Earlier this year (as you know), thousands of businesses were forced to shut down after mandatory lockdowns were imposed across the county. Expectedly, many of those businesses carried insurance – namely, business interruption insurance. After the lockdowns began, those businesses began submitting claims to their insurance providers for compensation to account for the income that was lost as a result of the shutdowns. However, most of those insurers promptly denied coverage.
Since that time, hundreds of policyholders have sued their insurers in claims across the country. So far, most of the rulings have favored the insurers. Courts have been reaching their ruling based on a lack of “physical loss” under the terms of the insured’s business interruption policies. For example, earlier this year, a California court ruled that an insurer does not have to cover business interruption losses for a policyholder that closed its operations due to government-ordered COVID-19 lockdowns.
In ruling for the insurer, U.S. District Court Judge Jon S. Tigar noted that the insurance policy says the insurer did not have to pay for the business losses because “the ‘direct physical loss of … property’ [clause in the insurance policy] was not intended to encompass a loss where the property was rendered unusable without an intervening physical force.”
Similarly, in Sandy Point Dental P.C. v. The Cincinnati Insurance Co., a U.S. District Court said the policy for the dental office required physical damage to occur to trigger coverage. “In essence, plaintiff seeks insurance coverage for financial losses as a result of the closure orders. The coronavirus does not physically alter the appearance, shape, color, structure, or other material dimension of the property. Consequently, plaintiff has failed to plead a direct physical loss — a prerequisite for coverage,” the ruling states.
However, within the last few weeks, there have been a few glimmers of hope on the horizon for insureds. For instance, earlier this week, a federal judge in Missouri issued his second ruling in favor of policyholders with coronavirus-related business interruption claims. There, U.S. District Court Judge Stephen R. Bough denied Michigan-based Owners Insurance Co.’s motion to dismiss a suit brought by a dental practice group that sought coverage for income lost due to mandatory COVID-19 lockdowns.
In that case, Blue Springs Dental Care LLC et al v. Owners Insurance Co. – the Kansas City-area dental offices argued that government-ordered closings imposed earlier this year constituted a direct physical loss under the terms of their policy and triggered business interruption coverage. Blue Spring Dental argued that the presence of the virus on or around their offices damaged the properties.
Judge Bough noted that noted because “the policy did not define the term ‘direct physical loss’ . . . Plaintiffs plausibly allege that COVID-19 physically attached itself to their dental clinics, thereby depriving them of the possession and use of those insured properties,” the ruling states.”
In addition, a few weeks ago, Judge Bough issued his ruling in Studio 417, Inc., et al. v. The Cincinnati Ins. Comp. There, the district court denied The Cincinnati Insurance Company’s motion to dismiss based on the argument that the virus causing COVID-19 cannot satisfy the requirement that “direct physical loss or damage” caused the loss.
The Cincinnati Insurance Company’s took the same position as nearly all insurance companies—that there must be tangible or structural damage to property, such as storm damage, to satisfy the physical loss or damage requirement in practically all business interruption policies. Rejecting this argument, the court reasoned that the coverage trigger is physical loss or damage, and that it “must give meaning to both terms.”
Finally, in August, a New Jersey state court denied an insurer’s claim that COVID-related losses cannot qualify as covered losses without more information. In Optical Services USA/JCI v. Franklin Mutual Insurance Co., in the Superior Court of New Jersey, the policyholders asserted that they purchased business interruption insurance coverage to protect their businesses from an “unanticipated crisis.” The insurer responded by filing a Motion to Dismiss. After review, the court held that the plaintiff should be afforded the opportunity to develop their case and prove before the Court that the event of the Covid-19 closure may be a covered event under the policy when occupancy of the described premises is prohibited by civil authorities. Additionally, the court noted that “[t]here is an interesting argument made before this Court that physical damage occurs where a policy holder loses functionality of their property and by operation of civil authority such as the entry of an executive order results in a change to the property.” As such, the court decided that it must afford the plaintiffs an opportunity to engage in discovery to fully establish the record.
So, does this mean that your business interruption insurance claim with your insurer is now a slam-dunk success? Nope. It just means that there could now be new possibilities and arguments and some of the courts in the country are starting to decide in the insured’s favor.
About Harrison Oldham
Harrison grew up in Mansfield, Texas. He attended Texas A&M University for his bachelor’s degree, where he met his wonderful wife, Kelsey. After graduating magna cum laude from Texas A&M, he attended SMU Dedman School of Law, graduating with honors in 2012. Today, Harrison and his wife live in Dallas, Texas with their son, Teddy.
Since graduating from SMU Law, Harrison has worked exclusively in the field of business law. He has spent time in private practice and in-house, working with clients of every size; from single person startups to Fortune 250 companies. Today his practice focuses on serving the diverse needs of businesses and individuals throughout Texas. You can learn more about Harrison by visiting his website, at: http://