Litigation Seeking Insurance Coverage for Business Losses Stemming from COVID-19 Sees Mixed Results

December 28, 2020

By: Stephen B. Stern

    As COVID-19 continues to spread across the country, a number of lawsuits have been filed seeking insurance coverage for losses stemming from government shutdown orders and other losses related to the COVID-19 pandemic.  While a number of these lawsuits have not succeeded, not all have necessarily been failures.  This article summarizes some of the recent lawsuits and how courts have analyzed the claims.

    In Vizza Wash, LP d/b/a The Wash Tub v. Nationwide Mutual Insurance Company, Civil Action No. 5:20-cv-00680-OLG, 2020 U.S. Dist. LEXIS 211737 (W.D. Tex. Oct. 26, 2020), the United States District Court for the Western District of Texas granted the motion to dismiss filed by Nationwide Mutual Insurance Company (“Nationwide”) because the insurance policy issued to Vizza Wash, LP d/b/a The Wash Tub did not provide coverage for business income loss based on a virus exclusion in the policy.  

    In Vizza Wash, Bexar County and the State of Texas issued orders on March 23 and March 31, 2020, in response to the COVID-19 pandemic that closed certain “non-essential” businesses.  The Wash Tub, a car washing business, was one of the non-essential businesses that had to shut down.  The Wash Tub sought coverage for its business income losses under the insurance policy Nationwide had issued, but Nationwide denied the claim.  The Wash Tub then filed suit alleging breach of contract and violation of the Texas Deceptive Trade Practices Act (“DTPA”).  The Wash Tub asserted it was entitled to coverage under the policy’s “business income” provision, which stated that the insurer would  "pay for the actual loss of ‘business income’ [the insured] sustain[s] due to necessary suspension of [the insured’s] ‘operations’ during the ‘period of restoration.’  The suspension must be caused by direct physical loss of or damage to property at the described premises.   The loss or damage must be caused by or result from a Covered Cause of Loss."

The Wash Tub also argued that it was entitled to coverage under the “civil authority” provision, which provided in relevant part:

"When a Covered Cause of Loss causes damage to property other than property at the described premises, [the insurer] will pay for the actual loss of Business Income [the insured] sustain[s] . . . provided that both of the following apply:

(1)    Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property; and
(2)    The action of civil authority is taken in response to dangerous physical conditions resulting from damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property."

    The court did not expressly rule on the applicability, or lack thereof, on these provisions, but implied that neither provision allowed for coverage because there was no “direct physical loss” to property alleged by The Wash Tub.  Instead, the court ruled that there was no coverage based on a “virus exclusion” that stated there was no coverage “for loss or damage caused directly or indirectly by . . . [a]ny virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”

    In West Coast Hotel Management, LLC v. Berkshire Hathaway Guard Insurance Companies, Case No. 2:20-cv-05663-VAP-DFMx, 2020 U.S. Dist. LEXIS 201161 (C.D. Cal. Oct. 27, 2020), the United States District Court for the Central District of California analyzed a “business income” provision in an insurance policy similar to the one at issue in Vizza Wash.  In Berkshire Hathaway, the court held coverage was not available to the hotel operator for losses resulting from the shutdown orders issued by state and local officials in California, finding that coverage under the “business income” provision required “direct physical loss of or damage to property,” which did not happen as a result of the shutdown orders.  Even though the insurance policy did not define “direct physical loss of or damage to property,” the court explained that the phrase necessarily required some loss or damage to be “physical in nature.”  The court found support for this conclusion not only in the plain language of the provision itself, but in another provision that contemplated a “period of restoration” after a loss or damage, during which time the property is “repaired, rebuilt, or replaced.”  The restoration requirement necessarily required some physical damage to the property according to the court.  Because the plaintiff did not allege some physical loss or damage to the property, the court found coverage was unavailable under the “business income” provision.  The court then analyzed the “civil authority” provision of the policy, which differed substantially from the “civil authority” provision in the policy at issue in Vizza Wash.  Unlike the policy issued in Vizza Wash, the policy issued by Berkshire Hathaway did not require physical damage to the insured property; rather, it required loss that resulted from an act of civil authority taken in response to physical damage that occurred to property other than the insured’s within one mile of the insured’s property.  The plaintiff did not identify such a property in its complaint and, therefore, the court found that the civil authority provision did not apply.  Then the court analyzed a virus exclusion that was identical to the one in Vizza Wash and, like the court in Vizza Wash, found that the virus exclusion precluded coverage.

    In Franklin EWC, Inc., v. The Hartford Financial Services Group, Inc., Case No. 20-cv-04434 JSC, 2020 U.S. Dist. LEXIS 234651 (N.D. Cal. Sept. 22, 2020), the United States District Court for the Northern District of California granted a motion to dismiss a claim for insurance coverage finding the policy’s virus exclusion applied and the civil authority coverage provision did not provide for coverage.  In Franklin EWC, the virus exclusion precluded coverage for any loss caused by “’fungi,’ wet rot, dry rot, bacteria or virus,” which necessarily precluded coverage according to the court.  As for the civil authority provision, it was similar to the provision analyzed in Berkshire Hathaway and, like the court in Berkshire Hathaway, the court in Franklin EWC found that the plaintiff did not allege the shutdown orders were issued as a result of any damage to nearby property; thus, coverage was not available under that provision either.   

    Not all policies, however, fail to provide coverage for losses related to government shutdown orders.  For example, in North State Deli, LLC d/b/a Lucky’s Delicatessen v. The Cincinnati Insurance Company, Case No. 20-CVS-02569, 2020 N.C. Super. LEXIS 38 (Sup. Ct. N.C. Oct. 9, 2020), the Superior Court of Durham County, North Carolina, found that the insurance policy issued by Cincinnati Insurance provided coverage for losses stemming from the government shutdown orders under the business income provision and the extra expenses provision.  The “business income” provision stated in relevant part that the insurer would pay for the loss of business income the insured “sustain[s] due to the necessary ‘suspension’ of [the insured’s] ‘operations’ during the ‘period of restoration.'”  “The ‘suspension’ must be caused by direct ‘loss’ to property at a ‘premises’ caused by or resulting from any Covered Cause of Loss.”  The “extra expense” provision stated in relevant part that the insurer would pay “extra expense” the insured “sustain[s] during the ‘period of restoration.’”  Extra expense was defined to include “necessary expenses [the insured] sustain[ed] . . . during the ‘period of restoration’ . . . [the insured] would not have sustained if there had been no direct ‘loss’ to property caused by or resulting from a Covered Cause of Loss.”  The court found that these provisions, when examining other definitions of the policy, provided coverage for “direct ‘accidental physical loss’ to property” or “direct ‘accidental physical damage’ to property.”  The court further found that “direct physical loss” includes “the inability to utilize or possess something in the real, material, or bodily world, resulting from a given cause without the intervention of other conditions.”  The court then concluded that the shutdown orders did precisely what was contemplated by the policy to provide coverage – deny businessowners and their employees, customers, vendors, and others from the full range of rights and advantages of using or accessing their business property, including the right to use the property to generate income.  The court rejected the insurer’s interpretation of “physical loss” to require physical alteration to the property because such an interpretation would be redundant of the term “physical damage” and render it meaningless, which is contrary to contract interpretation principles.  Additionally, the court noted that the insurance policy did not include any exclusions, such as a virus exclusion, that would preclude the availability of coverage.  

    Although the majority of these cases found insurance coverage was not available for losses stemming from government shutdown orders in response to the COVID-19 pandemic, that was not the case in every instance.  Plus, there are many other cases where courts have issued decisions that can give guidance.  These cases are a good reminder that, when evaluating the potential availability for insurance coverage, whether related to COVID-19 losses or otherwise, it is important to review the entirety of the relevant insurance policies thoroughly and give careful consideration to the underlying facts and each term in the relevant provisions, usually with the assistance of legal counsel.