Here's some good news for businesses seeking COVID-19-related "business interruption" coverage from their insurance carriers.
In Studio 417, Inc. v. Cincinnati Ins. Co., plaintiffs-a group of hair salons and restaurants-sued Cincinnati Insurance Co. for denying their claims under their "all risk" policy to recover lost revenues due to COVID-19 shutdowns. According to one count, over 900 similar cases have been filed around the U.S. by businesses against insurers for improperly denying business interruption claims. Two recent cases, one in Michigan and another in Washington, D.C., were decided in favor of the insurance companies suggesting that the scales were tipped in the insurance companies' favor. On August 12, 2020, that scale tipped back when, in Studio 417, Judge Bough of the Western District of Missouri denied Cincinnati Insurance's motion to dismiss plaintiffs' COVID-19 coverage claims.
Plaintiffs' policies "cover[ed] all risks of loss except for risks that are expressly and specifically excluded." A "Covered Cause of Loss" was "defined to mean accidental direct physical loss or accidental direct physical damage." Plaintiffs argued it was likely that customers who entered their properties were infected with COVID-19, which is a "physical substance" that can live on "physical surfaces," its presence "renders physical property in their vicinity unsafe and unusable," and they "were forced to suspend or reduce business at their covered premises." Cincinnati Insurance argued the policies only covered "income losses tied to [tangible] physical damage to property," not "economic loss caused by governmental or other efforts to protect the public from disease."
The Court's analysis of both sides' arguments revolved around the phrase-"direct physical loss." First, the Court began by noting that the policies did not define "direct physical loss" (or "direct physical damage," for that matter). It also did not find "any exclusion for losses caused by viruses or communicable diseases" in the policies. As such, the Court relied on the dictionary definition of "direct," "physical," and "loss" and held that plaintiffs' allegations fit squarely within the definitions. Second, the Court emphasized the "or" in the definition of "Covered Cause of Loss." It held that Cincinnati Insurance's tangibility requirement "conflates loss and damage," relying on other courts that have "recognized that even absent a physical alteration, a physical loss may occur when the property is uninhabitable or unusable for its intended purpose." That being said, the Court did acknowledge that there is case law requiring physical tangible alteration for a "physical loss." However, apart from differentiating them on the facts, the Court held that those cases were decided at the summary judgment stage, as opposed to the motion to dismiss stage here. Accordingly, the Court denied Cincinnati Insurance's motion to dismiss.
The Court's decision suggests that, unless defined, "direct physical loss" involves a fact intensive analysis warranting discovery. Thus, this decision gives businesses, at least at the motion to dismiss stage, some ammunition to push back against the insurance companies.
Originally published 24 August 2020.
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