Insurance Law Hawaii

Insurer's Motion to Dismiss COVID-19 Claim Denied

    The federal district court denied the insurer's motion to dismiss the hotel's claim for business interruption coverage. Sunstone Hotel Investors, Inc. v. Endurance Am. Spec. Ins. Co., No. SACV 20-02185, (C.D. Cal. Feb. 26, 2021). 

    From February 24 to 27, 2020, the insured hotel hosted an international meeting of leaders from biotechnology company Biogen, Inc. After the hotel was notified on March 4, 2020, that three attendees tested positive for coronavirus, the hotel closed on March 12, 2020, and remained closed for months.

    The hotel submitted a claim to cover its losses, but coverage was denied. The hotel sued and the insurer moved to dismiss. 

    Coverage D of the policy stated the insurer would pay business interruption losses that directly resulted from Biological Agent Conditions that "result in Cleanup Costs covered under this Policy." The parties disputed the meaning of the modifier "covered under this Policy." The insurer argued that "Cleanup Costs covered under this Policy" included only those Cleanup Costs that exceeded the $100,000 self-insured retention (SIR). To make this argument, the insurer relied upon Coverage C, which stated that the insurer would only pay Cleanup Costs in excess of the SIR. Since the hotel had not incurred Cleanup Costs in excess of that amount, the insurer argued that the hotel's claim should be dismissed. 

    The hotel, on the other hand argued that the phrase "covered under this Policy" meant only fitting within the policy's definition of Cleanup Costs. The policy defined Cleanup Costs as "the reasonable and necessary costs incurred in performing Corrective Actions and/or Restorative Actions at a Scheduled Location," without regard to the SIR. Therefore, Coverage C's SIR was not a factor in determining what Cleanup Costs were covered under Coverage D and that the insured need not have incurred $100,000 in Cleanup Costs to obtain Coverage D coverage. 

    The court agreed with the hotel. Nowhere in Section D did it say that an insured must incur $100,,000 in Cleanup Costs to trigger Coverage D coverage. Instead, to find the limitation the insurer sought to impose, it was necessary to look in a whole other coverage section, one under which the hotel did not seek coverage. 

    Therefore the Motion to Dismiss was denied. 

Illinois Federal District Court Finds Duty to Defend COVID-19 Claim

    The federal district court found that the insurer had a duty to defend the underlying suit based on damages allegedly arising from exposure to COVID-19. McDonald's Corp. v. Austin Mutual Ins. Co., No. 20 C 5057, Order (N.D. Ill. Feb.22, 2021). The decision is here. 

    McDonalds was sued for pubic nuisance and negligence based on its decision to remain open during the COVID-19 pandemic without enhanced health and safety standards. The underlying plaintiffs sought an injunction requiring McDonalds to: (1) provide employees with adequate protective equipment; (2) preclude the reuse of face masks; (3) supply hand sanitiser; (4) require that customers wear face masks; (5) monitor employee COVID-19 infections; and (6) provide employees with accurate information about COVID-19. 

    The suit was tendered to Ausin Mutual, but coverage was denied. Austin Mutual contended that the underlying suit did not seek "damages because of bodily injury." McDonalds responded that but for the underlying plaintiffs contracting COVID-19 (a bodily injury) it would not have to expend money as "damages" to comply with the mandatory injunction in the underlying suit. Further, exposure to the virus constituted "bodily injury" and money spent to comply with the mandatory injunction would constitute "damages" "because of" the exposure to the virus.

    McDonalds sued. Austin Mutual moved to dismiss. Regarding "damages," the court found that the mandatory injunction sought by the underlying plaintiffs was also a "damage" because it would require McDonalds to expend money to remediate the continuous and ongoing exposure to the virus. 

    Considering the phrase "because of," the policy did not say "proximately because of," but merely said "because of." So simple "but for" causation was enough. McDonalds had adequately alleged "but for" causation because "but for" the underlying plaintiffs actual contraction of COVID-19, McDonalds would not have to incur "damages" to comply with a mandatory injunction. Therefore, McDonalds met it burden of alleging that it might be on the hook for "damages" "because of" or "but for" the employees contracting COVID-19. 

    Finally, three employees had suffered  "bodily injury" by contracting the virus. Further, if the underlying plaintiffs prevailed, McDonalds would have to spend money to prevent the virus from entering the restaurants, and to eliminate or mitigate its presence in the restaurants. Those strategies would decrease the risk of bodily injury from exposure to the virus and from the possibility of reinfection. Further, Austin Mutual could have explicitly included a virus exclusion had it intended to not provide coverage for "bodily injury" caused by a virus. 

    Austin Mutual's motion to dismiss was denied.

Insured's Claims Under Communicable Diseases Coverage Survive Motion to Dismiss

    While the court determined the virus or bacteria exclusion precluded coverage under business income, extra expense, or civil authority for the insured's COVID-19-related shutdown, the insurer's motion to dismiss was denied based upon the communicable diseases coverage. Salon XI Color & Design Group v. W. Bend Mut. Ins. Co.,, 2021 U.S. Dist. LEXIS 21298 (E.D. Mich. Feb. 4, 2021). 

    The Governor's order on COVID-19 forced the insured to close its salon. The insured tendered to West Bend for business interruption losses that occurred during the closure required under the Executive Order. Coverage was denied and suit was filed.

    The court found the insured had plausibly alleged that the COVID-19 particles infected the property, exposed staff and patrons, and prevented the insured from using its property for its intended purpose. This was enough to survive a motion to dismiss when the policy promised to cover "direct physical loss or damage" and left "Loss" and "damage" undefined. 

    The policy included a virus or bacterial exclusion, however, providing that West Bend "will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism . . ."  West Bend did not dispute that COVID-19 was a virus. However, in addition to being a virus, COVID-19 was also a "communicable disease" as defined in the policy. The insured argued a special grant of coverage for communicable diseases followed by an exclusion for virus or bacteria could not plausibly exist in the same policy. This contradictory language was ambiguous and was to be construed in favor of the insured. 

    The court found that the virus or bacteria exclusion was written to exclude "any virus" from the business income, extra expense, and civil authority coverages. Nevertheless, the virus and bacteria exclusion did not preclude the communicable disease coverage. The insured's claim under the communicable disease coverage survived the motion to dismiss.

Restaurant Group's Multi-Litigation Business Interruption Claims Survive Motion to Dismiss

    Society Insurance Company unsuccessfully sought to dismiss plaintiff restaurant group's claims for business interruption after shut-down orders followed the onset of COVID-19. In re Soc'y Ins. Co. COVID-19 Business Interruption Protection Insurance Litigation, 2021 U.S. Dist. LEXIS 32351 (N.D. Ill. Feb. 22, 2021). 

    The multi-district litigation addressed Society Insurance's denial of business- interruption coverage for several restaurants based in several states whose operations were impacted by the COVID-19 pandemic. Society sought dismissal of three cases.

    All plaintiffs were forced to modify their normal business operations due to the pandemic. They had to suspend in-person dining and relied only on take-out orders. Plaintiffs alleged that the presence of the coronavirus created a dangerous condition and rendered their premises unsafe and unfit for their intended use, causing physical property damage or loss under Society's policies. Society argued that a slowdown in business due to the public's fear of the coronavirus or a suspension of business due to governmental authority ordering businesses to close was not a direct physical loss. Further, the actual or alleged presence of the coronavirus was not a Covered Cause of Loss.

    Notably, none of the policies at issue contained a specific exclusion of coverage for losses due to a virus or pandemic. 

    Society first argued that the plaintiffs' businesses were interrupted by the various state and local shutdown orders - not by the coronavirus itself. But Society's characterization of the cause of the business interruptions was not supported by the governing law of the pertinent states, none of which imposed such a strict causation requirement. With proximate cause as the governing causation standard, a reasonable jury could find that the novel coronavirus and the resulting pandemic proximately caused the business interruptions. Even if the government shutdown orders (and not the pandemic itself) played a causal role in the plaintiffs' losses, and even if those orders could not be construed as a "direct physical loss,' the shutdown orders were proximately caused by the pandemic. 

    The court next pondered whether there was a "direct physical loss." The policies required "direct physical loss of or damage to covered property." The disjunctive "or" meant that "physical loss" must cover something different from "physical damage." Therefore, plaintiffs did not need to plead or show a change to the property's physical characteristics.

    But did the restrictions imposed on plaintiffs' property count as "physical loss"? Most of the restaurants were able to use their kitchens and thus continue to operate on a take-out and delivery basis. But plaintiffs were not able to use their premises as they did for indoor, sit-down service before the pandemic. A reasonable jury could find that the plaintiffs did suffer s direct physical loss of property on their premises. In the light most favorable to the plaintiffs, the pandemic-caused shutdown orders imposed a physical limit; the restaurants were limited from using much of their physical space. 

    Here, the scope of the term "direct physical loss" was genuinely in dispute. A reasonable jury could find for either side based on the competing arguments. Therefore, Society's motion was denied as to the policies' business-interruption coverage. 

    Society's motion was granted, however, on civil authority coverage. Even if the general public was prohibited from congregating in the covered premises, there was no allegation that employees were prohibited from accessing the premises. For some plaintiffs, take-out customers or in-room dining guests could access the premises (and the immediately surrounding areas). 

    Finally, the plaintiffs' claims for bad faith survived the motion to dismiss. A more factual-based record needed to be developed before dismissal would be appropriate.

Cherokee Nation Prevails on Summary Judgment in COVID-19 Case

    The Oklahoma trial court granted partial summary judgment to the Cherokee Nation for its business interruption claim due to the mandated closure of its casinos. Cherokee Nation, et al v. Lexington Ins. Co., et al., Case No. CV-10-150, Order Granting Summary Judgment (Okla. Dist. Ct. Jan. 28, 2021). The decision is here [Cherokee Nation.]

    The State of Oklahoma temporarily closed the Cherokee Nation's business operations on March 16, 2020 to implement mitigation protocols and modification so its businesses could operate safely in the pandemic. While closed, the Nation repaired its property by implementing various mitigation protocols, such as installing acrylic barriers and sanitation stations, staggering seating and gaming machines, replacing air filters, etc. In June 2020, the Nation reopened its properties.

    The Nation submitted its claim for business losses under policies issued by the various Defendant Insurers. Coverage was denied because the Nation did not suffer direct physical loss or damage as contemplated by the Tribal Property Insurance Program. The Nation filed suit and moved for summary judgment. The day after suit was filed, the insurers added a new Communicable Disease exclusion that preempted coverage due to the fear or threat of viruses.

    The Nation argued that "direct physical loss" occurred when covered property was rendered unusable for its intended purpose. The insurers said that "direct physical loss or damage" was a phrase-of-art, which meant there had to be distinct, demonstrable, physical alteration to the property.  

    The court found the Nation's interpretation of the policy was reasonable. Even if the insurers' interpretation was also reasonable, the court would have two competing interpretations. Under Oklahoma law, the ambiguity would be interpreted in the Nation's favor. Nevertheless, the court found that the insurers' interpretation of "direct physical loss" was unreasonable, and the Nation's interpretation was correct.

    Other provisions of the policy also demonstrated that requiring a physical alteration of the property was inconsistent with the policy. For example, several exclusions excluded losses that did not require physical alteration to the property, such as infidelity, loss of market, and inventory shortage.

    The same was true for the new Communicable Disease exclusion, which concerned the "fear or threat (whether actual or perceived) of a Communicable Disease." If pandemics as a cause of loss were clearly not covered by the policy, then he new exclusion would be superfluous. The addition of the exclusion only made sense where the Nation's interpretation applied and pandemics could constitute a covered cause of loss. 

    The "all risk" nature of the policy also cut against the insurers' interpretation. The triggering language of coverage was all risk of direct physical loss or damage. The policy provided coverage specifically for imminent physical loss and required the insured to take reasonable and necessary actions to protect the property. Common sense dictated that the policy could not require the insured to demonstrate physical alteration to the property while also promising coverage for anticipated loss as well. 

    Further, because the policy provided for direct physical loss or damage, the court placed value in the disjunction "or." The work "loss" was divested of any meaning under the insurers' interpretation. The policy contemplated two categories of covered loss: direct physical damage, which may exist under the insurers' interpretation; and direct physical loss, which included the Nation's interpretation. 

    Regarding the Communicable Disease exclusion, the only loss shown to the court was the pandemic. Regardless of whether there was definitive proof that the COVID-19 virus was or was not on the Nation's property, the property was still rendered useless due to the reasonable precautionary measures implemented in response to the pandemic. Because the actual presence of the virus was not relevant to the closure of the Nation's property it was not relevant to the court's determination that direct physical loss occurred. The exclusion did not contemplate pandemics, or suspected, imminent, threatened, or fear of viruses, common language utilised by carriers to exclude such losses. Therefore, the exclusion did not clearly apply to the Nation's loss.

 

 

Insured's Expectations of Coverage Allows Escape from Dismissal in COVID-19 Claim

    While the court found no allegations of direct physical loss in a claim arising from COVID-19, the insured survived a motion to dismiss based upon its expectation of coverage. Humans & Res. v. Firstline Nat'l Ins. Co., 2021 U.S. Dist. LEXIS 3998 (E.D. Pa. Jan. 8, 2021). 

    The insured owned a restaurant in Philadelphia. In March 2020, local and statue authorities issued orders closing all non-essential businesses. The insured's restaurant remained closed for several months. It was later permitted to re-open on a part-time, limited basis with restricted hours. The insured claimed that COVID-19 made the restaurant unusable in the way that it had been used before the pandemic. Because it derived most of its revenue from in-restaurant seating and business, the insured argued it suffered losses within the coverage of its policy with the insurer.

    The insured filed for a declaratory judgment that its restaurant was covered for all of the business income losses that it had incurred as a result of its forced closure. The policy provided that business income coverage was triggered only when the suspension of business operations was caused by "direct physical loss" of or damage to property at the described premises, and that the loss or damage was caused by or resulted from a Covered Cause of Loss. The loss had to bear a causal relationship to some physical condition making the premises uninhabitable and unusable, or nearly as such.

    The policy did not afford coverage for the losses claimed here. The policy also included a virus exclusion.

    Nevertheless, the insured argued that Pennsylvania's Doctrine of Reasonable Expectations applied to override the insurer's denial of coverage. The court found this argument to be persuasive. Even the most clearly written exclusion did not bind the insured where the insurer created in the insured a reasonable expectation of coverage. The insured's complaint alleged,

32. Plaintiff had a reasonable expectation that the policy's business interruption coverage applied where a civil authority forced closure, thereby barring access to the business, due to an issue of public safety in the immediate area surrounding the Insured Property.

These allegations plausibly alleged facts which could give rise to a basis to afford coverage to the insured if proven. Therefore, the insurer's motion to dismiss was denied to provide the insured the opportunity to take discovery on this point. 

California Superior Court Overrules Insurer's Demurrer on COVID-19 Claim

    A Superior Court in California overruled the insurer's demurrer to the policy holder's complaint seeking business interruption coverage after government shutdown orders were issued because of the coronavirus pandemic. Goodwill Industries of Orange County, California v. Philadelphia Indemnity Ins. Co., Cal. Superior Ct., Civil No. 30-2020-01169032-CU-IC-CXC (Minute Order Jan. 28,, 2021). The minute order is here [Goodwill Decision].

    The insurer demurred on the ground that the insured had not alleged sufficient facts to show "direct physical loss" under the business income, extra expenses and civil authority provisions in the policy because coronavirus and COVID-19 did not physically alter the structure.     

    The complaint expressly alleged that the coronavirus and COVID-19 caused direct physical loss and damage to the insured's property. Further, coronavirus and COVID-19 were present at its properties at the time of the state and county closure orders. When the insured reopened its properties, its employees tested positive, requiring the insured to conduct additional cleaning and sanitization to respond to and remove the coronavirus and COVID-19 from physical surfaces in its insured premises. The insured argued (a) that "directly physical loss" did not require physical tangible alteration of the property and that allegations of loss of use were sufficient, and (b) that if physical tangible alteration is required, the insured had satisfied this requirement.

    The court noted that whether the insured had alleged sufficient facts to overcome the insurer's demurrer depended on the interpretation of "direct physical loss." Taking the complaint's allegations as true, the court could not determine as a matter of law that the allegations did not show a "direct physical loss." Therefore, the demurrer was overruled. 

Policyholder Prevails on Summary Judgment in COVID-19 Business Interruption Claim

    Summary judgment was awarded to the insureds on their business interruption claim due to governmental closures during the COVID-19 pandemic. Henderson Rd. Rest. Sys. v. Zurich Am. Ins. Co., 2021 U.S. Dist. LEXIS 9521 (N.D. Ohio, Jan. 19, 2021). 

    Plaintiffs owned restaurants in several states. In the spring of 2020, state governments issued orders restricting the operations of restaurants in an effort to abate the spread of the coronavirus. Plaintiffs closed all but four of their Ohio restaurants on March 15, 2020. These four restaurants continued to provide carry-out dining until March 17, 2020, and then they closed. Plaintiffs speculated that some of their restaurants would never re-open due to new seating capacity restrictions, and those that re-opened had reduced staffing and suffered financial loss. 

    Zurich denied coverage and plaintiffs sued. Count I was for breach of contract, Count II asserted a bad faith denial of coverage, and Count III requested a declaratory judgment. The parties stipulated to facts, including stipulating that the restaurants were not closed as the result of the known or confirmed presence of COVID-19. Further, there were no physical alterations or structural damage to any of the restaurants. 

    The parties filed cross motions for summary judgment. Zurich argued there was no coverage because plaintiffs' economic losses were not caused by "physical loss or damage to property." Zurich further argued that the underlying cause of loss was COVID-19; that COVID-19 was a microorganism; and that the Microorganism exclusion applied. Plaintiffs argued that "direct physical loss of" included an inability to possess something in the real or material world, and that the government orders caused plaintiffs to lose their property in this manner.

    The court first found that the policy was susceptible to more than one interpretation. The policy promised to pay for "direct physical loss of or damage to real property." Plaintiffs argued that physical loss of the real property meant something different than damage to the real property. The court agreed. Otherwise, why would both phrases appear side-by-side separated by the disjunctive injunction "or"? Because the policy was susceptible of more than one interpretation, it had to be liberally construed in favor of the insureds. 

    The policy provided business income coverage for suspension of operations. The policy defined "suspension" as "the slowdown or cessation of your business activities." Plaintiffs demonstrated that that there was a suspension of their operations. Plaintiffs also showed that there was a loss of business income due to the suspension of their operations. Zurich did not contest that plaintiff suffered a loss of business income. Plaintiffs also demonstrated that the state orders leading to the restaurants' closing were caused by a fortuitous event. Therefore, plaintiffs were entitled to summary judgment on the issue of coverage under the policy.

    The court next considered the Microorganism exclusion, which barred coverage for any loss caused by any activity of microorganisms. Plaintiff argued that the exclusion did not apply because the loss of their properties was not caused by any activity of "microorganisms." The parties had stipulated that the restaurants were not closed due to the presence of COVID-19, but because of the government closures. The court agreed with plaintiffs' argument.

    Zurich argued that despite the broad language of the exclusion, it was seeking to avoid coverage for "viral and bacterial contamination" of properties when approval for the exclusion form was sought from the Ohio Department of Insurance. Zurich further argued that Ohio had not recognised the doctrine of regulatory estoppel. The court found this was not relevant. The representations to the Ohio Department of Insurers showed the insurer's intent was to exclude coverage for property damage caused by the contamination of viruses and bacteria on the insured's premises, not the loss of business income caused by a government closure. Here, the plaintiffs' property was not damage by the contamination of a virus or bacteria.

    The court granted summary judgment to plaintiffs on Counts I and III, but denied the motion on Count II for bad faith. 

Motion to Dismiss Policyholder's COVID-19 Claim Denied

    The court denied the insurer's motion to dismiss a preschool's claim for business interruption due to COVID-19. An endorsement provided coverage for shutdowns by order or recommendation of government authorities due to a communicable disease. Baldwin Acad., Inc. v. Markel Ins. Co., 2020 U.S. Dist. LEXIS 239916 (S.D. Calif. Dec. 21, 2020). 

    The preschool closed on March 15, 2020, when a parent who tested positive for COVID-19 had repeatedly visited the school during the prior week. Moreover, the county and state imposed stay at home orders. Therefore, the preschool submitted a business income loss claim to Markel. The claim was denied and the preschool filed suit. Markel moved to dismiss.

    The preschool sought coverage under a "Communicable Disease Endorsement" which provided coverage for loss of business income resulting from communicable diseases. The endorsement stated that a shutdown or suspension of operations must  be ordered or recommended by a government authority and "result from a Covered Cause of Loss," which included "'Communicable disease' such as, but not limited to meningitis, measles, or Legionnaire's disease . . ."

    There was no dispute that COVID-19 was a "communicable disease." Markel argued there was no coverage because (1) there was no outbreak at the preschool; (2) the closure was voluntary, occurred before the issuance of government orders, and this was not the result of an order or recommendation from a governmental authority; and (3) any government-ordered closure was not caused by and did not result from anything that happened at the preschool. 

    The court disagreed. The preschool stated a claim sufficient to survive summary judgment. First, the preschool plausibly alleged the existence of an "outbreak" of COVID-19 at the school. Second, the preschool plausibly alleged that the shutdown of operations was the result of an order or recommendation from the mayor and governor. These allegations were sufficient to state a plausible claim for coverage. The court declined to decide whether the preschool's claim was outside the scope of the endorsement's coverage as a matter of law.

 

Court Denies Motion to Dismiss Plausible Allegations Under Portions of Virus Exclusion

    The court granted in part, denied in part, the insurer's motion to dismiss after examining portions of the policy's virus exclusion. Barbershop v. Twin City Fire Ins. Co., 2020 U.S. Dist. LEXIS 211152 (W.D. Texas, Nov. 4, 2020).

    The insured was a barbershop and grooming supply retailer. On March 31, 2020, government orders temporarily closed the insured's business until May 5, 2020, due to COVID-19. The insured submitted a claim for business interruption to its carrier, Twin City. The claim was denied because the coronavirus did not cause property damage at the insured's place of business. Further, the policy had a virus exclusion which provided limited coverage not available under the facts here. 

    The insured argued that Twin City could have easily expressly excluded pandemics from coverage, but it did not do so. Instead, the term "virus" was grouped with things that are not disease-causing agents, such as "wet rot" and "dry rot." Therefore, the exclusion could be understood to exclude the presence of virus that was "akin to rot," whlch would not include a global pandemic.

    The insured further argued that the Virus Endorsement included coverage for viruses. Up to 30 days of coverage for business interruption was permitted if "losses or damage to property caused by . ..virus caused a suspension of operations." The court held that the insured pled a plausible claim for relief pertaining to coverage under this provision in the Virus Endorsement. The motion to dismiss was denied as it related to this provision.