The momentum in favor of the insurance industry in business interruption litigation has picked up speed in recent weeks, with another federal appeals court, as well as the first two state high courts in the U.S., rejecting policyholders’ claims that COVID-19 caused “direct physical harm or damage” to their properties.
But at least one federal court has refused to consider the matter entirely settled, creating a small sliver of hope for insureds in some of these matters.
With the majority of federal appeals courts siding with insurers in these cases, state and federal courts now have a more solid blueprint to follow in these cases than they did even six months ago.
Federal appellate courts that have addressed similar policy language include: the U.S. Court of Appeals for the Second Circuit in 10012 Holdings v. Sentinel Ins.; the Fourth Circuit in Uncork & Create v. Cincinnati Ins.; the Fifth Circuit in Terry Black’s Barbecue Dallas v. State Auto. Mut. Ins.; the Sixth Circuit in Santo’s Italian Cafe v. Acuity Ins.; the Seventh Circuit in Sandy Point Dental v. Cincinnati Insurance; the Eighth Circuit in Oral Surgeons v. Cincinnati Ins.; the Ninth Circuit in Mudpie v. Travelers Cas. Ins. Co. of Am.; the Tenth Circuit in Goodwill Indus. of Cent. Okla. v. Philadelphia Indem. Ins.; and the Eleventh Circuit in Gilreath Family & Cosmetic Dentistry v. The Cincinnati Ins.
The result, predictably, is that courts are increasingly falling in line with the prevailing wisdom in these cases. But a federal judge in Maryland last week gave plaintiffs some hope that they might be able to regain some ground.
>> As Law.com’s Allison Dunn reported, the Massachusetts Supreme Judicial Court and the Iowa Supreme Court became the first state high courts in the country last month to decide whether businesses can recover COVID-19-related business losses under their insurance policies.
Both state high courts held that the mere loss of use of a business does not constitute “direct physical loss or damage to” within the meaning of the insurance policy provisions. Therefore, coverage is not triggered and the insurance companies are off the hook from such payments, the court opinions said.
“We conclude that ‘direct physical loss of or damage to’ property requires some distinct, demonstrable, physical altercation of the property. … Every appellate court that has been asked to review COVID-19 insurance claims has agreed with this definition for this language or its equivalent,” Justice Scott L. Kafker wrote on behalf of the Massachusetts Supreme Judicial Court on April 21.
The Iowa court followed suit on April 22 in Wakonda Club v. Selective Insurance Co. of America, rejecting the private golf club’s argument that loss of use of its restaurant during shutdown orders is enough to trigger recovery.
“While our decision today rests upon our interpretation of Iowa law and the specific language of the provisions at issue, we note that every federal appellate court [that] has addressed the same or very similar language has likewise held that the mere loss of use of property due to government orders made in response to the COVID-19 pandemic does not constitute ‘direct physical loss’ of the insured’s property,” wrote Justice Dana Oxley on behalf of the unanimous Iowa Supreme Court. “Likewise, federal district courts interpreting Iowa law have held the same. And, to date, all state appellate courts that have addressed the issue also hold that loss of use due to government orders in response to the COVID-19 pandemic does not result in physical loss of property.”
>> Those rulings came about a week after, as Law.com’s Colleen Murphy reported, the U.S. Court of Appeals for the Seventh Circuit reached the same conclusion for the second time, pointing to a “growing national consensus” on the issue.
In East Coast Entertainment of Durham v. Houston Casualty Company, Seventh Circuit Judge Amy St. Eve referenced the court’s own recent opinion in Sandy Point Dental P.C. v. Cincinnati Insurance, in which the Seventh Circuit joined what, at the time, were “four other circuits in concluding that mere loss of use due to COVID-related closures does not constitute ‘direct physical loss’ when unaccompanied by any physical alteration to property.” The Seventh Circuit found in Sandy Point Dental that “whatever ‘loss’ means, it must be physical in nature.”
St. Eve said the “mere presence of the virus on surfaces did not physically alter” the plaintiffs’ premises—in this case, a chain of movie theaters. Therefore the further policy provisions allowing the property to be “repaired, rebuilt, or replaced” in the “period of restoration provision” do not apply.
>> But as Law.com’s Mason Lawlor reported, a federal judge in Maryland, while recognizing the trend in rulings favoring insurers in these cases, nevertheless asked the Maryland Court of Appeals on April 25 to weigh in.
Claiming the physical presence of COVID-19 in its stores, Tapestry, owner of luxury accessory brands like Coach, Kate Spade New York, and Stuart Weitzman, sued its insurance provider, Factory Mutual Insurance Co., for lost profits due to employees’ exposure to coronavirus. Managing 414 stores in the United States, with 15 in Maryland alone, Tapestry alleged that 1,676 workers had contracted the virus when they submitted their first complaint.
According to Tapestry, its in-person stores, and therefore, business performance, was altered because of COVID-19.
“Although the virus is not visible to the naked eye in the way some other physical losses might be, the very presence of [the Coronavirus] damages the indoor air, and makes it dangerous to breathe, thereby causing the loss, in whole or in part, of that property’s functional use,” the company said in its complaint filed in the U.S. District Court for the District of Maryland.
Although courts have rarely sided with plaintiffs on recent business interruption claims, U.S. District Judge George L. Russell of the District of Maryland said that precedent offers little guidance in the case of Tapestry due to the broad language of Factory’s insurance policy. In recent District of Maryland cases like Bel Air Auto Auction v. Great N. Ins. Co. and Hamilton Jewelry, LLC v. Twin City Fire Ins., both from 2021, the policies at issue clearly referred to “tangible damage to a structure” or a “tangible object within a property,” according to Russell.
But, Russell added, “[a]ssuming that ‘property’ includes the entirety of a structure and not just each tangible object within its walls, an airborne virus arguably leads to physical damage to the property.”
Russell also noted that plaintiffs in other business interruption cases didn’t allege that coronavirus was present at its physical locations, whereas Tapestry documented figures on COVID cases and infections within its workforce, included in its first complaint. Factory Insurance also does not narrow its coverage to “physical injury to tangible property,” Russell said.
The insurer has maintained that Maryland law is settled on COVID-19 business interruption relief. But Russell said the insurer pointed to only four other Maryland decisions that provide only “general guidance” on such claims.
“This case is appropriate for certification because ‘there is no controlling appellate decision, constitutional provision, or Maryland statute on point,”‘ Russell added.
Moving forward with the case allows the State of Maryland to further establish an underlying precedent for pandemic-related suits, Russell said. As cases continue to be heard across the country, the court felt it was appropriate to promote “judicial economy” and build a “proper application of Maryland’s law.” This would create a foundation for more business interruption claims that will undoubtedly come in the future.
Russell said “a review of the hundreds of cases monitored by the Penn Law Covid Coverage Litigation Tracker reveals that dozens of courts have issued decisions denying motions to dismiss in these cases.”
“It is therefore facile to portray Tapestry’s position in this litigation as inherently frivolous or unambiguously without merit,” Russell said. ”Moreover, the sheer number of these lawsuits reveals the widespread relevance of this issue and the potential value of guidance from Maryland’s highest court on the issue. In other words, the frequency with which this issue arises demonstrates that a ruling from the Court of Appeals would “promote judicial economy and the proper application of [Maryland]’s law.”