Update: Insurers Continue To Succeed On Appeal On COVID-19 Property Claims

By Melinda S. Kollross

The body of federal and state appellate precedent keeps growing, with nearly every appellate tribunal holding that there is no property insurance coverage for pandemic related economic losses in the absence of physical loss or damage.

Three more high courts in Oklahoma, South Carolina and Washington have ruled against coverage for pandemic related economic losses. The Vermont Supreme Court, however, in a 3-2 split decision issued a ruling for an insured sending the case back for further proceedings to determine whether in fact the insured should prevail on its claims.

State Appellate Tribunals

California

Marina Pacific Hotel and Suites v. Fireman’s Fund Ins. Co., No. B316501 (Cal. App. 2d Dist. 7-13-22)

This outlier, result-oriented decision was issued by the California Court of Appeals for the Second District and reversed the dismissal of the insured’s complaint on a demurrer. Holding that a communicable disease, such as a virus like COVID-19, could cause damage or destruction to property, the Court found the insureds adequately alleged losses covered by Fireman’s Fund’s policy such that they must be afforded an opportunity to present their case, at trial or in opposition to a motion for summary judgment. 

Butter Nails and Waxing Inc. v. Underwriters at Lloyd’s, London, No. B311455 (Cal. App. 2d Dist. 8-25-22)

The Court ruled for the insured under a broadly worded Civil Authority Endorsement that did not contain any requirement for physical loss or damage. According to the Court, the Civil Authority Endorsement had little explanation or qualification, and simply stated that the underwriters would pay for loss of business income or extra expense at the described premises caused by interruption of business due to civil authority action that required evacuation of the described premises. The Court held that the public health orders prohibited the insured from providing in-person services to their customers, resulting in business losses and thus constituted an evacuation of the premises under the endorsement.

Apple Annie LLC v. Oregon Mutual Ins. Co., No. A163300 (Cal. App. 1st Dist. 9-2-22)

Citing to an adverse “wall of precedent” facing the insured, the Court held that policy language requiring physical loss or damage is not ambiguous and that an insured must show physical alteration to its property to trigger the coverage provisions. According to the Court, although COVID-19 has a physical presence, and while the insured may have suffered economic loss from the physical presence of COVID-19, it did not suffer any physical loss or damage to property.

Tarrar Enterprises Inc. v. Associated Indem. Corp., No. A162795 (Cal. App. 1st Dist. 9-22-22)

The Court followed its previous decision in Apple Annie, discussed above, and held that the insured did not allege the necessary direct physical loss of or damage to property to qualify for coverage for its pandemic related losses. But the Court threw the insured a bone—it ruled that the insured should have been allowed to amend its complaint to see if it could allege itself within the coverage of the policy.

Florida

Suhaag Garden Inc. v. Certain Underwriters at Lloyd’s London, No. 3D21-1803 (Fla. App. 8-3-22)

Relying on prior Florida precedent as well as cases from the federal Eleventh Circuit, the Court held that the term direct physical loss requires some actual alteration to the insured property, and that loss of intended use alone, without tangible alteration to the property, was not sufficient to trigger coverage under the plain language of the policy.

Illinois 

Ark Restaurants Corp. v. Zurich Am. Ins. Co., 2022 Ill. App. (1st) 211147-U

State & 9 Street Corp. v. Society Ins., 2022 Ill. App. (1st) 211222-U

Black Rock Restaurants LLC d/b/a/ The Marq v. Society Ins., 2022 Ill. App. (1st) 211215-U

Station Two LLC et al. v. Society Ins., 2022 Ill. App. (1st) 211217-U

R Restaurant Group LLC v. Society Ins., 2022 Ill. App. (1st)-U

JCJ Restaurant Co. d/b/a Pelican Harry’s v. Society Ins., 2022 IL App (1st) 211225-U

Lodge Management Corp. v. Society Ins., 2022 IL App (1st) 211133-U

These 7 unpublished decisions from the Illinois Appellate Court, First District, sitting in Chicago all held that the insured did not suffer “direct physical loss of or damage to property” within the meaning of their commercial property insurance policy when the insured suspended or scaled back restaurant operations in early 2020 as required by government-imposed restrictions intended to curb the COVID-19 pandemic.

Louisiana

Cajun Conti LLC v. Certain Underwriters at Lloyds London, No. 2021-CA-0343 (La. App. 8-8-22)

We had reported on this 3-2 split insured decision in our last issue where the Court held that direct physical loss of or damage to property was ambiguous in the context of the presence of COVID-19 and construed coverage in favor of the insured. The Court of Appeals subsequently granted rehearing “for clarification purposes” only, ruling that its initial decision still stands. 

New Jersey

AC Ocean Walk LLC v. American Guarantee and Liability Ins. Co., No. A-1824-21 (N.J. App. 6-23-22)

Reversing a trial court decision in favor of the insured, the Appellate Court ruled 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.

North Carolina

North State Deli LLC v. The Cincinnati Ins. Co., No. COA21-293 (N.C. Ct. App. 7-5-22)

Reversing a trial court decision in favor of the insured, the Court ruled that the policy provisions were unambiguous. The insured’s desired definition of “physical loss” as a general “loss of use” was not supported by caselaw or the unambiguous language in the policy. According to the plain language of the policy, only direct, accidental, physical loss or damage to the property is covered, and no such damage occurred here. 

Four Roses LLC v. First Protective Ins. Co., No. COA21-427 (N.C. Ct. App. 7-19-22)

The Court rejected the insured’s argument that “direct physical loss”—which was not defined in the policy— should be broadly construed to include economic losses incurred because of the lack of, or limited access to, the property. The unambiguous terms of the policy required that there be some “direct physical loss” to the dwelling itself, and no such physical loss occurred here. 

Oklahoma

Cherokee Nation v. Lexington Ins. Co., No. 2022 OK 71 (Okla. 9-13-22)

The Oklahoma Supreme Court ruled for the insurers, holding that the phrase “direct physical loss or damage” is not ambiguous and covers only those business interruption losses caused by actual tangible deprivation or destruction of property. The Court further stated that it could not rewrite the policy and expand coverage for losses that fell outside the plain and unambiguous terms of the insurance contract. 

South Carolina

Sullivan Management LLC v. Fireman’s Fund Ins. Co., No. 2021-001209 (S.C. 8-10-22)

The South Carolina Supreme Court ruled that the presence of COVID-19 in or near the insured’s properties, and/or related governmental orders, which allegedly hindered or destroyed the fitness, habitability, or functionality of property, did not constitute “direct physical loss or damage” to trigger the policy’s coverage provisions.

Vermont

Huntington Ingalls Indus. Inc. et al. v. Ace Am. Ins. Co., 2022 VT 45 (Vt. 9-23-22)

In a 3-2 split decision, the Vermont Supreme Court became the first state high court to rule in favor of an insured on it claims for pandemic coverage, albeit in a very limited way. The Court found the policy language unambiguous. “Direct physical damage” requires distinct, demonstrable, physical change to property. “Direct physical loss” means persistent destruction or deprivation, in whole or in part, with causal nexus to a physical event or condition. The Court plainly stated that “[p]urely economic harm will not meet either of these standards.” Nonetheless, given its liberal way of viewing pleadings, the Court held that the insured’s allegations about COVID-19 adhering to surfaces was enough to get beyond the pleading stage and into discovery. The Court also stated it was not commenting on the merits of the insured’s claims, and that the insured may very well not be able to show entitlement to coverage under the unambiguous policy provisions. 

Washington

Hill and Stout PLLC v. Mutual of Enumclaw Ins. Co., No. 100211-4 (Wash. 8-25-22)

The Washington Supreme Court in a unanimous 9-0 en banc decision held that that government closure orders to curb COVID-19 did not constitute any kind of direct physical loss of or damage to property. In addition, the Court upheld the applicability of a virus exclusion holding that the exclusion was unambiguous and would bar the entirety of the insured’s claim. 

Federal Appellate Tribunals

Fourth Circuit

Skillets LLC et al. v. Colony Ins. Co., No. 21-01268 (4th Cir. 7-25-22)

Golden Corral Corp. et al. v. Illinois Union Ins. Co., No. 21-2119 (4th Cir. 8-11-22)

With respect to Skillets under Florida law and Golden Corral under North Carolina law, the Court ruled that there can be no coverage without physical alteration to the property, and in the absence of such damage, the insured was not entitled to coverage.

Fifth Circuit

Dickie Brennan and Co., L.L.C. v. Zurich Am. Ins. Co., No. 21-30776 (5th Cir. 8-1-22)

Adler & Sons LLC et al. v. Axis Surplus Ins. Co., No 21-30478 (5th Cir. 9-20-22)

Applying Louisiana law, the Court ruled in each of these cases that it was bound by Q Clothier New Orleans, L.L.C. v. Twin City Fire Insurance Co., 29 F.4th 252 (5th Cir. 2022), holding that nearly identical policy language required tangible alterations of, injuries to, and deprivations of property. Id. at 257. Q Clothier concluded that business closures and suspensions related to the COVID-19 pandemic did not trigger coverage under this policy language because COVID-19 did not cause a tangible alteration or deprivation of the property. The Court further ruled that since the Louisiana Supreme Court has not yet rejected its application of Louisiana law in Q Clothier, it was not bound to follow the intermediate decision of the Louisiana Court of Appeals in Cajun Conti LLC v. Certain Underwriters at Lloyd’s, No. 2021-CA-0343 (La. Ct. App. 6-15-22)

Sixth Circuit

Dana Inc. v. Zurich Am. Ins. Co., No. 21-4150 (6th Cir. 7-6-22)

The Court ruled that a contamination exclusion which defined contamination as including a virus applied to bar the entirety of the insured’s claim for pandemic related losses. In so holding, the Court rejected the insured’s contention that the exclusion only applied to traditional environmental contamination, and not COVID-19. According to the Court, COVID-19 is a disease caused by a virus. Therefore, the actual or suspected presence of COVID-19 on Dana’s property was contamination as defined by the policy.

Wild Eggs Holdings Inc. v. State Auto Property & Casualty Ins. Co., No. 21-05962 (6th Cir. 9-9-22)

In a split 2-1 decision, the Court ruled for the insurer holding that under Kentucky law, civil authority orders to close the insured’s business did not arise from the insured’s exposure to COVID-19, but rather from the actions of the government to stem the spread of COVID-19 generally. A dissent argued that since both the insured and insurer’s interpretations were reasonable, she would have ruled for the insured under the reasonable expectations doctrine. 

Seventh Circuit

Legacy Sports Barbershop LLC et al. v. Continental Casualty Co., No. 21-2517 (7th Cir. 7-22-22)

Jump Buffalo Grove LLC v. Cincinnati Casualty Co., No. 22-1006 (7th Cir. 9-15-22)

In a one paragraph order entered in each of these cases, the Court affirmed the dismissal of the insured’s complaint for coverage based on its previous decision in Sandy Point Dental, P.C. v. Cincinnati Ins. Co., 20 F.4th 327 (7th Cir. 2021), which held that there must be some form of actual, physical damage to the insured premises to trigger coverage. A forced closure of the premises for reasons extraneous to the premises itself is not sufficient to fall within the policy’s coverage.

Circle Block Partners LLC and Circle Block Hotel LLC v. Fireman’s Fund Ins. Co., No. 21-2459 (7th Cir. 8-17-22)

Applying Indiana law, the Court ruled that in the absence of some physical harm to its property, the insured had not alleged a cognizable claim under its policy for coverage of its pandemic related losses. In so holding, the Court found that virus particles could not cause the kind of physical alteration to property required to trigger coverage. According to the Court, in ordinary parlance, the term “damage” connotes some kind of harm. The fact that “material matter” has been added to hotel surfaces did not mean the property was harmed. 

Eighth Circuit

Torgerson Properties Inc. v. Continental Casualty Co., No. 21-1663 (8th Cir. 6-28-22)

In this published opinion, the Court ruled that under Minnesota law, insurance provisions covering “direct physical loss of or damage to property” are not triggered unless “there [is] some physicality to the loss or damage of property.” Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141, 1144 (8th Cir. 2021) (relying on Minnesota law). Government orders that restrict the use or value of property, and which apply regardless of contamination status, are not a direct physical loss of property.

Robert Levy, D.M.D., LLC v. Hartford Casualty Ins. Co., No 21-1446 (8th Cir. 7-7-22)

Rock Dental Arkansas PLLC et al. v. Cincinnati Ins. Co., No. 21-2919 (8th Cir. 7-21-22)

The Court issued per curiam orders in these cases holding that in the absence of any physical harm or damage to the insured’s property, there was no coverage under the respective policies. Although Levy involved Missouri law and Rock Dental involved Arkansas law, the Court found the result was the same. The policy could not reasonably be interpreted to cover mere loss of use when the insured’s property has suffered no physical loss or damage.

Ninth Circuit

Palomar Health v. American Guarantee and Liability Ins. Co., No. 21-56073 (9th Cir. 7-28-22)

The Court ruled that a contamination exclusion applied to any cost due to contamination including the inability to use or occupy property and defined contamination to include any condition of property due to the actual presence of any virus. This exclusion barred the entirety of the insured’s claim for pandemic related losses. The Court issued a memorandum decision; while the decision is not binding precedent, it can be cited in other cases. 

Out West Restaurant Group, Inc, et al. v. Affiliated FM Ins. Co., No. 21-15585 (9th Cir. 9-2-22)

In another memorandum decision, the Court ruled for the insurer. The Court held that Inns by the Sea v. Cal. Mut. Ins. Co., 286 Cal. Rptr. 3d 576, 595–96 (Cal. Ct. App. 2021), was controlling and thus the insured had no coverage because there was no physical loss or damage and further there was no coverage under the civil authority provision because the shutdown orders were not based on direct physical loss or damage to property. 

Eleventh Circuit

AIKG LLC v. Cincinnati Ins. Co., No. 21-13506 (11th Cir. 6-23-22)

The Court found that its prior decision in Henry’s Louisiana Grill, Inc. v. Allied Ins. Co. of Am., 35 F.4th 1318 (11th Cir. 2022), was dispositive of this appeal in favor of the insurer. The presence of COVID-19 was not a tangible harm. Nor was reduced capacity caused by the pandemic and related government orders. Thus, there was no coverage under the policy.

Learning Point: To date, the following high courts have issued opinions ruling in favor of insurers on COVID-19 claims: Washington, Oklahoma, Wisconsin, Iowa, South Carolina and Massachusetts. The Virginia Supreme Court refused to review a trial court decision finding no error in its ruling that an insured suffered no physical loss or damage. In all trial and appellate cases moving forward, it is important to stress the nearly uniform nationwide consensus among state high courts that there is no property coverage for pandemic related economic losses. Huntington Ingalls does not dictate otherwise as it merely affords the insured an opportunity to get past judgment on the pleadings.