Insurer-Friendly COVID-19 Case Law Is No Silver Bullet

October 15, 2020

As we’ve written in a previous Law360 article, although insurers have trumpeted several recent victories in cases regarding insurance coverage for business interruption caused by the coronavirus pandemic, these cases are by no means a silver bullet.

In particular, we pointed to the recent decision in Studio 417 Inc. v. Cincinnati Insurance Co.,[1] in which the U.S. District Court for the Western District of Missouri refused to dismiss the claims of various hair salons and restaurants under all-risk property insurance policies. Studio 417 demonstrates that the facts of the specific claims, the specific policy language at issue, the jurisdiction in which claims are brought and the established precedent in that jurisdiction will all influence the outcome of COVID-19-related business interruption suits.

Consequently, each policyholder should evaluate the strength of its individual claim and not merely accept insurer denials of coverage. Litigation of such disputes has barely begun, and there are sure to be many twists along the way.

Three additional recent decisions confirm that individual or consolidated coverage cases will turn on their specific facts.

First, on Sept. 21, in Blue Springs Dental Care LLC, et al. v. Owners Insurance Co.,[2] the same judge presiding over the Studio 417 litigation denied the insurer’s motions to dismiss and to strike class allegations of four dental care clinics.

In general, the policyholders alleged that “COVID-19 and the Stay Home Orders have forced them to suspend most of their business operations and deprived them of the use of their dental clinics, thus causing them to suffer ‘a direct physical loss’ and entitling them to coverage under the Policies.”[3]

The insurer denied coverage and plaintiffs filed suit on behalf of themselves and over 100 similarly situated policyholders who were denied coverage under identical policies.[4]

Before discussing its decision, the court recognized that while “Studio 417 is instructive in certain respects, this case presents a different set of facts and contractual language.”[5] This statement demonstrates that, as we predicted, claims are likely to be determined on an individualized basis or in classes that pertain to similarly situated policyholders that purchased coverage with similar or identical policy language.[6]

The Blue Springs court then proceeded to hold that the plaintiffs had adequately stated a claim for a direct physical loss. The court relied on plaintiffs’ allegations that “it is likely customers, employees, and/or other visitors to the insured properties … were infected with the coronavirus” and that plaintiffs “suspended operations due to COVID-19 to prevent physical damages to the premises by the presence or proliferation of the virus and the physical harm it could cause persons present there.”

The court also pointed to allegations that “customers cannot access the property due to the Stay at Home Orders or fear of being infected with or spreading COVID-19”; and that “COVID-19 is physically transmitted by air and surfaces through droplets, aerosols, and fomites that remain infectious for extended periods of time.”[7] The court found support for its decision in case law “recognizing that ‘absent a physical alteration, a physical loss may occur when the property is uninhabitable or unusable for its intended purposes.'”[8]

Finally, the Blue Springs court denied the insurer’s motion to strike class allegations because “striking class allegations prior to discovery and the class certification stage is a rare remedy because it is seldom, if ever, possible to resolve class representation questions from the pleadings alone.”[9]

Second, on Aug. 13, a trial court in Bergen County, New Jersey, rejected an insurer’s motion to dismiss COVID-19-related business interruption claims asserted by a group of optometrists in Optical Services USA/JCI v. Franklin Mutual Insurance Co.

The plaintiffs asserted that “the loss of physical functionality and the use of their business constitutes a covered loss under the policies” and that the governor’s “executive order prohibited access to the plaintiffs’ premises.”[10] The insurers disagreed.

The court determined that the plaintiffs should be permitted to take discovery and amend the complaint accordingly prior to any adjudication on the merits.[11] The court described the issue before it as the meaning of “a direct covered loss under the policy and whether or not there was physical damage to the plaintiffs’ business.”[12]

In denying the insurer’s motion to dismiss, the court rejected the insurer’s blanket assertion that the closure of the plaintiffs’ business is not a “direct physical loss” under the policy. Using a state-specific and policy-specific legal analysis, the court found the insurer’s argument “unsupported by any common law in the State of New Jersey or by a blanket review of the policy language.”

To the contrary, the court noted that there is New Jersey precedent that the term “physical” can mean more than “material alteration or damage” and that “it is incumbent on the insurer to clearly and specifically rule out coverage in the circumstances where it was not to be provided.”[13]

Even the insurer’s counsel acknowledged the importance of the specific facts and policy language at issue.[14] Counsel also stated that, “[i]f the complaint had alleged that there was contamination on the premises [from COVID-19], then there probably would be direct physical loss, but there would also be exclusion of coverage under [the] virus exclusion.”[15]

This is a critical point because many policyholders do in fact allege the presence of COVID-19 on their premises and many business interruption policies do not include virus exclusions.

Finally, the insurer acknowledged that the policy does not include an exclusion for a closure of business based on the risk of virus proliferation because, as the insurer said, “this is an unprecedented event. First in my lifetime. First in my parents and our parents. So yeah, in an ideal world all potential cataclysmic risks could be underwritten and determined in advance as to what [the insurer is] going to cover and to what extent.”[16]

Significantly, policyholders purchase insurance precisely for unprecedented events and unforeseen risks. If such an event or risk is within the coverage grants of the policy and not clearly excluded, then the policyholder is entitled to coverage.

Third, on Sept. 24, in Urogynecology Specialist of Florida LLC v. Sentinel Insurance Co., the U.S. District Court for the Middle District of Florida, Orlando Division, denied an insurer’s motion to dismiss the policyholder’s claim for losses associated with medical office closures due to the COVID-19 pandemic.[17]

The insurer denied coverage under an all-risk insurance policy arguing that “the Policy expressly excludes losses caused by a virus.”[18] The plaintiff argued that the policy is ambiguous and ambiguity is to be read in favor of coverage.[19]

Before addressing the issue at hand, the court noted that the “issues surrounding whether insurance policy virus exclusions apply to losses caused by COVID-19 are novel and complex.”[20] In denying the insurer’s motion to dismiss, the court noted that “several arguably ambiguous aspects of the Policy make determination of coverage inappropriate at [the motion to dismiss] stage.”[21]

First, the court noted that not all relevant forms of the policy had been submitted for the court’s consideration.

Second, the court reasoned that:

It is not clear that the plain language of the policy unambiguously and necessarily excludes Plaintiff’s losses. The virus exclusion states that [the insurer] will not pay for loss or damage caused directly or indirectly by the presence, growth, proliferation, spread, or any activity of ‘fungi, wet rot, dry rot, bacteria, or virus.’ Denying coverage for losses stemming from COVID-19, however, does not logically align with the grouping of the virus exclusion with other pollutants such that the Policy necessarily anticipated and intended to deny coverage for these kinds of business losses.[22]

Third, the court noted that none of the cases cited by the insurer in support of applying the virus exclusion “dealt with the unique circumstances of the effect COVID-19 has had on our society — a distinction [the] Court consider[ed] significant.”[23]

The court ultimately held that plaintiff had stated a plausible claim at the motion to dismiss stage and denied the insurers’ motion to dismiss.[24]

Significantly, even cases in which the insurers prevail demonstrate the fact-specific nature of the issue of coverage for pandemic-related business interruptions.

For example, in August, the Judicial Panel on Multidistrict Litigation denied policyholder motions attempting to consolidate hundreds of lawsuits seeking business interruption coverage for pandemic-caused losses.[25] Several groups of policyholders argued that all the suits raised similar issues regarding policy language and the legal effect of closure orders. The insurers opposed consolidation, arguing that the suits involved multiple fact patterns and many different policies with multiple variations in language.

The panel agreed with the insurers’ arguments and denied the motions. The court reasoned that the cases involved multiple insurers and that there was therefore no common defendant. The court further explained that “these cases involve different insurance policies with different coverages, conditions, exclusions, and policy language, purchased by different businesses in different industries located in different states. These differences will overwhelm any common factual questions.”[26]

The panel suggested that actions involving the same insurer might be appropriate for consolidation, and it asked for further briefing on this possibility. Several groups of policyholders responded by seeking consolidation of all the cases against each of five insurers.

On Oct. 2, however, the panel denied consolidation for all but one of the insurers. For example, with respect to Travelers, the panel acknowledged that all the cases against The Travelers Cos. Inc. involved common policy language. But the panel concluded that consolidation would not be efficient because many of the policyholders are pursuing different theories of liability and the laws of many different states will apply.[27] The panel reached similar conclusions regarding Hartford Casualty Co., Cincinnati Financial Corp. and the London Market Insurers.[28]

The consolidation cases demonstrate the same basic point as the other cases discussed above. Each case, or consolidated group of cases, will turn on their own circumstances. These facts will include policy language, the presence or absence of a virus exclusion, and the applicable state law.

Accordingly, policyholders and their counsel should not assume that insurer-friendly decisions will preclude coverage, but rather should make a careful investigation to determine the precise circumstances of their individual situations before deciding whether and where to proceed.

Jason Rubinstein and Mark Packman are partners at Gilbert LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Studio 417, Inc. v. Cincinnati Ins. Co. , No. 6:20-cv-03127, 2020 WL 4692385 (W.D. Mo. Aug. 12, 2020).

[2] Blue Springs Dental Care, LLC, et al. v. Owners Ins. Co. , No. 4:20-cv-00383, 2020 WL 5637963 (W.D. Mo. Sept. 21, 2020).

[3] Id. at 2.

[4] Id. at 2–4.

[5] Id. at 3.

[6] The Blue Springs court noted that, contrary to decisions relied upon by the insurer in favor of dismissal, the insurance policies at issue did not contain an exclusion for “pandemics” or “communicable disease” making such case law non-binding on the court. Id. at 1, n.2.

[7] Id. at 4 (citation omitted).

[8] Id. (quoting Studio 417).

[9] Id. at 9 (internal citations omitted).

[10] Optical Servs. USA/JC1, et al. v. Franklin Mut. Ins. Co. , Case No. BER-L-3681-20, (N.J. Super. Ct. Bergen Cty. Aug. 13, 2020) Oral Argument dated August 13, 2020 at 25.

[11] Id. at 29–30.

[12] Id. at 25.

[13] Id. at 26–28.

[14] Id. at 6–7.

[15] Id. at 9.

[16] Id. at 12.

[17] Order, Urogynecology Specialist of Florida LLC v. Sentinel Ins. Co. , No. 6:20-cv-1174 (M.D. Fla. Sept. 24, 2020), ECF 21.

[18] Id. at 4.

[19] Id.

[20] Id.

[21] Id. at 6.

[22] Id. at 7 (citation omitted).

[23] Id.

[24] Id. at 7–8

[25] In re COVID-19 Bus. Interruption Prot. Ins. Lit., MDL No. 2942, 2020 WL 4670700 (J.P.M.L. Aug. 12, 2020).

[26] Id. at *2.

[27] In re Travelers COVID-19 Bus. Interruption Prot. Ins. Lit., MDL No. 2965, 2020 WL 5884785 (J.P.M.L. Oct. 2, 2020).

[28] In re Hartford COVID-19 Bus. Interruption Prot. Ins. Lit., MDL No. 2963, 2020 WL 5884785 (J.P.M.L. Oct. 2, 2020); In re Cincinnati Ins. Co. COVID-19 Bus. Interruption Prot. Ins. Lit., MDL No. 2962, 2020 WL 5884791 (J.P.M.L. Oct. 2, 2020); In re Certain Underwriters at Lloyd’s, London COVID-19 Bus. Interruption Prot. Ins. Lit., MDL No. 2961, 2020 WL 5887416 (J.P.M.L. Oct. 2, 2020). The only insurer for which the panel ordered consolidation was Society Insurance Company, because it is a regional insurer with relatively few suits against it in a limited number of states. See In re Soc’y Ins. Co. COVID-19 Bus. Interruption Prot. Ins. Lit., MDL No. 2964, 2020 WL 5887444 (J.P.M.L. Oct. 2, 2020).
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