Throughout the COVID-19 pandemic this firm has published a series of legal briefings discussing the use of business interruption insurance for affected businesses to help offset losses from government mandated shutdowns. The legal briefings can be found here: https://www.lawpf.com/post/covid-19-and-mitigation-of-business-losses-via-insurance and here: https://www.lawpf.com/post/commercial-insurance-policies-and-all-risk-coverages-for-losses-during-covid-19-pandemic and finally, here: https://www.lawpf.com/post/business-interruption-insurance-coverage-during-the-covid-19-pandemic
As a rule, insurance companies have denied business interruption claims related to COVID-19 losses. Insurance companies argue that COVID-19 related losses do not involve physical damage, which is required to establish a claim under business interruption coverage. In the litigation stemming from denied claims, the courts supported the insurer’s interpretation of the policies. As a result, business owners are left without a viable way to mitigate COVID-19 losses. The endgame is permanent closure for affected businesses, a devastating result for small-business owners.
Recent rulings may signal a possible change in how business interruption policies are analyzed by the courts, and as a result, business owners may have a better chance to offset losses from COVID-19. In North State Deli, LLC, et al. v. The Cincinnati Ins. Co., et al., a North Carolina court ruled that the Cincinnati Insurance Co. owes a group of restaurants coverage for their losses related to a state mandated shutdown. The restaurants were initially denied claims because the claimed losses did not constitute a physical loss as required by the policy. Cincinnati Insurance Co’s position was that the policy language “accidental physical loss or accidental physical damage” meant that the restaurants had to suffer some form of physical alteration.
The court ruled against the insurer, holding that under the policy “direct physical loss” should be applied using its plain meaning which, in the context of the insurance policy, meant that the inability to utilize something in the “material” world constitutes a “direct physical loss”, and does not require actual physical damage to trigger coverage. If the insurer’s interpretation were to rule, under the policy language, there is no difference between “physical loss” and “physical damage,” making the term “physical loss” superfluous.
In another case, a Texas judge remanded a suit from Federal court to state court after allowing the plaintiff to join an insurance adjuster to a COVID-19 related suit. The insured party (a dental practice) asserted that Allstate denied coverage under a virus exclusion and the lack of physical damage to the property. After the lawsuit was filed in state court and removed to Federal court by Allstate, it was remanded back to state court after the insured party added the insurance adjuster. The insured party asserted that the adjuster’s review of its claim was inadequate because they did not review any documents or information related to the claim before denying the claim.
Allstate refuted the insured party’s assertion arguing that it failed to show “a single document or piece of evidence that she should have considered” and there was no evidence for the adjuster to consider because the office did not have the physical damage to make a claim as required under the policy. The suit will proceed in state court and may highlight how insurance companies are evaluating claims related to business interruption coverage and COVID-19 going forward.
Finally, in a Pennsylvania court, a judge ruled against underwriters for noted insurer Lloyd’s of London, holding it wrongly denied coverage for losses stemming from COVID-19. In Taps & Bourbon on Terrace LLC v. Those Certain Underwriters at Lloyd's, London et al., the court was tasked with determining whether a virus can cause the physical loss as required under the insured’s policy. In its preliminary objection to granting coverage, Lloyd’s asserted that the virus does not cause physical damage because it does not result in “physical alteration” of the property. The insured party, a Philadelphia bar and restaurant, argued that shutdown orders constitute physical loss under the policy because a shutdown is a “loss of use”, and Third Circuit courts have ruled that loss of use is “physical loss”. Additionally, the insured party presented an interesting argument that COVID-19’s classification as a virus, in fact, makes it a physical object, and therefore, any effect is a physical alternation as required under the policy.
Whether the aforementioned cases represent a possible change in how the courts will approach litigation related to denial of coverage under business interruption coverage remains to be seen. In any event, businesses must carefully review their insurance policies to evaluate whether its business interruption insurance will allow any recovery for losses associated with the COVID-19 pandemic.
Our team has extensive experience in reviewing, arbitrating, and litigating insurance agreements. If you have any questions about this Legal Briefing, please contact any member of our Firm at (585) 730-4773. Please note that any embedded links to other documents may expire in the future.
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This Legal Briefing is intended for general informational and educational purposes only and should not be considered legal advice or counsel. The substance of this Legal Briefing is not intended to cover all legal issues or developments regarding the matter. Please consult with an attorney to ascertain how these new developments may relate to you or your business. © 2020 Law Offices of Pullano & Farrow PLLC