On August 12 a federal court in Missouri turned back an insurance company’s effort to quickly secure the dismissal of a COVID-19 business interruption case.
- These policyholders won (so far) because they went all on with allegations COVID-19 causes physical damage to property.
- Going forward, the success of the policyholders’ case will hang on proving at trial COVID-19 physically attached to relevant property and thereby rendered it unusable.
- Insurance policies do differ even in the small business market — and the precise wording formulations may drive the outcome of COVID-19 claims.
Before we dig into the ruling, there are three important points about this case to keep in mind.
First, the insurance company had brought a motion to dismiss which is based solely on the allegations in the complaint. When considering such a motion, the court must consider the plaintiffs’ allegations to be true. The court could only grant the insurer’s motion to dismiss if the policyholders’ claims are not “plausible.” While the court’s reasoning sheds light on how the insurance policy may be viewed in later motions or at trial, the court left the door open for the insurance company to reassert its arguments after discovery.
Second, it appears the policy form at issue is Cincinnati’s IB 101 (05/06). Paraphrasing this form, business interruption coverage is available if:
[C]aused by direct physical loss or damage to property at a premises ….
Third, the policy did not contain a virus or pandemic exclusion.
In Studio 417 v. Cincinnati Ins. Co., Case №20-cv-03127-SRB (W. Dist. Mo.), a hair salon in Springfield, Missouri and two restaurants in Kansas City, Missouri commenced a putative class action against Cincinnati Insurance for COVID-19-related business interruption.
Specifically, the policyholders allege “that over the last several months, it is likely that customers, employees, and/or other visitors to the insured properties were infected with COVID-19 and thereby infected the insured properties with the virus.” The complaint further alleged:
- COVID-19 is a physical substance that lives on and is active on inert physical surfaces and is also emitted into the air; and
- COVID-19 attached to the plaintiffs’ property making it unsafe and unusable.
The court accepted at this preliminary stage that the plaintiffs had alleged a “direct physical loss.” In particular, the court found the plaintiffs allege (a) COVID-19 is a physical substance; (b) COVID-19 attached to their property; and © the attached COVID-19 rendered their premises unsafe and unusable. This line of reasoning opens a pathway to “full” business interruption coverage of up to 12 months.
This court’s reasoning is entirely reconcilable with the rulings in the state court in Michigan last month and the federal court in Texas last week. In both cases, policyholders were facing down virus exclusions. In an effort to get around those exclusions, the policyholders avoided allegations that the virus had physically damaged property. Instead, they point to the lockdown orders alone as the cause of business interruption loss.
In the Missouri case, the plaintiffs were unencumbered by any virus exclusion so they could fully embrace the notion that COVID-19 itself causes physical harm to property. Based on that allegation, the court said has effectively told the policyholders: “Okay, now go prove it.”
There is something else that may have caught the Missouri court’s eye. The Cincinnati Insurance policy used the formulation of the insuring agreement “direct physical loss or damage to property at the premises.” The court in Michigan was looking at the more typical formulation “direct physical loss of or damage to property at the premises.” While less clear, the court in Texas seemed to be working with wording similar to that in the Michigan case.
Tellingly, the Michigan judge admonished the policyholder’s attorney for misquoting the insuring agreement by omitting the “of” — which she suggested could have altered the meaning of the phrase. It could be that courts reviewing insuring agreements formulated without a strong linkage between “direct physical loss” and the relevant “property” are more open to a finding of coverage.
This could also help explain the policyholders’ strategy in the D.C. case decided earlier this month. In that case, the insuring agreement used the more typical formulation of “direct physical loss of or damage to property” but the policy had no virus exclusion. Nevertheless, “Plaintiffs offer[ed] no evidence that COVID-19 was actually present on their insured properties at the time they were forced to close.” Like the policyholders in Michigan and Texas, these policyholders relied entirely upon the lockdown order as the cause of the business interruption.
We are still in the early days of COVID-19 business interruption litigation and a handful of trial court rulings on preliminary motions can tell us only so much. Based on what we have so far, it may be fair to figure:
- No path has been shown leading to coverage in a policy with a virus exclusion;
- Any pathway to coverage is at risk of hitting a dead end without proof COVID-19 causes physical damage to property; and
- Some insuring agreements may offer a wider such path than others.