Pandemic Coverage Claims Quarterly Update: The Appellate Tribunals Are Still Overwhelmingly Ruling in Favor of Insurers

By Melinda S. Kollross

The Louisiana and New Hampshire Supreme Court have added their names to the unanimous list of state high courts holding that there is no coverage for pandemic related economic losses under commercial property polices in the absence of physical loss or damage—and COVID-19 causes no such damage. Further similar cases pend before the high courts of other states. The various federal circuit courts of appeals continue to rule for insurers on these issues.

State Appellate Tribunals

California

Another Planet Entertainment, LLC v. Vigilant Ins. Co. (Cal. 3-1-23)

John’s Grill, Inc. v. The Hartford Financial Services Group, Inc., S278481 (Cal. 3-29-23)

French Laundry Partners v. Hartford Fire Ins., S278492 (Cal. 3-29-23)

These three cases pending before the California Supreme Court will resolve many issues regarding coverage for pandemic related losses in that state.

At issue in Another Planet is whether the actual or potential presence of the COVID-19 virus on an insured’s premises constitutes direct physical loss or damage to property for purposes of coverage under a commercial property insurance policy.

At issue in John’s Grill is whether an endorsement granting coverage for loss or damage caused by a virus was broad enough to trump the policy’s virus exclusion rendering that virus exclusion inapplicable to an insured’s coverage claim for pandemic related losses. French Laundry Partners involves a similar issue, and that appeal has been staying pending the Court’s resolution of John’s Grill.

Coast Restaurant Group v. Amguard Ins. Co., No. G061040 (Cal. App. 4th Dist. 4-10-23)

The Court ruled that governmental closure orders physically affected the property because they affected how the physical space of the property and the physical objects (chairs, tables, etc.) in that space could or could not be used. The Court further held that the insured suffered a covered loss under the policy because the governmental restrictions deprived the insured of important property rights in the covered property. However, the policy’s virus exclusion was clear and unambiguous and barred the entirety of the insured’s claim for coverage caused by the COVID-19 shutdown orders.

Santa Ynez Band of Chumash Mission Indians of the Santa Ynez Reservation Cal. v. Lexington Ins. Co., No. B320834 (Cal. App. 2nd Dist. 4-27-23)

The Court ruled for the insurer holding that the insured did not show it suffered any physical loss or damage. According to the Court, the insured did not provide any meaningful and specific expert testimony that its property was physically damaged. The insured’s expert testimony was just conclusory and did not identify which specific property was altered. Since the insured could not identify any property that was physically damaged, it had no claim under its policy.

Starlight Cinemas Inc. et al. v. Massachusetts Bay Ins. Co., No. B313518 (Cal. App. 2nd Dist. 5-1-23)

The Court ruled for the insurer holding that the insured failed to allege that any of its property was physically altered to trigger coverage when direct physical loss or damage was required. Further, the governmental closure orders did not operate to dispossess the insured of its property so as to constitute a physical loss of use; the orders instead merely prohibited the insured from using its property in a business way.

Showa Hospitality LLC et al. v. Sentinel Ins. Co. Ltd., No. D080008 (Cal. App. 4th Dist. 5-30-23)

The Court ruled for the insurer holding that under an endorsement providing coverage for loss or damage caused by a virus, the insured failed to allege any facts showing that COVID-19 caused any such loss or damage.

Illinois

Oak Park Prosthodontics Ltd. v. Twin City Fire Ins. Co., No. 1-22-0563 (Ill. App. 1st Dist. 3-22-23)

The Court, applying both Illinois and Colorado law, ruled for the insurer holding that the insured’s loss of use of its facility and loss of business income due to closure orders did not constitute direct physical loss or damage to trigger coverage under its commercial property policy.

Louisiana

Landry’s LLC v. AIG Lexington Ins. Co., No. CW 22-00801 (La. App. 3-15-23)

The Court reversed summary judgment for the insured and held for the insurer ruling that the insured failed to show direct physical loss or damage to its property because none of its property suffered any kind of physical alterations.

Cajun Conti LLC v. Certain Underwriters at Lloyds London, No. 2022-C-1349 (La. 3-17-23)

The Louisiana Supreme Court ruled that pandemic related business income losses were not covered under the insured’s commercial property policy holding:

–Expert testimony that COVID-19 damages property was contradicted by the fact that the insured could clean its property with disinfectants and thus was able to continue using the same property.

–The fact that the insured property can be cleaned and sanitized with disinfectants indisputably showed that the insured property was never damaged but remained physically intact and functional.

–The insured argument that direct physical loss encompasses the inability to use covered property would render the modifier “physical” before “loss” superfluous and contrary to settled rules of contract construction. The fact of the matter was that even when in-door dining was prohibited, the insured was able to still maintain a carry out/delivery business showing indisputably that the insured property was neither lost nor changed.

–All policy terms were clear and unambiguous.

–The lack of a virus exclusion was irrelevant because there was no coverage in the first instance under the four corners of the policy.

–Numerous state supreme courts have reached a similar result when analyzing comparable policy language.

–While the insureds had the sympathy of the Court, the policy had to be enforced as written.

New Hampshire

Schleicher and Stebbins Hotels, LLC v. Star Surplus Lines Ins. Co., No. 2022-0155 (N.H. 5-11-23)

The New Hampshire Supreme Court ruled there was no commercial property coverage for pandemic related business income losses in the absence of direct physical loss or damage to insured property holding:

–Coverage under the business interruption provisions of the policy were triggered only by showing that the insured sustained physical loss or damage to property.

–The presence of COVID-19 on property, whether by aerosolized particles suspended in the air, or by fomites that come to rest on surfaces, did not cause direct physical loss of or damage to property because the virus’ presence on the surface of property cannot be said to have changed the property in a distinct and demonstrable way.

–The conclusion that the presence of Covid-19 in the air or on surfaces at a premises was not direct physical loss of or damage to property was consistent with the conclusions of an “overwhelming majority of federal and state courts” construing similar language.

New Jersey

Grand Cru, LLC d/b/a/ Restaurant Nicholas v. Liberty Mut. Ins. Co., No. A-0619-21 (N.J. App. 2-23-23)

The Court ruled for the insurer holding that the policy’s requirement of physical loss of or damage to property required a direct, physical deprivation of possession of the property. The executive orders barring the insured from operating its property for its intended purpose at full capacity did not physically deprive the insured from possessing it. In fact, the insured was still allowed to service customers using take-out services.

Pure Hair Salon LLC v. Hiscox Ins. Co. Inc., No. A-3617-20 (N.J. App. 3-10-23)

The Court ruled for the insurer holding that the policy’s virus exclusion barred all of the insured’s pandemic related losses and, in any event, the insured suffered no physical loss or damage to property.

Highgate Hotels L.P. v. Liberty Mut. Fire Ins. Co. et al., No. A-0661-21 (N.J. App. 4-24-23)

The Court ruled for the insurer holding that the presence of the COVID-19 virus in the air and surfaces did not physically alter the physical structure to qualify as a direct physical loss of or damage to the insured property. The Court found that the record was devoid of any evidence pointing to damage to equipment or property that caused the insured to lose the physical capacity to operate, and there was no physical alteration that made the building too dangerous to enter.

Federal Appellate Tribunals

Second Circuit

147 First Realty LLC v. Aspen Am. Ins. Co., No 22-2220 (2nd Cir. 4-20-23)

The Court, applying New York law, ruled for the insurer holding that policy provisions establishing coverage for physical loss of or physical damage to the insured’s business property did not extend to claims for losses and expenses resulting from business suspensions in response to COVID-related public health restrictions.

Fifth Circuit

Southern Orthopaedic Specialists LLC v. State Farm Fire & Casualty Co., No. 22-30340 (5th Cir. 4-3-23)

Exceptional Dental v. Bankers Ins. Co., No. 22-30705 (5th Cir. 4-11-23)

Hotel Management of New Orleans LLC v. General Star Indem. Co., No. 22-30354 (5th Cir. 5-5-23)

These three cases each arose under Louisiana law, and the Court in each found it was bound by the Louisiana Supreme Court’s decision in Cajun Conti LLC v. Certain Underwriters at Lloyds London, No. 2022-C-1349 (La. 3-17-23), and thus ruled for the insurer in each case holding that economic losses arising from mere loss of use did not qualify for coverage under a commercial property policy which required direct physical loss or damage to insured property.

Seventh Circuit

Froedtert Health Inc. et al. v. Factory Mut. Ins. Co., No. 22-2577 (7th Cir. 6-2-23)

The Court ruled for the insurer holding that under the policy’s general provisions and exclusions, the parties did not intend for any COVID-19 losses to fall within the policy’s general $2 billion coverage limit because COVID-19 did not cause any physical loss or damage.

Ninth Circuit

In-N-Out Burgers v. Zurich Am. Ins. Co., No. 22-55266 (9th Cir. 3-10-23)

The Court ruled for the insurer holding that a contamination exclusion applied to any losses from the pandemic and thereby barred the entirety of the insured’s claim for coverage. According to the Court, the contamination exclusion barred recovery due to contamination, defined to include in pertinent part any virus. Thus, to the extent that the insured relied on the presence of COVID-19 on its property to claim coverage, its own theory barred recovery under the contamination exclusion.

First and Stewart Hotel Owner LLC v. Fireman’s Fund Ins. Co., No. 21-35637 (9th Cir. 5-19-23)

HT-Seattle Owner LLC v. American Guarantee and Liability Ins. Co., No. 21-35916 (9th Cir. 5-19-23)

Aspen Lodging Group LLC et al. v. Affiliated FM Ins. Co., No. 21-35472 (9th Cir. 5-19-23)

In each of these cases arising under Washington law, the Court found Hill & Stout, PLLC v. Mut. of Enumclaw Ins. Co., 515 P.3d 525, 533 (Wash. 2022), dispositive of the insured’s claim for coverage for pandemic-related losses. Hill & Stout held that COVID-19 did not cause physical loss to covered property as required by a commercial property policy, and consequently, the insured’s economic losses arising from the restrictions on the use of its property did not fall within the ambit of coverage under such a policy, as held by Hill & Stout.

TP Racing LLLP v. American Home Assurance Co., No. 21-16910 (9th Cir. 6-1-23)

The Court ruled for the insurer based upon a contaminant exclusion in the policy. The contaminant exclusion stated that the insurer would not pay for any loss or damage caused, either directly or indirectly, by the dispersal of a virus. The Court held that, given the breadth of that exclusion, the very thing that the insured claimed gave rise to coverage—namely, that the physical presence of virus particles resulted in direct physical loss or damage—necessarily triggered the contaminant exclusion barring the entirety of the insured’s claim.

Learning Point: To date, these state high courts are unanimous in the view that there is no commercial property coverage for pandemic related business income losses in the absence of direct physical loss or damage to insured property: Connecticut, Delaware, District of Columbia, Iowa, Louisiana, Maryland, Massachusetts, New Hampshire, Ohio, Oklahoma, South Carolina, Virginia, Washington, and Wisconsin. Nearly every federal circuit court of appeals has ruled likewise. This state and federal national appellate consensus constitutes a persuasive body of law that mere economic losses caused by governmental shutdown orders or the alleged actual or potential presence of Covid-19 virus are not covered under a commercial property policy without direct physical loss or damage to insured property.