It is time for a new-year’s update on the ongoing thousands of cases on COVID-19 Business Interruption (BI) insurance. Even though the carriers have declared victory, numerous issues are still up in the air with conflicting state decisions; the carriers have set significant reserves; and we shall see what the new year will bring.

  1. The states appear to have split on the issue of whether there have to be structural alterations to prove property loss or even damage. It seems illogical that physical loss would require structural alteration, but some states have required that. See e.g., Rose v. Erie, Amicus Brief of UP (D.C. Cir. Nov. 3, 2020); Martinez v. Allied Ins. Co. (M.D. Fla. Sep. 2, 2020) (requiring an allegation of structural alteration to the property by COVID-19 as a prerequisite to BI coverage); Turek Enterp. v. State Farm Mut. Ins. (E. D. Mi. Sept. 3, 2020) (same); 10e, LLC v. Travelers Indem. Co. of Conn. (C.D. Cal. Aug. 28, 2020) (same)). In contrast are cases such as Studio 417 v. The Cincinnati Ins. Co., 2020 WL 4692385 (W.D. Mo. Aug. 12, 2020), which find that the mere presence of COVID-19 on the insured property prevents use of the property and amounts to a covered physical loss. See also, e.g., Optical Servs. v. Franklin Mut., No.: BER-L-3681-20, Decision on Summary Judgment (N.J. Sup. Ct. 2020); Perry St. Brewing v. Mut. of Enumclaw, No. 20-2-02212, Order granting Motion for Partial Summary Judgment (Spokane Cnty. Sup. Ct. Nov. 23, 2020); N. State Deli v. Cincinnati Ins., Order on Summary Judgment (N.C. Sup. Ct. Oct. 9, 2020). In Hyde Park Grille v. Zurich Ins., Order Granting Summary Judgment for Plaintiff (N.D. Ohio Jan. 19, 2021), the judge found that structural damage was not needed to prove property loss.

Plaintiffs argue that physical loss of the real property means something different than damage to the real property, and this is a valid argument. Otherwise, why would both phrases appear side-by-side separated by the disjunctive conjunction “or.”

The court also found that total suspension of operations was not required for physical loss and mere loss of dine in operations was enough. An Iowa case that the trial court dismissed for lack of physical damage is on appeal to the Court of Appeals for the 8th Circuit and may be headed to a decision in the next few months. Oral Surgeons, PC v. Cincinnati Ins. Co., No.203211 (8th Cir. 2021). There will doubtless be numerous other appeals during the course of 2021.

  1. The states appear split on whether the traditional contamination/pollution exclusion applies to losses caused by COVID-19. The basic issue in those cases is whether this exclusion was meant to cover only a traditional release of pollutants or can be construed to cover a virus pandemic (whether or not the policy defines contamination as including viruses and pandemics). See, e.g., Franklin EWC v. The Hartford, (N.D. Cal Sep. 22, 2020) (traditional pollution exclusion prevents coverage for COVID-19 pandemic); JGB Vegas Retail v. Starr Ins., Order denying Motion to Dismiss Complaint (Clark Dist., Nev. Nov. 30, 2020) (traditional pollution exclusion meant to cover releases of pollutants at specific property and thus does not cover pandemic like COVID-19); London Bridge v. Ill. Union Ins., Order Granting Motion to dismiss (D. Ariz. Dec. 4, 2020) (clause covering pollution does not provide coverage of COVID-19 pandemic because there is no traditional release of pollutants); Hyde Park Grille, supra (microorganism exclusion does not apply because the damage was caused by government orders, not COVID-19).
  2. Even though regulatory estoppel has been rejected in several states, no court has seriously considered the regulatory estoppel argument. See, e.g., Chattanooga Prof. Baseball v. Nat’l Cas. Co., No. CV-20-01312-PHX-DLR, Order granting Motion to Dismiss (D. Ariz. Nov. 13, 2020) (regulatory estoppel rejected without examining any evidence or underlying principles). More evidence is being assembled that the carriers specifically stated, when seeking ISO approval of the virus exclusion, that the 2006 strongest form of virus exclusion did not decrease coverage, even though carriers are now arguing that that exclusion does bar coverage for COVID-19-related losses. In other words, the carriers paid claims for SARS-1 under the previous contamination exclusion and now refuse to pay claims under COVID-19. It therefore appears that something was less than fully disclosed in the 2006 filings adding the “Virus” exclusion, which should affect its enforceability. See Lehigh Valley BB v. Philadelphia Ins., No. 201200958, Complaint (Penn. Ct. Common Pleas Dec. 16, 2020) (summarizing evidence of filings claiming that virus exclusion was added after claims paid for SARS-1 without explaining that it reduced coverage and without lowering rates). A motion addressing this topic was filed in New Jersey based on previous New Jersey precedents such as Morton Int’l v. Gen. Accident Ins. Co. of Am., 629 A.2d 831 (N.J. Sup. Ct. 1993), which held that regulatory estoppel prevented enforcement of the traditional pollution exclusion. Everett AquaSox v. Arch Ins. (D.N.J. Jan. 19, 2021). Unfortunately, the court denied the motion, claiming that the law of Arizona and Washington state applied and that these states did not recognize regulatory estoppel. Hyde Park Grille, supra, did use the regulatory history of the adoption of the microorganism exclusion to find that the exclusion did not cover the loss of use of the property due to regulatory orders.
  3. The carriers claim they are winning everything, yet they have set aside reserves of over $1 billion for COVID-19-related BI claims and have paid approximately $300 million for such claims so far. COVID-19 Business Interruption Data Call October 2020. It took at least five years for the carriers to acknowledge making payments for asbestos and environmental-pollution claims. The first bench trial on the issue of property damage resulting from COVID-19 concluded in early January, and we now await the judge’s decision. Cajun Conti LLC v. Certain Underwriters at Lloyd’s (La Dist. Ct. Nov. 4, 2020). It will probably be a long haul, but the insureds should not give up yet.
  4. Carriers such as AFM provided some allegedly limited coverage for shutdown due to a “communicable disease,” which must mean that a communicable disease such as COVID-19 causes property damage. Nonetheless, those carriers are now trying to argue that that is not the case. AFM even seems to have changed its policy form to delete the express finding of property damage resulting from viruses in the communicable-disease coverage section. This would appear to be another example of how the carriers’ filings on this topic might be found to represent an attempt to reduce coverage or at least argue that coverage was not provided by a previous form; all without reducing rates when the changes to the coverage forms were introduced. Hopefully, at least some states will find this practice questionable. See AFM v. Mohawk Casino, No.: 8:20-cv-00701 (N.D.N.Y. Nov. 6, 2020) (cross motions for summary judgment on whether to require property damage under communicable-disease coverage and whether to apply pollution exclusion). Carriers such as AFM also insist that they can provide coverage for a communicable disease such as COVID-19 with one hand while taking it away with the other through the virus exclusion, all without creating any ambiguity about the meaning of the policy. Any 6th grader reading the policy could reasonably conclude that it covered contamination by a virus and that it included BI coverage therefore as well as BI coverage for closure by the government. Notably, the recent test case in the UK, which has now been affirmed by the UK Supreme Court, observed that policies should make sense as a whole.

In the case of an insurance policy of the present kind, sold principally to SMEs [Small Medium Enterprises], the person who must understand the policy is not a pedantic lawyer who will subject the entire policy wording to a minute textual analysis. It is an ordinary policyholder who, on entering into the contract, is taken to have read through the policy conscientiously in order to understand what cover they purchased.

The Fin. Conduct Auth. &Arch Ins., et al., No [2020] EWHC 2448 (Comm) (Sep. 15, 2020), affirmed (UK S. Ct. Jan. 15, 2021).

The FCA decision establishes that policies that provide specific extensions to cover “notifiable” communicable diseases cover COVID-19-related losses. By analogy, U.S. policies such as those issued by AFM, Great American, and U.S. Fire that specifically cover contamination by communicable disease should also cover COVID-19. U.S. courts should, like the UK ones, prevent insurance companies from relying on technicalities and simply apply common sense to the policy language.

Indeed, AFM also filed briefs in previous cases in which it argued that mold caused property damage similar to the damage alleged by insureds resulting from COVID-19. See, e.g., Treasure Island Casino v. Affiliated FM Ins., Plaintiff’s Response to Defendant’s Motion for Partial Summary Judgment on the Pleadings (D. Nev. Nov. 16, 2020) (summarizing previous conflicting briefs on property damage); AFM v. Federal Ins., Motion In Limine (D.N.M. Nov. 19, 2019) (arguing that mold causes property damage); Thor Equities v. AFM, No. 20 Civ. 03380 (AT), Reply Brief In Support of Motion for Judgment on The Pleadings (S.D.N.Y. Sept. 28, 2020) (summarizing inconsistent AFM positions).

  1. U.S. District Courts seem to be disregarding the state law established by their own state courts or, even worse, to be disagreeing amongst themselves on what is the law in the same state. In some states, it appears that the U.S. District Courts are so eager to get rid of cases that they disregard the law of their own states. See, e.g., Triumph Hospitality v. Hartford Ins., No. 653853/2020, Brief in Opposition to Motion to Dismiss (N.Y. Sup. Ct. Dec. 2, 2020) (summarizing NY state court decisions that structural alteration to property not required for coverage as opposed to USDC decisions which hold the opposite). Similarly, the decision in 10e LLC, supra, which required structural alteration to establish loss of property, seems to be contrary to other California law and even to another case against Travelers that was previously decided by the same court. See Total Intermodal Servs. v. Travelers Prop. Cas., 2018 WL 3829767 (C.D. Cal. Jul. 11, 2018) (holding that structural alteration is not required to prove property damage).

A recent California state court decision refused to follow the Federal Court decisions. In Goodwill Industries of Orange County v. Philadelphia Indemnity Insurance Co., No. 30-2020-01169032 (Cal. Super. Ct. Jan. 28, 2021), the plaintiff alleged that COVID-19 was present at properties at the time of the closure orders, employees tested positive, and additional cleaning and sanitization was needed to respond to and remove the coronavirus. Thus, the court distinguished the federal precedent: “However, these federal California [COVID BI] cases are not binding on this court and were decided under a different standard.” The court found that none of the California Federal cases involved specific allegations of physical presence of COVID-19 and necessary cleaning.

And in Missouri, one U.S. District Court judge questioned the reasoning of another judge in the same District on the same subject where there apparently is no clear state court precedent. Zwillo V, Corp. v. Lexington Ins. Co., No. 4:20-cv-00339-RK (W. D. Mo. Dec. 2, 2020) (questioning ruling in Studio 417, supra, that structural alteration is not prerequisite to property loss). The rulings in Hyde Park Grille, supra, and Aqua Sox, supra, provide contrasting decisions on the same topics that seem hard to explain other than based on the willingness of each respective judge to explore the issues; they do not appear to be based on any actual differences in the respective states’ laws.

The inconsistencies discussed in this post again demonstrate that a system like the UK FCA test case might better serve the interests of policyholders than the above inconsistent, and sometimes dueling, federal and state court decisions. In the words of the UK Supreme Court:

It is a testament to the success of the Test Case Scheme procedure that it will have enabled the important legal issues raised in this case to be finally decided following a trial and an appeal to the Supreme Court in just over seven months. It is hoped that this determination will facilitate prompt settlement of many of the claims and achieve very considerable savings in the time and cost of resolving individual claims.

The Financial Conduct Auth., supra. In contrast, the U.S. system seems to do little but create uncertainty and confusion that may ultimately lead to rushes to the courthouse as well as to forum shopping.