September 10, 2021

COVID-19 Business Interruption Lawsuits Move Through the Courts

Attempts in Congress and state legislatures to pass legislation forcing insurers to cover COVID-related losses have been resisted by insurers who point out that paying such claims would make many companies insolvent.

The National Association of Insurance Commissioners has also said that expanding the coverage obligations of insurance policies in this manner would be unconstitutional under the Contracts Clause of the U.S. Constitution, since there is no specific contractual obligation to cover these losses in most insurance policies.

Nevertheless, many businesses have filed lawsuits against insurers to enforce COVID business interruption claims. Some businesses, like restaurants and hotels, say their policies include provisions that expressly address losses caused by viruses.

Additional arguments are that COVID-19 losses are the result of governmental orders (to some extent policies may cover losses stemming from acts of civil authorities) or that the absence of tangible physical damage does not mean loss of use of the property and should therefore be covered. These suits also challenge the applicability of the virus exclusion found in most policies.

More than 1900 lawsuits have now been filed. And according to analysts from the University of Pennsylvania who track these suits, more are on the way. But fewer than a quarter of those have been decided and of those decided 188 are on appeal. Appeals remain pending in 13 state courts: California, District of Columbia, Florida, Illinois, Indiana, Massachusetts, Michigan, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, and Wisconsin. No state appellate court has yet rendered a decision.

“Although new COVID-19 business interruption filings and trial court rulings will continue capturing headlines well into the balance of this year and beyond, as courts of last resort, the appellate courts will ultimately shape the law on coverage for COVID-19 business interruption coverage,” according to attorneys Ashley Jordan and Jessica Gopiao of Reed Smith, a law firm.

The following five cases are expected to be heard soon:

Sea v. California Mutual Insurance

The main question for the court is:
Does coverage for “direct physical loss of or damage to” property need to include a physical alteration of the property? In other words, can property be said to be damaged even if there’s nothing wrong with it except that it just can’t be used under the present circumstances?

Choctaw Nation v. Lexington

The lower court concluded that “direct physical loss” does include property that is normally usable but has been rendered unusable by COVID-19 and that its physical alteration was not necessary.

Also, even though the policy has virus exclusions, the court said the language was not specific enough to rule out coverage against pandemics. The insurers have appealed the decision to the Supreme Court of Oklahoma.

Gavrilides Management Company v. Michigan Insurance Company

A Michigan Circuit Court dismissed the policyholder’s suit saying that the virus exclusion does apply. It is on appeal.

Nail Nook v. Hiscox Insurance.

The Ohio court said that the virus exclusion was clear and unambiguous. It is on appeal.

Mudpie v. Travelers

The Northern District Court of California, as with the Michigan and Ohio courts, dismissed the complaint. But it is on appeal to the 9th U.S. Circuit.

At this point, it does seem like Choctaw Nation v. Lexington is an outlier. However, policyholders and insurers alike should be glad to see these cases come up for review, particularly Mudpie v. Travelers because it will be heard in the 9th U.S. Court of Appeals. The only higher court is the U.S. Supreme Court, where the matter may ultimately be decided.

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