Property insurers faced with COVID-19 related claims for business income losses can take comfort in the recent trend of most appellate courts to find in favor of insurers that have denied coverage based on policy language requiring direct physical loss or damage.
What You Need to Know:
- Many policyholders have submitted COVID-19 related claims to their property insurers for coverage for business income losses.
- A number of appellate courts are addressing whether COVID-19 and related government orders limiting indoor dining (and other activities) satisfy threshold policy requirements of direct physical loss or damage.
- To date, most appellate courts addressing these issues have found in favor of insurers.
Appellate courts are increasingly reviewing decisions as to whether policyholders have insurance coverage for financial losses arising from COVID-19 related business interruption and are, in many cases, issuing decisions in favor of insurers. Recent appellate decisions were issued by the Washington Supreme Court, the South Carolina Supreme Court, the Fourth Circuit, and the Fifth Circuit, following other appellate decisions favorable to insurers.
The Washington Supreme Court held on August 25, 2022 that an insured’s claim to recover lost business income arising from loss of use of its dental offices for nonemergency dental practice as a result of COVID-19 and a related state proclamation prohibiting non-emergency services was not covered under a property insurance policy which required that there be “direct physical loss of or damage to Covered Property.” Hill and Stout, PLLC v. Mutual of Enumclaw Insurance Company, Case No. 100211-4, 2022 WL 3651805 (Aug. 25, 2022) (in which the insured brought the claim on behalf of itself and those similarly situated). The Washington Supreme Court upheld, post-discovery, the trial court’s grant of summary judgement in favor of the insurer. The court held, under the facts of the case, that the claim for loss of intended use and loss of business income is not a “physical loss of property” and the insured was “still able to physically use the property at issue.” It rejected the insured’s urging to apply a “loss of functionality test” to the claim because there was no “physical loss of functionality to the property,” noting that nothing physically prevented use of the property or rendered it useless, and that to recover there must be some physical effect on the property. Despite the insured’s argument that Washington insurance law strongly favors insureds in ways other jurisdictions may not, the court noted that, although not deciding the case for them, it was persuasive that “the national consensus is that COVID-19 and related governmental orders do not cause physical loss of or damage to a property and do not trigger coverage under similar policy language.” Id. at 18. (The court also found that a virus exclusion applied, although that was not the primary issue addressed).
In August, the South Carolina Supreme Court also held in favor of insurers, finding that COVID-19 related government orders and the presence of COVID-19 in or around an insured property did not qualify as direct physical or tangible damage, on a question certified from the United States District Court for the District of South Carolina. Sullivan Management, LLC v. Fireman’s Fund Insurance Company, et al., Case No. 3:20-cv-02275; Sullivan Management, LLC v. Fireman’s Fund Insurance Co., 2022 WL 3221920 (Aug. 10, 2022).
In an August 10, 2022 decision, the South Carolina Supreme Court agreed with insurers, finding that there was no business interruption coverage under a property insurance policy for a restaurant’s COVID-19 losses.
The South Carolina decision arose when Sullivan Management, LLC (Sullivan) sought to recover for loss of income for the restaurants it operates in the state. The court considered whether the presence of the COVID-19 virus in or near Sullivan’s properties, and/or the related governmental orders, including orders prohibiting on-site food and beverage consumption at restaurants and related stay-at-home orders, constituted “direct physical loss or damage” to the properties and whether that required some permanent dispossession or physical alteration of the property. The court found that no, the presence of COVID-19 and corresponding governmental orders that prohibited indoor dining did not fall within the policy’s trigger language of “direct physical loss or damage.”
Insurer Fireman’s Fund and Allianz Global Risks US Insurance Company (Fireman’s) asserted, and the court agreed, that neither the presence of COVID-19 nor the government shut-down orders constituted “direct physical loss or damage” because the phrase required “actual” or “discernible” physical damage. In order for there to be coverage, the loss or damage had to be a “physical alteration, destruction, or permanent dispossession of property” and loss of use or economic loss alone did not suffice. The court also noted that steps taken by the insured to mitigate the spread, such as increasing cleaning or installing plexiglass, were not sufficient to demonstrate the requisite “direct physical loss or damage.”
Previously, the highest courts in Massachusetts, Iowa, and Wisconsin also issued decisions finding that policyholders were not entitled to business interruption coverage in property policies for the losses resulting from COVID-19 shutdowns and governmental restrictions on indoor dining. Verveine Corp., et al. v. Strathmore Insurance Co., et al., 184 N.E.3d 1266 (Mass. 2022); Wakonda Club v. Selective Insurance Co. of America, 973 N.W.2d 545 (Iowa 2022); Colectivo Coffee Roasters, Inc., et al. v. Society Insurance, 974 N.W.2d 442 (Wis. 2022).
Also in the last few weeks, the Fourth Circuit affirmed the United States District Court of the Eastern District of North Carolina’s September 8, 2021 decision in favor of insurers, which had held that Golden Corral Corp. and Golden Corral Franchising System, Inc. could not recover for financial losses incurred during the COVID-19 pandemic when it suspended its business operations. Golden Corral Corp., et al. v. Illinois Union Insurance Co., 559 F.Supp.3d 476 (E.D. N.C. 2021), aff’d, Golden Corral Corp., et al. v. Illinois Union Insurance Co., 2022 WL 3278938 (4th Cir., August 11, 2022).
The Golden Corral case arose when policyholders sought coverage under a commercial property insurance policy which insured plaintiffs against, in relevant part, “‘all risks’ of direct physical loss, damage or destruction, occurring during the Policy period”, noting: “[s]imply put, the virus did not change the physical condition of the property.” Much like in the South Carolina case, Golden Corral contended it sustained substantial financial losses when it and its franchises suspended restaurant operations in response to government orders restricting access to restaurants that were issued to address the pandemic in early 2020. Golden Corral relied on a “Loss of Ingress or Egress” endorsement; the “Business Interruption” provisions; and the “Interruption by Civil or Military Authority” endorsement to support their contention that their financial losses should be covered under the policy. Both the lower court and the appellate court agreed with Fireman’s, finding that, based on a close reading of the policy language, both the Loss of Ingress or Egress endorsement and the Business Interruption provisions required tangible, physical harm or loss to the covered property. Additionally, the court found that the Interruption by Civil or Military Authority had a similar physical loss component which prevented plaintiffs from recovering under the endorsement.
The Fourth Circuit’s decision came shortly after a Fifth Circuit decision issued on August 1, 2022, finding in favor of the insurer. In the decision Dickie Brennan & Co., L.L.C. v. Zurich Am. Ins. Co., et al., 2022 WL 3031308 (5th Cir. Aug. 1, 2022), the Fifth Circuit upheld the United States District Court for the Eastern District of Louisiana’s December 20, 2021 judgment dismissing an insured’s coverage claims for pandemic related economic losses and expenses under their property policy. The Fifth Circuit held that the insured could not “recover economic losses stemming from the closure of its restaurants during the COVID-19 pandemic” because “there was no covered cause of loss” since there was “no underlying physical loss or damage” to the restaurants. The insured in this instance sought coverage under multiple provisions, but each required “physical loss or damage.” The court reasoned that “[b]ecause COVID-19 did not cause a ‘tangible alteration to, injury to, or deprivation of’” the insured’s restaurants, that “there was no coverage-triggering physical loss.”
The current trend in appellate decisions appears favorable to insurers, particularly those issued by the highest state appellate court or a federal appellate court. Many courts have been finding, based on the language of the policies before them, that without a tangible, physical harm to the covered property, that policyholders cannot recoup financial losses based on business interruption theories when there is no tangible damage to the insured property. Significantly, most appellate courts are, so far, generally upholding findings in favor of insurers. Still to be seen is whether this favorable appellate trend will continue as strongly when appellate courts are faced with trial court holdings favorable to policyholders, and whether there will be a distinction based on factual allegations and findings.
This alert was written by Laurie A. Kamaiko, Co-Chair of the Firm’s Cyber Insurance Practice, and Amanda Dennis, a member of the Firm’s Insurance Practice. Laurie can be reached at (212) 980-7202 or Laurie.Kamaiko@saul.com. Amanda can be reached at (202) 295-6644 or Amanda.Dennis@saul.com. This alert has been prepared for information purposes only.