Federal Appellate Courts Rule For Insurers On COVID-19 Business Interruption Claims

By Melinda S. Kollross

To date, four separate Federal Circuits have issued 7 decisions all holding for insurers on COVID-19 business interruption claims. A body of precedent is being built that can now be cited by the insurance industry at both the trial and appellate level in both state and federal court. 

Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141 (8th Cir. 7-2-2021)

The Eighth Circuit was the first to rule that property policies did not cover business losses suffered during the pandemic, in a case controlled by Iowa law. The Court, applying Minnesota law, which the Court found similar to Iowa law, rejected the insured’s argument that the policy’s disjunctive definition of “loss” as “physical loss” or “physical damage” created an ambiguity, and further rejected the contention defining physical loss to include “lost operations or inability to use the business”. According to the Court, the policy terms were plain and unambiguous. Nothing short of some tangible alteration to the property will trigger coverage.

Gilreath Family & Cosmetic Dentistry, Inc. v. Cincinnati Ins. Co., __ Fed. Appx. __, 2021 WL 3870697 (11th Cir. 8-31-2021)

The Eleventh Circuit was the next court to rule that business income losses were not covered in the absence of physical loss of or damage to property. Applying Georgia law, the Eleventh Circuit held that Georgia courts made it clear that “direct physical loss or damage,” meant that there must be “an actual change in insured property” that either makes the property “unsatisfactory for future use” or requires “that repairs be made.” According to the Eleventh Circuit, the closure order did not damage or change the property in a way that required its repair or precluded its future use for dental procedures. Although the Eleventh Circuit issued Gilreath as an “unpublished decision”, it may still be cited to other courts pursuant to Federal Rule of Appellate Procedure 32.1(a).

Santo’s Italian Café LLC v. Acuity Ins. Co., 2021 U.S. App. LEXIS 28720 (6th Cir. 9-22-2021)

The Sixth Circuit applied Ohio law in holding that a pandemic-triggered government order, barring in person dining at a restaurant, did not constitute direct physical loss of or damage to property. The Court refused the insured’s invitation to construe “any loss of use to be a physical loss of property”, and rejected the insured’s contention that the policy was ambiguous, stating that the policy unambiguously and plainly referred to the direct physical loss of property and not “the inability to use property”.

In re: Zurich American Ins. Co., No. 21-302 (6th Cir. 9-29-2021)

The Sixth Circuit immediately put its decision in Santo’s to work summarily vacating a District Court decision that was one of the most widely cited by policyholders trying to obtain coverage for their pandemic related business interruption losses. In Henderson Road Restaurant Systems Inc. v. Zurich American Ins. Co., No. 20-1239 (N.D. Ohio 1-19-21), the district court granted the insured summary judgment on its claim for business income losses holding that the insured suffered a direct physical loss of and damage to property because of it being shut down due to the COVID-19 pandemic. The district court certified the case for immediate appeal under 28 U.S.C. 1292(b). The Sixth Circuit, following its decision in Santo’s, granted the immediate appeal and vacated the entirety of the district court’s order granting the insured summary judgment. The Court stated that a pandemic-triggered government order, barring in-person dining at a restaurant, did not qualify as direct physical loss of or damage to the property under Ohio law. 

Mudpie, Inc. v. Travelers Casualty Ins. Co. of Am., 2021 U.S. App. LEXIS 29624 (9th Cir. 10-1-2021)

The Ninth Circuit issued a published opinion, and applying California law, held that California law clearly required that for business interruption losses to be covered, there had to be a distinct, demonstrable, physical alteration of the property. The insured contended that direct physical loss of or damage to property did not require actual damage but only that the property was no longer suitable for its intended purpose. The Ninth Circuit rejected this contention as having no basis under California law or the unambiguous language of the policy. The Ninth Circuit further ruled that the virus exclusion barred the entirety of the insured’s claim. That exclusion barred payments “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.” Applying California’s efficient proximate cause rule, the Court concluded that the efficient cause of the insured’s losses was the virus, and not just the closure order. The insured in fact had not alleged that the efficient cause of its losses was anything but the virus. 

Selane Products v. Continental Casualty Co., 2021 U.S. App. LEXIS 29633 (9th Cir. 10-1-2021)

The Ninth Circuit immediately applied its Mudpie ruling disposing of two other appeals on October 1 in favor of insurers issuing two unpublished but still citable decisions. In Selane, the Ninth Circuit cited directly to Mudpie, holding that the direct physical loss of or damage policy language required an insured to allege a physical alteration of its insured property under California law. But the insured did not allege that COVID-19 was present on its property to cause any damage. Additionally, while the insured alleged that the stay-at home orders caused it to suspend its operations, it did not plausibly allege that the stay-at-home orders caused its property to sustain any physical alterations. Thus, there was no coverage for its business income claims. 

Chattanooga Professional Baseball LLC v. National Casualty Co., 2021 U.S. App. LEXIS 29632 (9th Cir. 10-1-2021)

In Chattanooga, the Ninth Circuit found a virus exclusion, which was identical to the one in Mudpie, dispositive of the insured’s claims. The insured had ballparks in 10 states—California, Idaho, Indiana, Maryland, Oregon, South Carolina, Tennessee, Texas, Virginia, and West Virginia. California, Oregon, and West Virginia were efficient proximate cause jurisdictions. Idaho, Indiana, Maryland, Tennessee, and South Carolina had either applied or been persuaded by the efficient proximate cause analysis. The two remaining states, Texas and Virginia, used other methods to determine causation. Regardless of the method, the Ninth Circuit ruled that under each state’s rule of law, the result was the same: the virus was the cause of the insured’s losses and thus the exclusion barred the insured’s claim. Finally, the Court rejected the insured’s regulatory estoppel arguments against enforcing the virus exclusion holding that the insured conceded that only one state (West Virginia) recognized such a doctrine, and its jurisprudence did not support the insured

Practice Pointer: In this author’s opinion, the Sixth Circuit’s Santo’s decision is by far the most important, as the Court there articulated a crucial policy argument which goes to the very heart of why all these insured COVID-19 business interruption claims should be rejected by the courts. The Sixth Circuit stated:

The singular challenges facing restaurants, bars, and other hospitality services over the last eighteen months are not lost on us. Staying in business through a once-in-a-century pandemic (let us hope) that has prompted all kinds of new government regulations, including prohibitions on many in-person services, has to be trying. Sure, state and federal loans and grants have offered some support for entities that suffered government-created losses of this sort, and surely that aid has allowed some companies to survive. But that truth provides little solace to those that did not.

That leaves a hard reality about insurance. It is not a general safety net for all dangers. If risk is not having money when you need it, insurance is one answer to perilous events that could prompt a sudden drop in revenue. Fair pricing of insurance turns on correctly accounting for the likelihood of the occurrence of each defined peril and the cost of covering it. Efforts to push coverage beyond its terms creates a mismatch, an insurance product that covers something no one paid for and, worse, runs the risk of leaving insufficient funds to pay for perils that insureds did pay for. That is why courts must honor the coverage the parties did—and did not—provide for in their written contracts of insurance.

This policy argument should be featured prominently in all future COVID-19 business interruption briefing.