Pandemic Coverage Claims Update: Federal and State Appellate Tribunals Continue to Rule For Insurers
By Melinda S. Kollross
In a long awaited decision, the United States Court of Appeals for the Third Circuit, encompassing the areas of Pennsylvania, New Jersey, Delaware, and the Virgin Islands, ruled that there is no coverage for pandemic related economic loses. And the Connecticut Supreme Court and the DC Court of Appeals (the District’s highest court) added their names to a growing list of state high courts ruling that economic losses from the pandemic unrelated to tangible physical loss or damage are not covered under property policies.
State Appellate Tribunals
John’s Grill Inc. v. Hartford Financial Serv. Group Inc., No. A162709 (Cal. App. 1st Dist. 12-27-22)
The California Court of Appeals issued an opinion here even though the parties settled and stipulated for the dismissal of the insured’s appeal.
The policy by endorsement, (1) contained an affirmative grant of coverage specifically for “loss or damage” caused by a virus, and (2) a special definition of “loss or damage” that included direct physical loss or direct physical damage to property but was broad enough, according to the Court, to encompass pervasive infiltration of virus particulates onto the surfaces of covered property, which was alleged by the insured in its complaint. The Court found that this endorsement “trumped” the policy’s virus exclusion and that exclusion could not be enforced in the face of the endorsement under the illusory coverage doctrine.
Boffo Cinemas LLC v. Fireman’s Fund Ins. Co., No. D079665 (Cal. App. 4th Dist. 1-13-23)
This case, like John’s Grill, involved distinct policy language ordinarily not found in the vast majority of pandemic coverage cases.
Initially, the Court found that there was no coverage for the insured’s purely economic losses that were unrelated to any physical loss or damage according to ruling previously made by Inns-by-the-Sea v. California Mut. Ins. Co., 71 Cal.App.5th 688 (2021), However, the policy contained a crisis management coverage endorsement providing coverage for the actual loss of business income sustained due to a crisis event, defined as the premises closing due to contamination from a communicable disease. According to the Court, coverage under the crisis management endorsement did not turn on whether the insured could allege direct physical loss of or damage to its property. Although the Court found that the insured’s existing complaint did not allege any facts showing entitlement to coverage under this endorsement, the Court nonetheless ruled that the insured should be given leave to amend to try to allege such facts.
Best Rest Motel v. Sequoia Ins. Co., No. D079927 (Cal. App. 4th Dist. 2-24-23)
Affirming summary judgment for the insurer, the Court held that the insured failed to show that the presence of COVID-19 on its insured motel premises caused the income losses it suffered during the pandemic. The key facts centered on deposition testimony that would-be guests were cancelling reservations not because of the presence of COVID on motel premises, but because the would-be guests were afraid to travel during the pandemic.
Another Planet Entertainment LLC v. Vigilant Ins. Co., No. S277893 (Cal. 3-1-23)
The California Supreme Court granted the application made by the United States Court of Appeals for the Ninth Circuit to decide a certified question of California law regarding property insurance coverage for pandemic related losses. Specifically, the California high court will decide 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. The case now proceeds to full briefing and oral argument before the California Supreme Court. We will monitor the appeal and report on the same once a decision is issued.
Connecticut Dermatology Group v. Twin City Fire Ins. Co., No. 20695 (Conn. 1-27-23)
The Connecticut Supreme Court unanimously ruled for the insurer holding that the plain meaning of the term direct physical loss of property did not include the suspension of business operations on physically unaltered property to prevent the transmission of the coronavirus. Rather, in ordinary usage, the phrase direct physical loss of property clearly and unambiguously meant that there must be some physical, tangible alteration to or deprivation of the property that renders it physically unusable or inaccessible.
Hartford Fire Ins. Co. v. Moda, LLC, No. 20678 (Conn. 1-27-23)
The insured here had two polices: one was a package policy governed by Connecticut law and the other a marine policy governed by New York law. With respect to the package policy, the Connecticut Supreme Court ruled that Connecticut Dermatology was dispositive of the insured’s coverage claim. The insured contended that it lost the value and use of its insured property when its business was forced to close during the pandemic. That claim failed as a matter of law because the losses the insured suffered did not result from any tangible physical alteration to the insured’s property. The insured suffered the same fate under New York law under its marine policy. There was no actual physical loss or damage, and thus no coverage under the terms of the marine policy.
District of Columbia
Rose’s 1, LLC v. Erie Ins. Exchange, No. 2020-CA-002424-B (D.C. App. 3-2-23)
The Court of Appeals for the District of Columbia held that it was joining the majority of other courts in determining that direct physical loss of or damage to property requires some sort of tangible, material alteration, which did not include loss of use. The Court stated that nearly all courts addressing this issue have held that economic loss unaccompanied by a physical alteration to the property does not trigger coverage under a commercial property insurance policy.
Ragan Consulting Group LLC v. Continental Casualty Co., No. 1-22-0905 (Ill. App. 1st Dist. 2-22-23)
The Court ruled for the insurer because the insured could not show that its property suffered any physical loss or damage as required by the unambiguous policy terms. Merely because the insured alleged that its property was rendered unusable or unsuitable for its intended purpose or unsafe for ordinary human occupancy or continued use, was insufficient to establish direct physical loss of, or damage to, its property.
Indiana Repertory Theater, Inc. v. The Cincinnati Casualty Co., No. 21A-CP-2848 (Ind. App. 2-13-23)
The Court ruled for the insurer holding that as a matter of law, COVID-19 virus particles do not cause physical loss or damage to property because the COVID virus did not physically alter the insured’s property or otherwise render it physically useless or uninhabitable. The Court found that its holding was consistent with the “great weight of authority from around the country.”
Antone’s, A Bar 401, LLC and D Bar 401, LLC (all d/b/a The Ark Pub and Eatery) v. American Property Ins. Co., No. A-1407-21 (N.J. App. 1-24-23)
The New Jersey Appellate Division ruled for the insurer because of a virus exclusion that barred the entirety of the insured’s claim for coverage. The Court further held that governmental closure orders were not the proximate cause of the insured’s losses. Although the insured had to reconfigure the business hours of operation, provide take-out, and lay-off employees, the proximate cause of these losses was the COVID-19 virus, not the closure orders. The orders imposed restrictions on business activities, but did not prevent the insureds from entering and operating their business.
Appearance Workshop Inc. v. Mercer Ins. Co. of N.J. Inc., No. A-0919-21 (N.J. App. 1-25-23)
The Court ruled for the insurer holding that the policy clearly and unambiguously required that the suspension of a claimant’s business be caused by direct physical loss of or damage to property. The policy’s requirement of physical loss of or damage to property should be interpreted to require a direct, physical deprivation of possession of the property. The executive orders barred the insured from operating its property for its intended purpose but did not physically deprive the insured from possessing it. The closure amounted to a “partial loss” but did not rise to the level of a direct physical loss as required by the policy.
AC Ocean Walk, LLC, v. American Guarantee and Liability Ins. Co., No. 087304 (N.J. 1-27-23)
We had earlier reported on the New Jersey Appellate Division’s decision reversing a trial court decision in favor of the insured, holding that the insured failed to show it suffered any direct physical loss or damage even if COVID-19 was on its premises, and that in any event, its losses were barred by a contamination exclusion in the policy.
The New Jersey Supreme Court has now taken this case for review. We will monitor the proceedings and report on the same once a decision is issued.
Any Garment Cleaners Somerdale LLC v. Selective Ins. Co. of New England, No. A-2221-20 (N.J. App. 2-22-23)
The Court ruled for the insurer holding that the virus exclusion barred the entirety of the insured’s claim for losses arising from the COVID-19 business closure orders.
Madison Square Garden Sports Corp. et al. v. Factory Mut. Ins. Co., No.2022-02068 (N.Y. App. 1st Dep’t 2-9-23)
The Court ruled for the insurer holding that under New York law, the insured’s pandemic related losses due to having to close its business was not covered in the absence of actual physical damage to its property.
Muscogee (Creek) Nation v. Lexington Ins. Co., No. 119701 (Okla. 1-23-23)
Choctaw Nation of Okla. v. Lexington Ins. Co., No. 119413 (Okla. 1-23-23)
The Oklahoma Supreme Court ruled for the insurer in these two appeals finding that the Court’s prior decision in Cherokee Nation v. Lexington Ins. Co., 2022 OK 71 was dispositive. Cherokee Nation held that the policy language “direct physical loss or damage . . . to real and/or personal property” required immediate, actual or tangible deprivation or destruction of property. Since the insureds here did not present any evidence that property was tangibly damaged, the policies did not cover the alleged business interruption losses.
Federal Appellate Tribunals
ITT Inc. v. Factory Mut. Ins. Co., No. 22-1245 (2nd Cir. 1-31-23)
The Court applying Connecticut law ruled for the insurer, finding the recent decision in Connecticut Dermatology Group v. Twin City Fire Ins. Co., No. 20695 (Conn. 1-27-23), dispositive of the insured’s claim for business interruption coverage for its pandemic related losses. According to the Second Circuit, the Connecticut Supreme Court joined the consensus of state and federal courts nationwide in holding that “in ordinary usage”, the phrase direct physical loss of property clearly and unambiguously meant that there must be some physical, tangible alteration to or deprivation of the property that renders it physically unusable or inaccessible.
Wilson v. USI Ins. Serv. Inc., No. 20-3124 (3rd Cir. 1-6-23)
The Court applying New Jersey and Pennsylvania law to a number of cases predicted that the New Jersey and Pennsylvania Supreme Courts would rule that in the absence of actual physical loss or damage to property, there can be no coverage under a property policy for the insureds’ pandemic related economic losses. According to the Third Circuit, the insured’s arguments for coverage were completely divorced from the physical condition of the premises. The insureds lost the ability to use their properties for their intended business purposes because of governmental closure orders limiting the activities of nonessential businesses, not because there was anything wrong with their properties. The properties were not destroyed in whole or in part; their structures remained intact and functional.
Central Laundry LLC v. Illinois Union Ins. Co., No. 22-1075 (4th Cir. 1-31-23)
The Court summarily affirmed the District Court’s decision that the insured was not entitled to coverage for its pandemic related losses finding no reversible error. The District Court had held that the insured could not obtain coverage by trying to liken COVID-19 to a pollution condition. According to the District Court, it was evident that the term pollution condition was confined to environmental pollution only and did not include communicable diseases caused by viruses such as Covid-19.
Death and Taxes LLC et al. v. The Cincinnati Ins. Co., No. 22-1237 (4th Cir. 2-23-23)
The Court summarily affirmed the District Court’s decision that the insured was not entitled to coverage for its pandemic related losses finding no reversible error
New Orleans Equity L.L.C., d/b/a as Galatoire’s Restaurant, d/b/a Galatoire’s 33 Bar & Steak v. U.S. Specialty Ins. Co., No. 21-30544 (5th Cir. 1-9-23)
The policy in this case covered business interruption losses if caused by an accidental contamination of an insured product, defined as ingestible for human consumption. The insured claimed that a worker who tested positive for COVID-19 contaminated the food products and thus the insured was entitled to coverage for its pandemic related losses. The Fifth Circuit rejected the insured’s contentions for two reasons. First, the insured had to show actual contamination of food, and no such actual contamination was shown. Second even if actual contamination was shown, the contamination had to be the “sole” cause of the loss. That could not be shown here because the insured’s business was closed due to government closure orders.
PHI Group, Inc. v. Zurich Am. Ins. Co., No-22-30142 (5th Cir. 1-30-23)
The Court ruled for the insurer adhering to its decision in Q Clothier New Orleans, L.L.C. v. Twin City Fire Ins. Co., 29 F.4th 252 (5th Cir. 2022), holding that business closures and suspensions related to the pandemic did not trigger coverage because COVID did not cause the required tangible alteration or deprivation of covered any property.
Stant USA Corp. v. Factory Mut. Ins. Co., No. 22-1336 (3-2-23)
In a case arising under Indiana law, the Court in a published opinion ruled that in the absence of any allegations that COVID-19 materially altered or changed in any way the insured’s property, the insured did not suffer any physical loss or damage to property necessary to trigger coverage under its commercial property policy. Loss of use caused by governmental closure orders to stem the pandemic did not constitute physical loss or damage.
Rossi v. Arch Ins. Co., No. 21-3087 (8th Cir. 2-27-23)
The insureds sought reimbursement for the loss of their ski pass benefits under a policy providing season pass Interruption coverage, claiming that the stay-at-home orders and related ski resort closures were quarantines under the policy that prevented them from using their ski pass. The Court disagreed and ruled for the insurer holding that the stay-at-home orders that restricted the insured’s skiing opportunities were not quarantines under the policy.
Lindenwood Female College, d/b/a Lindenwood University v. Zurich Am. Ins. Co., No. 21-3738 (8th Cir 3-2-23)
The Court held that a contamination exclusion that referenced viral contamination barred the entirety of the insured’s claim for coverage. The Court further ruled that an exemption noted in the policy that geographically limited application of the exclusion in certain states such as Louisiana did not apply to the insured, whose property was located in Illinois and Missouri. According to the court, these state specific exemptions only apply to the states so identified.
Goergio Cosani Menswear, Inc. v. Amguard Ins. Co., No. 22-55541 (9th Cir. 12-12-2022)
The policy contained a virus exclusion barring coverage for any loss or damage caused directly or indirectly by any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease, whether or not the loss event results in widespread damage or affects a substantial area. The Court found that this exclusion was clear and unambiguous barring the entirety of the insured’s claim for business losses resulting from the pandemic.
AECOM v. Zurich Am. Ins. Co., No. 22-55092 (9th Cir. 1-31-23)
The policy contained a contamination exclusion barring contamination, and any cost due to contamination including the inability to use or occupy the property or any cost of making the property safe or suitable for use or occupancy and defined contamination in part as a virus. The Court found this language plain and unambiguous applying to the insured’s claim that it had to close its business because of the presence of COVID-19 on its property. According to the Court, the very thing that the insured claimed triggered coverage—the presence of the virus on its property—was excluded by virtue of the contamination exclusion.
Discount Electronics, Inc. v. Wesco Ins. Co., No. 22-55133 (9th Cir. 2-15-23)
The Court ruled for the insurer holding that a virus exclusion was applicable to all forms or endorsements that cover business income, extra expense or action of civil authority, and thus barred the entirety of the insured’s claim for pandemic related income losses.
Sagome, Inc. v. The Cincinnati Ins. Co., No 21-1359 (10th Cir. 1-3-23)
The Court applying Colorado law ruled for the insurer holding that for the insured to be covered, COVID-19 had to injure or harm its property in some physical manner. But the insured did not—and could not—plead such damage, because COVID-19 does not physically injure or harm property.
Learning Point: To date these high courts have all acted favorably to the insurance industry regarding pandemic related loss claims: Connecticut, Delaware, District of Columbia, Iowa, Maryland, Massachusetts, Ohio, Oklahoma, South Carolina, Virginia, Washington and Wisconsin. In all trial and appellate cases moving forward, it is important to stress the unanimity growing among the high courts nationwide on this issue.