In 2017, Sunstone purchased a "Site Environmental Impairment Liability Coverage" policy from Endurance. The policy provided $25,000,000 of coverage for business interruption losses caused by a biological agent. Coverage D provided that Endurance would pay "the Insureds' Business Interruption Losses and Extra Expenses during the Interruption Period that directly results from . . . Biological Agent Conditions  . . ." There was no dispute that COVID-19 was a Biological Agent, but the parties disagreed on coverage provided under Coverage D. 

    From February 24 to 27, 2020, one of Sunstone's hotels in Boston hosted the Biogen Conference. On March 5, 2020, Sunstone was informed by the Boston Public Health Department (BPHD) that three attendees of the conference tested positive for COVID-19. The next day, Sunstone gave notice to Endurance. Between March 6, 2020 and March 14, 2020, portions of the hotel were cleaned. On March 11, 2020, BPHD informed the hotel that it must be closed. The hotel agreed to suspend its operations for 14 days.

    Before the hotel could reopen, on March 23, 2020, the State of Massachusetts issued an order requiring the closure of all non-essential businesses in the state. The hotel remained closed until July 7, 2020, at which point it reopened in a limited capacity. 

    Sunstone filed a claim with Endurance on March 5, 2020. Endurance denied the claim. Sunstone filed suit and cross-motions for summary judgment were filed.

    Coverage D provided that Endurance would pay for Business Interruption Losses during the Interruption Period that "directly result from . . . Biological Agent Conditions. . ." Endurance argued that any Business Interruption Losses that may have been sustained after March 23, 2020 were due to the Massachusetts Order, not a Biological Agent Condition.

    Endurance relied upon cases discussing "damage to property" policies. But the policy here did not require physical damage or physical loss of use. Instead, the coverage was designed to address viruses and other biological agents that interrupted the hotel's operations.     

    The Massachusetts Order may not have been issued solely to stop the spread of the virus disseminating from the hotel, but it was issued to prevent future super-spreader events like the Biogen conference which took place at the hotel. The Order was designed, at least in part, to prevent the virus's spread because of the hotel's operations. 

    Next, Endurance argued the the Interruption Period ended as soon as the Massachusetts Order took effect on March 24, 2020. Sunstone countered that the Interruption Period lasted until March 2021, or for one year - the maximum duration of the Interruption Period under the Policy. Due to an ambiguity in the policy and Sunstone's objectively reasonable expectations, the court concluded that as long as the virus was a source of the hotel's Business Interruption Losses, the Interruption Period continued, ending no later than March 2021. 

    Finally, Endurance raised an exclusion under Coverage D providing that "the Interruption Period will be deemed to have ended even if operations cannot resume . . . for regulatory reasons." Endurance argued that the Massachusetts Order was regulatory and even if the hotel was initially closed to address the presence of the virus, the hotel's operations remained suspended after March 26, 2020 solely because of the Massachusetts Order. Endurance had not shown, however, that the Massachusetts Order was the actual reason there was interruption to the hotel's operations. There was no question that the virus itself interrupted the hotel's operations because even if the State had allowed the hotel to operate at full capacity, the hotel could not have done so. 

    Therefore, Endurance's motion for summary judgment was denied. Sunstone's motion with respect to how to interpret the provision governing the ending of the Interruption Period was granted. The court denied Sunstone's motion that the court make the factual determination that the Interruption Period ended in March 2021. Further discovery was required to decide this issue. 

Federal District Court Submits Certified Question to Maryland Court of Appeals on COVID-19 Claim

    In an unusual move for a federal district court handling COVID-19 claims, a certified question was submitted to the Maryland Court of Appeals for an interpretation of state law. Tapestry, Inc. v. Factor Mut. Ins. Co., 2022 U.S. Dist. LEXIS 75665 (D. Md. April 25, 2022). 

    Tapestry owned three luxury accessory lifestyle brands: Coach, kate spade new york, and Stuart Weitzman. Before the pandemic, Tapestry had 1540 retail and outlet stores under its three brands, with 414 stores in the United States. Tapestry employed approximately 16,000 people across the United States.

    Tapestry suffered considerable losses due to the Coronavirus. When Tapestry filed its First Amended Complaint, at least 1,676 of its employees had confirmed they contracted COVID-19. Tapestry alleged that the Coronavirus was present in its stores. Given the high prevalence of infectious COVID-19 cases in Maryland, Tapestry argued it was statistically certain that Coronavirus droplets and aerosols were frequently dispersed into the air and on property in, on and around the Tapestry stores. 

    Tapestry had an all risk commercial property policy from Factory Mutual Insurance Company. Coverage was denied and Tapestry filed suit. Factory moved to dismiss Tapestry's First Amended Complaint. In response, Tapestry asked the court to certify a question to the Maryland Court of Appeals asking whether a policy covering "all risks of physical loss or damage" was triggered when a toxic, noxious, or hazardous substance - such as COVID-19 - that was physically present in the indoor air damages property or causes loss of the functional use of the property?

    Factory opposed the motion and noted that the court had previously denied a motion to certify a similar questions whether the effect of the Coronavirus on a property could constitute 'physical loss or damage" to the property. In the court's view, however, the prior cases were distinguishable because the policy language at issue was different and the prior cases did not include specific allegations that the insureds' properties had in fact been contaminated by the Coronavirus. The court reasoned that a property could arguably be physical degraded - if only temporarily - by the existence of coronavirus in the air.      

    This case was appropriate for certification because there was no controlling appellate decision or statute on point. Therefore, the motion to certify was granted.

Don't Give Up Yet - Another COVID-19 Victory for Policyholders

    The Louisiana Court of Appeals reversed the lower court's decision, finding there was business interruption coverage for losses due to government shutdown orders related to the COVID-19 pandemic. Cajun Conti LLC v. Certain Underwriters at Lloyd's, 2022 La. App. LEXIS 939 (La. Ct. App. June 15, 2022).

    The insured owned a restaurant in the French Quarter of New Orleans. Prior to the COVID-19 pandemic, the insured employed 200 people and could accommodate up to 500 guests at a time. Government shutdown orders limited restaurant operations to take out and delivery services in March 2020. The insured reopened on May 16, 2020, but in limited capacity to comply with the updated mayoral guidelines. 

    On March 16, 2020, the insured filed suit for a declaratory judgment that the Lloyd's policy covered losses due to the pandemic. The policy covered losses due to "direct physical loss of or damage to" the insured property. Lost business income and extra expenses were covered for losses sustained due to necessary suspensions of the property's operations during the "period of restoration." Lloyd's filed a motion for summary judgment arguing that the claims were not covered because there was no "direct physical loss of or damage to" property. The motion was denied and a bench trial proceeded. The trial court rendered judgment denying the insured relief and an appeal was filed.

    The court of appeals noted that the "all-risk" policy covered loss of business income sustained due to necessary "suspension" of operations during the "period of restoration." The "suspension" had to be caused by "direct physical loss of or damage to the property." The policy did not define "direct physical loss' or "damage." 

    "Suspension" was defined in the policy as the "slowdown or cessation of our business activities." Therefore, the complete cessation of operations and an uninhabitable property were not required. Suspension included the slowdown of business activities, which occurred here, as well as the compete cessation of business operations. 

    Lloyd's pointed to recent cases in other jurisdictions that interpreted "physical" in relation to coronavirus claims as requiring a tangible or corporeal loss of property or damage. These cases were not binding on this court, however. 

    The court found the policy ambiguous.  Under one reasonable interpretation, suspension of business operations due to "direct physical loss of or damage to the property" meant the loss of the property's full use, as Lloyds argued. The insured's expert opined that the contagion-causing viral particles persisted in the air of the premises. The presence of COVID-19 substantially diminished the usable space of the property.

    Another reasonable interpretation was that the suspension of business operations due to "direct physical loss of or damage to the property" required the full loss of the property's use, a situation distinct from the loss of the property's full use. Under this scenario, the insured would have had to shut down the restaurant completely for some period of time in order to qualify for coverage.

    The presence of this ambiguity and the existence of two equally reasonable interpretations as to what constituted a "direct physical loss of or damage to" the insured property meant the policy was construed in favor of coverage.

    The ambiguity allowed the court to consider parole evidence. The court noted that when the policy was issued, Lloyd's could have included a viral exclusion to the policy. The insured testified it would not have purchased the policy with such an exclusion. This testimony provided insight regarding how the insured reasonably construed the policy at the time of its purchase. 

    Consequently, the judgment of the trial court was reversed. The court held that coverage existed for loss or damage caused by "direct physical loss of or damage to" the insured premises as a result of contamination by COVID-19. 

 

Rare Policy Language Gives Insured Rare Victory on COVID-19 Claim

    The Appellate Division of the New York Supreme Court affirmed the lower court's denial of a motion to dismiss the insured's business interruption claim arising from COVID-19 closures. New York Botanical Garden v. Allied Work Assur. Co. (U.S.), 2022 N.Y. App. Div. LEXIS 3792 (N.Y. App. Div. June 14, 2022). Our post on the lower court's decision is here.

    The insured was forced to cease operations after executive orders by the governor and mayor were issued in March 2020. The insured also had to reduce its in-person workforce by 100%. The insured's claim for business interruption and contingent business interruption were denied by Allied. The insured sued for a declaratory judgment.

    Allied issued a Pollution Legal Liability policy with unusual language for purposes of business interruption and COVID-19 claims. The policy defined "contingent business interruption" as "the necessary suspension of your business operations at a location owned  . . . as a result of an order by a government body denying access to the location . . . provided that" the suspension and the order must be "caused solely and directly by a pollution incident on, at or under an independent location." "Independent location" was defined as "a location that is not and was not at any time a location owned, leased, managed, operated or used by an insured."

    Allied agreed COVID-19 constituted a "pollution incident," but moved to dismiss. The lower court denied the motion and Allied appealed.

    The appellate court affirmed. Allied failed to establish that contingent business interruption coverage was available only if the insured was completely denied access to its property. The policy contemplated coverage for periods when the insured would have some temporary access to the property, including periods involving potential partial resumption of operations to mitigate damages, which for the insured included maintaining its extensive plantings. The cases relied upon by Allied involved civil authority coverage in property liability policies and periods of complete denial of access due to physical damage and were inapposite. 

    The appellate court also affirmed the decision not to dismiss the insured's claim for bad faith. 

LA Lakers Partially Survive Motion to Dismiss COVID-19 Claims

    While the appellate court affirmed dismissal of a majority of the claims submitted by the Los Angeles Lakers for closure of the Staples Center and other properties due to COVID-19, a portion of their claims survived. L.A. Lakers v. Fed Ins. Co., 2022 U.S. Dist. LEXIS 31503 (C.D. Calif. March 17, 2022).

    Government orders closed the Staples Center in March 2020. The Lakers alleged they lost tens of millions of dollars in revenue. They further alleged that the presence of coronavirus particles on fixtures and building systems caused physical alterations to the covered properties. The Lakers had to upgrade their properties to include new air filters, touchless light switches, toilets and sinks; sleeves or coatings for high-touch surfaces; and plexiglass dividers. The Lakers also alleged that five Metro stations within a mile of the Staples Center, that was used to get to games, were closed by civil authorities due to the presence of COVID-19. 

    The Lakers submitted a claim for property damage and business interruption to Federal. The claim was denied and the Lakers filed suit. In February 2021, the court granted Federal's motion to dismiss without prejudice, after concluding that the Lakers' allegations of direct physical loss or damage were mere legal conclusions and not sufficient to state a claim. 

    The Lakers filed a first amended complaint (FAC). The same claims were alleged, but with additional factual allegations. Federal again moved to dismiss the FAC.

    Regarding the property damage claim, the Lakers alleged that the virus physically altered surfaces at covered properties by changing their chemical and physical properties and creating viral vectors that required cleaning or replacement before the covered properties were safe again. The claim for property damage was sufficiently stated for declaratory judgment and breach of contract.

    The business interruption claims failed, however. The closure of the Staples Center and other properties was not caused by virus damage, but by a litany of blanket NBA and government measures. There was no causal chain connecting virus-related physical alterations at the covered properties to the properties' closure. 

    The civil authority claim was also dismissed. The government orders closing both the covered properties and the Metro stations were aimed at limiting viral spread in the community, not at mitigation of property damage at any specific facility. The stay-at-home orders applied to the entire City of Los Angeles and would have closed the Metro stations even if the virus had never been present there. Thus, the stay-at home orders were not issued in response to direct physical loss or damage at the Metro stations. 

 

 

Insured Survives COVID-19 Motion for Judgment on the Pleadings

    The insured's suit for business interruption survived a motion for partial judgment on the pleadings due to the policy's coverage for contamination. Live Nation Entertainment, Inc. v. Factory Mutual Ins. Co., No. LA CV 21-00862, Order (Feb. 3, 2022, C.D. Calif.). The minute order is here.    

    Live Nation alleged that the outbreak of COVID-19 and government shut down orders forced all of it properties in the United States to close by the end of the third quarter of 2020, it had cancelled more than 5000 concerts. The complaint alleged that the loss of use of the property was "'physical' because Live Nation has been deprived of the use and function of its buildings." The complaint further alleged that the physical presence of COVID-19 in its properties caused physical damage. A claim was presented to Factory Mutual, but a decision was never made on coverage. Live Nation alleged, on information and belief, that Factory Mutual had taken the position that it would deny nearly all coverage sought by its policyholders for COVID-19 losses.     

    Based on the Ninth Circuit decision in Mudpie, Inc. v. Travelers Can. Ins. Co. of Am., 15 F.4th 885, 892 (9th Cir. 2021), the court found that neither the presence of COVID-19 on the property nor the government closure orders constituted physical loss or damage to property. 

    The policy also covered "Communicable Disease Response" for "reasonable and necessary costs" incurred for "cleanup, removal and disposal" and for "public relations services" related to a communicable disease. But an exclusion for "contamination and any cost due to contamination including the inability to use or occupy property or any cost of making property safe or suitable for use or occupancy" was included in the policy. An exception to the exclusion stated, "If contamination . . . directly results from other physical damage not excluded by the Policy, then only physical damage caused by such contamination may be insured." 

    The Communicable Disease Provisions provided coverage for non-physical loss caused by COVID-19 that did not appear elsewhere in the Policy. For example, Ingress/Egress coverage would cover losses incurred due to the prevention of entry into the property because the physical presence of COVID-19 had been detected on the property, causing physical damage. However, once the physical presence of COVID-19 was eliminated,, e.g., by cleaning and disinfection, the property could still remain closed to prevent reinfection. Any losses incurred because of the continued closure of the property would not be covered by the Ingress/Egress provision because there would be no actual physical damage causing the closure. The losses from the continued closure could only be covered as non-physical, virus-related damage under the Communicable Disease Provisions. Whether the claims qualified for coverage under either type of coverage was a question of fact that could not be resolved on a motion based on the pleadings,.

    Therefore, Factory Mutual's motion was denied, 

 

Insurers' Motion to Dismiss COVID-19 Business Interruption Claims Denied

    With the exception of one insurer with a virus exclusion, the court denied a motion to dismiss filed by various insurers business interruption claims related to COVID-19. AC Ocean Walk, LLC v. Am. Guar. and Liab. Ins. Co., No. ATL-L0703-21, Order (N.J. Super. Ct. Dec. 22, 2021)

    AC Ocean Walk, LLC, ran a casino that suffered business losses when COVID-19 was present on its property, forcing a closure of the business. Ocean sought coverage from its numerous insurers. The insurers denied coverage because there was no actual physical damage to the property. The insurers further argued that contamination exclusions in their policies barred coverage. 

    Ocean asserted the COVID-19 virus caused a direct physical loss of its property, i.e., the loss of use of the casino, when the risk of damage to the health and property that accompanies the COVID-19 became imminent and the casino was forced to close. Further, the property suffered direct physical loss because of the actual presence of the COVID-19 on the premises, which fundamentally altered and damaged the surfaces and the air space within the casino, preventing Ocean's use of the property.

    In considering the insurers' motion to dismiss, the court observed that the complaint asserted that the respiratory droplets expelled from individuals landed on, attached, and adhered to surfaces and objects which rendered physical changes to the property and its surface by becoming part of its surface. As a result of that physical alteration, contact with these surfaces was unsafe. Numerous scientific studies documented that COVID-19 could physically remain on and alter property for extended periods of time. 

    The court found that the allegations met the requirements for coverage pursuant to the insuring agreements and would not be dismissed. Further, the term "direct physical damage" in the carriers' policies was ambiguous because it could reflect different meanings. 

    Most of the policies contained a pollution exclusion which the insurers argued barred coverage. The policies excluded damage caused by contaminants, which meant materials that could be harmful to human health. But the contaminants listed were associated with traditional environmental pollution damages, not reasonably related to the damages in this case, which were derived from a communicable disease.

    The only possible applicable exclusion was the Biological or Chemical Substance Exclusion in the National Fire Insurance policy. Its policy did not provide coverage for "the actual or suspected presence or threat of any pathogenic or poisonous chemical substance, . . . including, but not limited to, any malicious use of such substance." COVID-19 fell within the category of pathogens covered by the endorsement. Consequently, the endorsement precluded coverage under the National Fire policy. 

New Hampshire Superior Court Grants Interlocutory Appeal for COVID-19 Claim

    After issuing the insureds' summary judgment motion that COVID-19 invasion of the insureds' property constituted "direct physical loss or damage to property," the New Hampshire Superior Court granted the insurers' motion for an interlocutory appeal. Schleicher & Stebbins Hotels, LLC, et al. v. Starr Surplus Lines Ins Co, et al., No. 217-2020-CV-000309, Order (N.H. Super. Ct. Jan. 6, 2022). The original decision granting summary judgment was discussed in a post here. 

    The insureds owned and operated twenty-three hotels in New Hampshire, Massachusetts and New Jersey. The insureds purchased $600 million of coverage from the various insurers. 

    When the COVID-19 related government orders restricted the operation of the hotels, they sought coverage from the insurers. The policies insured against "risks of direct physical loss of or damage to property." The insurers contended that the hotels failed to provide sufficient details concerning physical damage to their properties. 

    The insureds filed suit and moved for summary judgment to establish that the terms "loss or damage" and "directly physical loss of or damage to property" encompassed the impact of COVID-19 on their properties. The insureds' motion was granted. The insurers now moved for an interlocutory appeal,

    The trial court found it was appropriate to present an interlocutory appeal for the Supreme Court's consideration. The court noted that courts in other jurisdictions had decided in favor of insurers on the issue of whether policy holders had experienced "direct physical loss of or damage to property" due to the presence of COVID-19. Therefore, the motion was granted.

    The court also granted the insureds' motion to amend their complaint to add two causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing. The insureds' allegations were reasonably susceptible of a construction that would permit recovery on the claim for breach of the implied covenant of good faith and fair dealing, and thus the amendment was not futile. 

New York Court Denies Injunction to Prevent Out-of-State Suit

    The Appellate Division of the Supreme Court refused to grant an injunction to the insurer to prevent a pending suit in Washington state. North Am. Elite Ins. Co. v. Space Needle, LLC, 2021 N.Y. LEXIS 6792(N.Y. App. Div. Dec. 2, 2021).

    In 2019 Seattle based Space Needle, LLC procured a policy from Elite, a New Hampshire company authorised to sell insurance in the state of Washington. The policy covered business interruption with limits of $160 million and provided that the laws of the State of New York "shall govern the construction and interpretation" of the policy and that the parties submitted to the "exclusive jurisdiction" of New York State courts. 

    In March 2020, Space Needle notified Elite of a business interruption loss claim due to the city and state governments' COVID-related closure of the Space Needle to the public. Space Needle requested a coverage determination under Washington law concerning the policy coverage provisions and exclusions.    

    Elite sued in New York seeking a declaration that it owed no coverage to Space Needle for its COVID-related losses under the policy. Elite also moved for a preliminary injunction to prevent a similar suit from going forward in Washington. The Supreme Court denied Elite's motion because it did not show a likelihood of success on the merits or the balance of equities in seeking to enforce the New York exclusive forum selection clause.

    The Appellate Division agreed. As an insurer authorised to sell insurance in Washington, Elite was required to comply with the Washington Insurance Code's prohibition against choice-of-law and forum selection clauses in policies sold in Washington. The code provided that no insurance issued in Washington "shall contain any condition, stipulation or agreement (a) requiring it to be construed according to the laws of any other state or country . . . or (b) depriving the courts of this state of the jurisdiction of action against the insurer. . ." Elite did not demonstrate that the equities tip in its favor where it was attempting a blatant end run around of Washington's prohibition against choice-of-law and forum selection clauses. The clauses were void under the Washington law with which Elite agreed to comply. Elite should have known that by participating in the Washington insurance market, it had an obligation not to include such clauses. 

    

Insurer's Motion for Summary Judgment on COVID-19 Claim Denied, Case Set for Trial

    The Ohio Court of Common Pleas granted the insured's motion for summary judgment, denied the insurer's motion for summary judgment and and set the COVID-19, business interruption case for trial on damages. McKinley Dev. Leasing Co. v. Westfield Ins. Co., 2021 Ohio Misc. LEXIS 885 (Ohio Ct. Pleas Nov. 14, 2021). 

    McKinley owned several commercial properties and had multiple leases with small and larger businesses. When the governor and Department of Health ordered shutdowns at the beginning of the pandemic, tenants could not pay rent, causing substantial business income losses to McKinley. McKinely filed a claim under its property policy with Westfield and coverage was denied. McKinley sued for breach of contract and bad faith.

    The court previously denied Westfield's motion to dismiss. Subsequently, McKinley filed a motion for summary judgment based upon the court's earlier ruling that the policy language was ambiguous. Westfield filed a cross-motion requesting the court to review the caselaw across the country and reverse its prior ruling finding the policy to be ambiguous. 

    The court found it "astounding" that the Westfield policy did not define the critical policy terms, "direct," "physical," "loss" or "damage." It was hard to believe that Westfield would not find it important for the insured to understand when purchasing the lengthy policy and making premium payments. Policyholders had the right to have a clear understanding of what they received in return. Given the spectrum of accepted interpretations for these terms in other decisions, the court interpreted the disputed language in Westfield's policy in favor of McKinley. 

    Westfield next relied upon the policy's virus exclusion which barred coverage for "loss or damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness or disease." Again, the court agreed with McKinley that the exclusion was reasonably susceptible of more than one interpretation. 

    Westfield also raised Civil Authority Coverage. Under this provision, Westfield agreed to pay for loss of income caused when covered causes of loss caused damage to other properties within one mile of McKinley's properties and resulted in an order by civil authority that prohibited access to McKinley's properties. Here, it was clear that the pandemic had caused damage to properties surrounding McKinley's properties, resulting in dangerous physical conditions for which Ohio Civil Authority orders were issued, preventing access to McKinley's properties. As a result, the language in the policy was susceptible to more than one reasonable interpretation and did not preclude coverage. 

    Finally, the court granted Westfield's motion on the bad faith and punitive damages claims. There was sufficient case law to support Westfield's reasonable justification for denying coverage. 

    The court set a trial date for damages.