Insurance Law Hawaii

Dentist's COVID-19 Business Interruption Claim Dismissed Based on Virus Exclusion

    A Florida dentist could not survive the carrier's motion to dismiss a business interruption claim due to closures for COVID-19. Martinez v. Allied Ins. Co. of Am., 2020 U.S. Dist. LEXIS 165140 (M.D. Fla. Sept. 2, 2020). The court's Order is here.

    The dentist alleged that the government mandated emergency declarations limited his dental practice. He claimed that he (1) incurred costs to decontaminate his dental office of the virus, and (2) lost business income because of the Governor's limitation of dental services to only emergency procedures during the COVID-19 pandemic.  

    Allied argued that the policy contained an exclusion for loss or damage caused "directly or indirectly," by "any virus, bacterium or other microorganism that induces or is capable of including physical distress, illness or disease."

    Because the dentist's damages resulted from COVID-19, a virus, neither the Governor's executive order narrowing dental services to only emergency procedures nor the disinfection of the dental office of the virus was a "Covered Cause of Loss" under the policy. The complaint was dismissed with prejudice. 

    

Civil Authority Claim Based on COVID-19 Dismissed

    A California federal district court dismissed the insured restaurant's civil authority claim after being ordered to close due to COVID-19. 10E, LLC v. Travelers Indemnity Co. of Connecticut, et al., 2020 U.S. Dist. LEXIS 156827 (C.D. Calif. Aug. 28, 2020).  The decision is here. 

    Public health restrictions prohibited in-person dining at plaintiff's restaurant, limiting its business to takeout and delivery. Plaintiff sought compensation for lost business and other costs of the disruption under Business Income and Extra Expense Coverage. The policy covered losses and expenses "caused by action of civil authority that prohibits access to the described premises." Further, "[t]he civil authority action must be due to direct physical loss of or damage to property." Finally, the policy included a virus exclusion that applied to actions of civil authority. 

    Plaintiff sued, alleging that it was entitled to coverage because public health restrictions prohibited access to its restaurant. The restrictions caused "physical damage" by labelling of the insured property as non-essential and preventing the ordinary intended use of the property. Plaintiff also alleged that the virus exclusion did not include exclusion for a viral pandemic. 

    Travelers filed a motion to dismiss. The court agreed that Plaintiff did not plausibly allege that it suffered "direct physical loss of or damage to property" as required for civil authority coverage. Under California law, losses from inability to sue property did not amount to "direct physical loss of or damage to property" within the ordinary meaning of that phrase. Physical loss or damage occurred only when property underwent a distinct, demonstrable, physical alteration. Detrimental economic impact did not suffice. Labeling the property as non-essential did not physically alter any of Plaintiff's property. Further, Plaintiff did not allege that the virus infected or stayed on surfaces of its insured property. Whatever physical alteration the virus caused to property in general, nothing in the complaint plausibly supported an inference that the virus physically altered conditions for Plaintiff's restaurant 

    Plaintiff attempted to circumvent the plain language of the policy by emphasising its disjunctive phrasing - "direct physical loss of or damage to property." Plaintiff, however, did not allege that it was permanently dispossessed of any insured property. Instead, Plaintiff remained in possession of its dining room and restaurant. 

    Therefore, the motion to dismiss was granted. Plaintiff was allowed 14 days to amend its complaint. 

Failure to Plead Physical Loss or Damage Leads to Dismissal of COVID-19 Claim

    The insured's claim for business interruption losses due to COVID-19 was dismissed for failure to plead direct physical loss of or damage to property. Malaube LLC v. Greenwich Ins. Co., 2020 U.S. Dist. LEXIS 156027 (S.D. Fla. Aug 26, 2020).

    The insured restaurant had to suspend operations when local and state orders closed all onsite dining due to COVID-19. The insured submitted a claim for business interruption losses to its carrier. Greenwich denied the claim because the insured did not experience any physical loss or damage to the insured property. The insured sued. 

    Greenwich moved to dismiss the complaint because it only provided coverage for actual loss of business income if a direct physical loss or damage to the property caused a suspension to the insured's operations. There were no allegations that the insured property ever suffered a direct physical loss or damage. The insured equated the closure of its indoor dining to a physical loss because the business could no longer operate for its intended purpose.

    The court compared the allegations here to those made by the insured in Studio 417, Inc. v. Cincinnati Ins. Co., 2020 U.S. Dist. LEXIS 147600 (W.D. Mo. Aug 12, 2020) [prior post is here]. There, the court denied the insurer's motion to dismiss because the insureds' alleged that COVID-19 was a highly contagious virus that was physically present in viral fluid particles and deposited on surfaces and objects. In contrast, here there was no allegation that COVID-19 was physically present on the premises. 

    Other provisions in the policy supported the same interpretation. The Business Income and Extra Expense provisions provided for coverage for an insured's operations during a "period of restoration." A period of restoration was defined to end after the property was repaired or replaced. The words "repair" and "replace" contemplated physical damage to the insured premises as opposed to loss of use of it. 

    Therefore, Greenwich's motion to dismiss was granted. The insured, however, was given leave to amend its complaint.

 

 

Court Denies Remand of COVID-19 Case

    The federal district court rejected a challenge to its diversity jurisdiction and rejected the insured's attempt to remand the COVID-19 claims back to state court. Vandelay Hospitality Group LP v. Cincinnati Ins. Co., 2020 U.S. Dist. LEXIS 149196 (N.D. Tex. Aug. 18, 2020).

    Vandelay purchased a commercial property policy from Cincinnati through Swingle Collins, its registered broker, and its employee, Baron Cass. The policy was "all risk" and purported to insure three of Vandelay's restaurants for, amoung other things, direct physical loss and loss incurred due to business interruptions.

    Vandelay had to close its restaurants in March 2020 when state and local officials issued emergency orders limiting dine-in restaurants to take-out service due to COVID-19. Vandelay closed its three restaurants and submitted a claim to Cincinnati. The claim was denied. Vandelay sued Cincinnati and Cass in state court for breach of contract and for a declaratory judgment that the policy covered the claimed losses. Vandelay amended its petition to join Swingle Collins.

    Cincinnati removed the case based on diversity jurisdiction, contending Cass and Swingle Collins were fraudulently joined. Cincinnati was an Ohio corporation. Vandelay, Cass and Swingle Collins were all citizens of Texas.

    A declaratory judgment was appropriate only if (1) a justiciable controversy existed and (2) the controversy would be resolved by the declaration sought. Duplicative relief could not be sought in a declaratory judgment action.

    Vandelay sought a declaration that the forced closures of its restaurants denied access to the premises and was covered under the policy. Further, Vandelay sustained "direct physical loss to property" because of COVID-19 and the related state and local orders. Finally, Vandelay wanted to establish that the lost business income it sustained was due to the necessary suspension of operations.

    Each of the declarations sought would be resolved in the context of Vandelay's breach of contract action. Therefore, the declaratory relief sought would add nothing to the action in that the request mirrored Vandelay's claims and duplicated its own claim for breach of contract.  Because the court's adjudication of the breach of contract claim would determine whether there was coverage and thereby determine all parties' rights under the policy and any claims arising out of its formation, the declaratory judgment claims were duplicative and unavailable as a matter of law. 

    Consequently, defendants met their burden of demonstrating that there was no reasonable basis for predicting that Vandelay might be entitled to a declaratory judgment in state court. There was no reasonable basis for recovery against Swingle Collins and Cass, so Vandelay's motion for remand was denied. 

Texas Federal District Court Dismisses COVID-19 Claim

    Judge Ezra, formerly on the bench in Hawaii, dismissed a COVID-19 claim pursued by a Texas policy holder. Diesel Barbershop, LLC v. State Farm Lloyds, 2020 U.S. Dist. LEXIS 147276 (W.D. Texas Aug. 13, 2020).

    Local and state officials in Texas issued shutdown orders in March 2020 due to the spread of the cornavirus. All non-essential businesses, including the insureds' barbershop businesses, were ordered closed from April 2, 2020 until April 30, 2020. The insureds submitted a claim for business interruption and civil authority coverage to their carrier, State Farm. The claim was denied based on the policy's exclusion for loss caused by enforcement of ordinance or law, virus, and consequential losses. For Civil Authority coverage, State Farm contended the policy required that there by physical damage within one mile of the described property and that the damage be the result of a Covered Cause of Loss, which, State Farm asserted, a virus was not. 

    The insureds sued and State Farm moved to dismiss. The court noted cases in which courts had found physical loss even without tangible destruction to the covered property. Yet, the court found that the line of cases requiring tangible injury to property were more persuasive. Therefore, the court found that the insureds failed to plead a direct physical loss.

    Further, the virus exclusion barred the insureds' claim. The lead-in language for the virus exclusion included an anti-concurrent causation clause (ACC clause) which stated State Firm did not insure for a loss regardless of "whether other causes acted concurrently or in any sequence within the excluded event to produce the loss." 

    The court found that the insureds pleaded that COVID-19 was the reason for the shutdown orders being issued and the underlying cause of the alleged losses. While the orders forced the properties to close to protect public health, the orders only came about sequentially as a result of the COVID-19 virus spreading rapidly throughout the community. The presence of COVID-19 was the primary root cause of the insureds' businesses temporarily closing. Therefore, the ACC clause excluded coverage for the losses the insureds incurred in complying with the orders.

    The court also found that the Civil Authority provision was not triggered. The events caused the Virus Exclusion to apply such that the insureds failed to alleged a legally cognizable "Covered Cause of Loss."

Remand Denied for COVID-19 Business Interruption Claim

    The district court refused to remand plaintiff's claim for business losses due to COVID-19 shut down orders. Mark's Engine Co. No. 28 Restaurant, LLC v. Traveler's Indem. Co. of Conn., 2020 US. District. LEXIS 132841 (C.D. Calif. July 27, 2020). 

    Plaintiff restaurant sued Traveler's in state court. Los Angele Mayor Eric Garcetti was also named as a defendant for his part in issuing the shut down orders. An Executive Order issued on March 15, 2020 directed all non-essential businesses to close. Plaintiff argued that this triggered its coverage because plaintiff was forced to close by order of Civil Authority. Further, the denial of coverage would not have occurred absent the mayor's order, the propriety of which was an significant issue that allegedly had to be resolved.

    Travelers removed the state proceeding to federal court. Travelers argued removal was proper because the only non-diverse defendant, the mayor, was fraudulently joined. Plaintiff moved to remand, contending the mayor was not fraudulently joined. 

    The court found that Travelers met its burden to show that the mayor was fraudulently joined. The cased turned on a contract between plaintiff and Travelers, and the mayor was not a party to the contract. Because the mayor, the only non-diverse defendant, was fraudulently joined, complete diversity of citizenship among the parties was present. The motion for remand was denied. 

COVID-19 Claim for Business Interruption Survives Motion to Dismiss

    In the first noteworthy decision recognizing a possible business interruption claim due to the presence of COVID-19 and the associated closure orders, the insureds survived a motion to dismiss. Studio 417, Inc. v. The Cincinnati Ins. Co., 2020 U.S. Dist. LEXIS 147600 (W.D. Mo. Aug.12, 2020).

    The insureds operated hair salons and a restaurant. They held "all-risk" policies from Cincinnati. The policies provided that Cincinnati would pay for "direct loss" unless excluded. A "Covered Cause of Loss" was defined to mean accidental physical loss or accidental property damage.The policies did not define "physical loss" or "physical damage." The policies also did not have exclusions for virus or communicable disease. 

    For business income coverage, the policy promised to pay for loss of business income due to suspension caused by direct loss to property. The policies provided "Civil Authority" coverage, which paid for loss of business income caused by action of civil authority that prohibited access to the covered property when the loss caused direct damage to property other than the covered property. 

    "Ingress and Egress" coverage paid for loss of business income caused by prevention of existing ingress or egress due to a direct loss at a location contiguous to the insured premises. Finally, the policies provided "Sue and Labor" coverage, which required the insureds to take all reasonable steps to protect the covered property and to keep a record of expenses incurred to protect the property for consideration in the settlement of a claim. 

    The insureds sued after coverage was denied. They alleged that over several months, it was likely that customers, employees and other visitors were infected with COVID-19 and thereby infected the property. It was further alleged that the presence of COVID-19 rendered the physical property in their vicinity "unsafe and unusable," and that the insureds were forced to suspend or reduce business at their covered locations. 

    In response to the COVID-19 pandemic, civil authorities issued orders requiring the suspension of business at various establishments, including the insureds' businesses. The insureds alleged that the presence of COVID-19 and the closure orders caused a direct physical loss or direct physical damage to their premises by denying use of and damage to the covered property, and thereby causing a necessary suspension of operations during a period of restoration. The insureds alleged that their losses were covered under the policies. 

    Cincinnati's motion to dismiss argued that the policies provided coverage only for income losses tied to physical damage to property, not for economic loss caused by governmental or other efforts to protect the public from disease. The insureds contended that the policies expressly covered "physical loss or physical damage." This meant "loss" was distinct from "damage." Cincinnati's focus on an actual physical alteration ignored the coverage for a "physical loss."

    The court found that the insureds adequately stated a claim for direct physical loss. Dictionary definitions of "direct" included "characterized by close logical, causal, or consequential relationship." "Physical" was defined as "having material existence: perceptible especially through the senses and subject to the laws of nature." "Loss" was "the act of losing possession" and "deprivation."

    Applying these definitions, the insureds had adequately alleged a direct physical loss. The alleged a causal relationship between COVID-19 and their alleged losses. They further alleged that COVID-19 was a "physical substance," that it lived on and was active on inert physical surfaces, and was also emitted into the air. COVID-19 allegedly attached to and deprived the insureds of their property, making it "unsafe and unusable, resulting in direct physical loss to the property." Based on these allegations, the amended complaint adequately alleged a "direct physical loss."

    Additionally, the insureds alleged that civil authorities issued closure and stay at home orders, which included property other than the insureds' premises. At the motion to dismiss stage, the amended complaint plausibly alleged that access was prohibited to such a degree as to trigger civil authority coverage.

    Further, the insureds alleged both COVID-19 and the closure orders rendered the premises unsafe for ingress and egress. The insureds adequately stated a claim for ingress and egress coverage. A claim for dependent property coverage was also made because the amended complaint alleged that the insureds suffered a loss of materials, services, and lack of customers as a result of COVID-19 and the closure orders.

    Finally, the insureds plausibility stated a claim for sue and labor coverage. The insureds alleged that complying with the closure orders and suspending operations meant they incurred expenses in connection with reasonable steps to protect covered property.

    Cincinnati's motion was denied in its entirety.    

 

Judicial Panel Denies Nationwide Consolidation of COVID-19 Business Interruption Cases

    The Judicial Panel on Multidistrict Litigation denied motions to centralize pretrial proceedings in pending COVID-19 business interruption claims. In re COVID-19 Business interruption Protection Insurance Litigation, 2020 U.S. District. LEXIS 144446 (Aug. 12, 2020). 

    Plaintiff policy holders sought consolidation, contending their policies provided coverage for business interruption losses caused by the COVID-19 pandemic and the related government orders suspending, or severely curtailing, operations of non-essential businesses. The Panel considered 15 actions on the pending motions, but had notice of 263 related actions. 

    Some plaintiffs opposed centralization or sought to be excluded from any MDL. Some argued the Panel should centralize the coverage actions on a state-by-state, regional, or insurer-by-insurer basis. 

    The Panel did not accept consolidation of all cases. There was little potential for common discovery across the litigation because there was no common defendant as the actions involved either a single insurer or insurer-group. The various cases involved different insurance policies with different coverages, conditions, exclusions, and policy language, purchased by different businesses in different industries located in different states. 

    While policy language for business income and civil authority coverages should be very similar among the policies, seemingly minor differences in policy language could have significant impact on the scope of coverage. Managing such litigation would be an ambitious undertaking  and implementing a pretrial structure that was efficient would take time. Yet, time was of the essence in this litigation as many plaintiffs were on the brink of bankruptcy. An industry-wide MDL would not promote a quick resolution of these matters. Therefore, the motions for centralisation were denied. 

    Arguments for insurer-specific MDLs were more persuasive, however. Such an MDL would be limited to single insurer or group of related insurers and would not entail the managerial problems of an industry-wide MDL involving more than 100 insurers. 

    Orders would issue in actions naming four insurers or groups of related insurers - Certain Underwriters an Lloyd's, London; Cincinnati Insurance Company; the Hartford insurers; and Society insurance. The parties were ordered to show cause why those actions should not be centralized. With respect to these four insurers or insurer groups, centralization could be warranted to eliminate duplicative discovery and pretrial practice. 

    

With No Evidence of COVID-19 Being Present, DC Trial Court Finds No Claim for Business Interruption

    A D.C. Superior Court rejected a business interruption claim due to closures related to the COVID-19 pandemic. Rose's 1, LLC v. Erie Ins. Exchange, Civil Case No 2020 CA 002424 B (Order dated Aug. 8, 2020). The decision is here. 

    Plaintiffs owned a number of restaurants in the District of Coiumbia. Plaintiffs had commercial property coverage in a policy issued by Erie. The policy provided coverage for loss of income sustained due to interruption of business resulting directly from "loss or damage" to the insured property. 

    DC Mayor Bowser issued a series of orders in March 2020 which closed all non-essential businesses, including plaintiffs' restaurants. Plaintiffs filed claims with Erie. When coverage was denied, plaintiffs filed suit. Both sides moved for summary judgment. 

    The dispute centered on whether the closure of the restaurants due to the mayor's orders constituted a "direct physical loss" under the policy. Plaintiffs argued that the loss of use of the restaurants was "direct" because the closures were the direct result of the mayor's orders without intervening action. The court reasoned, however, that the orders were governmental edicts that commanded individuals and businesses to take certain actions. Standing alone and absent intervening actions by individuals and businesses, the orders did not effect any direct changes to the properties. 

    Plaintiffs argued that their losses were "physical" because the COVID-19 virus was "material" and "tangible." But plaintiffs offered no evidence that COVID-19 was actually present on their insured properties at the time they were forced to close. 

    Plaintiffs also argued "loss" incorporated "loss of use" in the policy, which only required them to be deprived of the use of their properties, not that the properties suffered physical damage. But under a natural reading of the term "direct physical loss," the words "direct" and "physical" modified the word "loss." Any "loss of use" had to be caused, without the intervention of other persons or conditions, by something pertaining to matter - in other words, a direct physical intrusion on to the insured property. The mayor's orders were not such a direct physical intrusion. 

    The court noted cases cited by plaintiffs in which "direct physical loss" was found even though there was no physical damage to a structure. Interestingly, the court found that Murray v. State Farm Fire & Cas. Co., 509 S.E. 2d 1, 16-17 (W.Va. 1998), where the future risk of a landslide was a "direct physical loss" because it rendered the homes uninhabitable, was not applicable here. 

    Consequently, Erie's motion for summary was granted while plaintiffs' motion was denied. 

    Thanks to the Hunton Insurance Recovery Blog [here] for covering this recent case. 

 

     

Hundreds of Coronavirus Coverage Cases Await Determination on Consolidation

    On July 30, 2020, the Judicial Panel on Multi-District Litigation (JPML) heard oral argument on the potential consolidation of all federal cases involving business interruption coverage relating to coronavirus and shut-down orders. A decision will be rendered in the near future.

    Meanwhile, many cases are on hold, waiting for a determination on consolidation. One such case is Pigment Inc. v. Hartford Fin. Servs. Group, 2020 U.S. Dist. LEXIS 133230 (S.D. Cal. July 27, 2020), where the court granted a stay pending a decision by the JPML. The case is a class action based on denial of coverage under business interruption insurance. Plaintiff's case alleged a bad faith denial that risked the permanent closure of its business due to unexpected temporary shutdowns from the COVID-19 pandemic.  Plaintiff sought a stay pending the decision of the JPML.

    The court considered the possible damage which could result from granting a stay, the hardship which a party could suffer in being required to go forward, and the orderly course of justice measured by the simplifying or complicating of issues, proof, and questions of law which could be expected to result from a stay. 

    Given that he JPML would soon hear and decide whether to consolidate cases, a short stay until a decision was made would have very little effect on the ultimate resolution of the case. Therefore, the insurers had not presented any persuasive argument of prejudice if the motion was granted. Accordingly, the action was stayed pending the JPML's decision on consolidation.