HNRK Coverage Corner

On August 12, 2020, United States District Judge Stephen Bough of the Western District of Missouri issued an important decision for policyholders seeking business interruption insurance for losses arising from closures relating to the COVID-19 pandemic. 

In Studio 417, Inc. v. Cincinnati Ins. Co., Case No. 20-cv-03127-SRB (W.D. Mo.), Judge Bough ruled that the plaintiffs insureds, who operate hair salons and restaurants subject to government-mandated closures, adequately alleged a claim for business interruption insurance coverage. The insureds submitted claims for business interruption coverage under standard all-risk property insurance policies issued by Defendant Cincinnati Insurance Company.  The policies defined a “Covered Cause of Loss” as “accidental [direct] physical loss or accidental [direct] physical damage.”  The insurer argued that Plaintiffs did not plead a “physical loss” because COVID-19 did not cause any “actual, tangible, permanent, physical alteration of property.”  The court disagreed and denied the insurer’s motion to dismiss, explaining:

Plaintiffs have adequately alleged a direct physical loss. Plaintiffs allege a causal relationship between COVID-19 and their alleged losses. Plaintiffs further allege that COVID-19 “is a physical substance,” that it “live[s] on” and is “active on inert physical surfaces,” and is also “emitted into the air.”  COVID-19 allegedly attached to and deprived Plaintiffs of their property, making it “unsafe and unusable, resulting in direct physical loss to the premises and property.”  Based on these allegations, the Amended Complaint plausibly alleges a “direct physical loss” based on the plain and ordinary meaning of the phrase. Second, the Court must give meaning to all policy terms and, where possible, harmonize those terms in order to accomplish the intention of the parties. Here, the Policies provide coverage for accidental physical loss or accidental physical damage. Defendant conflates “loss” and “damage” in support of its argument that the Policies require a tangible, physical alteration. However, the Court must give meaning to both terms. The Court’s finding that Plaintiffs have adequately stated claim is supported by case law. . . .  Other courts have similarly recognized that even absent a physical alteration, a physical loss may occur when the property is uninhabitable or unusable for its intended purpose. . . . Plaintiffs here have plausibly alleged that COVID-19 particles attached to and damaged their property, which made their premises unsafe and unusable.  This is enough to survive a motion to dismiss.

As discussed in my article, which appeared in the Summer 2020 edition of NYLitigator, insurers have sought to avoid coverage for COVID-19 business losses by taking a narrow view of the “physical loss” or “physical damage” requirement, arguing that some structural property damage is required.  However, as this decision shows, the case law supports a broader reading of the coverage.  Insureds seeking business interruption coverage for losses arising from the pandemic should not take an insurer’s reflexive “no” for an answer without understanding their rights under the policy.