Insurers Keep Successfully Defending Covid-19 Business Interruption Lawsuits At The Trial Court Level, But The Real Battles Will Occur In The Reviewing Courts

Introduction

We are currently monitoring Covid-19 decisions nationwide. Except for a few outlier decisions, the trial court rulings are predominantly going one way— towards dismissal of insured business interruption lawsuits because the insureds either cannot show direct physical loss or damage from the virus or cannot escape the consequences of virus exclusions in their polices. The following recent federal court decisions from Florida, California and Pennsylvania illustrate the approach being taken by federal courts across the nation. Additional cases are discussed in the feature article at page 16 of this CM Report.

Analysis

Mauricio Martinez, DMD, P.A. v. Allied Ins. Co. of Am., No. 20-401 (M.D. Fla. 9/2/20)

The insured dental practice suffered a loss of revenue due to a Florida closure order limiting the dental services that could be performed, and sued the insurer to recover for the monetary losses the business sustained because of the Covid-19 pandemic.

The policy provided for business income loss sustained by a suspension caused by a direct physical loss. It also provided for business income coverage when a civil authority order prohibits access to the insured premises because of damage to other property within 1 mile of the insured premises. The policy contained an exclusion for loss or damage caused “‘directly or indirectly’” by “‘[a]ny virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.’”

The virus exclusion was deemed critical by the district court in ruling on the insurer’s motion to dismiss. All loss or damage caused directly or indirectly by any virus, bacterium or other microorganism that induces or can induce physical distress, illness or disease was excluded from coverage. The district court found this exclusion was dispositive, holding that because all of the insured’s damages resulted from Covid-19, which is clearly a virus, the virus exclusion barred coverage of all of the insured’s purported damages.

Plan Check Downtown III v. AmGuard Ins. Co., No. 20- 6954 (C.D. Calif. 9/16/20)

The insured operated restaurants in two different California locations and suffered loss of business income due to the shelter in place Covid-19 orders that required it to end on-premises dining.

The policy insured against loss of business income, but only where the loss of business income was due to the suspension of business operations due to any physical loss of or damage to the covered properties.

The insured sued its insurer for refusing to pay its claim, contending that while it may not have suffered any physical damage to property, it did suffer a physical loss of property, so that its loss fell within the ambit of the policy coverage. The insured took the position that “physical loss of” and “damage to” had to be read so that these terms had different meanings. Accordingly, the insured maintained that its inability to offer on-premise dining at its restaurants would be a physical loss of property covered by the policy, even though there was no physical alteration.

The district court rejected this interpretation and dismissed the insured’s lawsuit holding that the insured’s interpretation would be a sweeping expansion of insurance coverage contrary to the policy terms and existing law. The court pointed out that the “weight of California law” required some tangible alteration to property regardless whether the trigger language uses loss or damage. And, the court concluded that the insured’s interpretation was unreasonable because it would represent a sweeping expansion of insurance coverage without any manageable bounds. According to the court, the insured’s interpretation would mean that any regulation limiting a business would trigger coverage under the policy. Such a “major departure” from established California law was unwarranted.

Wilson v. Hartford Casualty Co., No. 20-3384 (E.D. Pa. 9-30-20)

Plaintiff-insured, a solo practitioner law office, had to shut down her practice in March because of government closure orders related to COVID-19. She filed an insurance claim on April 12, and Hartford denied coverage the next day. Wilson then sued Hartford for breach of contract, arguing that the policy provides civil authority coverage for business interruptions and that a $50,000 limited fungus and virus coverage was triggered.

The subject policy contains a civil authority provision providing for payment of lost business income due to suspension of the insured’s operation caused by direct physical loss of or physical damage to property at the premises. It also contains an exclusion for damage caused by fungi, wet rot, dry rot, bacteria, and virus. Limited virus coverage may be triggered when a virus is caused by a “special cause of loss” such as an explosion, civil riot, water damage or windstorm.

The district court ruled for Hartford, finding that the Third Circuit
and Pennsylvania courts have enforced similar virus exclusions as unambiguously barring coverage for losses such as those sustained by the insured in this case. The court explained that the virus exclusion applies “regardless of any other cause or event that contributes concurrently or in any sequence to the loss” and “whether or not the loss event results in widespread damage or affects a substantial area.” The only exceptions to the virus exclusion require that the virus be caused either by fire and lightning or by a special cause covered under the limited virus coverage. Plaintiff ’s alleged COVID-19 related losses do not fall within these exceptions. The court also rejected the insured’s argument that the governmental closure orders were a separate cause of its lost business income which are not excluded by the virus exclusion, because the virus exclusion is part of the same property coverage that includes the civil authority provisions.

Wilson is a most significant decision for those involved in litigating COVID-19 business interruption claims in Pennsylvania. Prior to Wilson, several other federal district courts in Pennsylvania refused to accept and decide these cases that insurers sought to transfer to federal court, holding that there was a dearth of Pennsylvania law on the issues regarding the impact of COVID-19 on coverage for business interruption losses. See, e.g., Dianoia’s Eatery v. Motorists Mut. Ins. Co., No. 20-706 (W.D. Pa. 5-19-20); Dianoia’s Eatery v. Motorists Mut. Ins. Co., No. 20-706 (W.D. Pa. 8-27-20); Greg Prosmushkin, P.C. v. The Hanover Insurance Group, No. 20-2561 (W.D. Pa 8-14-20). But as shown by the Wilson decision, there was certainly ample Pennsylvania law “on the books” from both state and federal courts enabling the court to review the policy provisions and decide the merits of this case.

Practice Pointer: Certainly, being on the winning side of these and other decisions is a plus for our friends in the insurance industry. But the real battles are coming later, when these and other decisions are appealed and heard by three judge panels of the various federal Circuit Courts of Appeal, and potentially even en banc panels of all the Justices in these various Circuits. All of these cases will be reviewed de novo on appeal, meaning the reviewing courts will not be bound by any of the various trial court decisions. The various federal circuit judges will be free to look at these issues anew and make their own determinations on policy coverage. The temptation might be to use “what was done and won below”, but in this author’s appellate opinion, that would be a grave error. With so much on the line, especially with the first several appeals that will be heard and decided, best practices demand original briefing prepared and oral argument presented by a trained and experienced appellate practitioner.