In the legal battle over whether business interruption insurance policies cover business losses due to the COVID-19 pandemic, a pair of recent cases have sided with the policyholders. This is positive news for theatres, restaurants, hotels, sporting teams, and other businesses that purchased business interruption insurance with the expectation that a pandemic such as COVID-19 would be covered under the policy. Business interruption insurance generally covers revenue lost while the property is out of commission due to some physical damage or loss to the business premises.
In North State Deli, LLC v. Cincinnati Insurance Co., No. 20-CVS-02569 (N.C. Sup. Ct. Oct. 7, 2020), the court granted the plaintiffs motion for a declaratory judgment and concluded that the business interruption insurance policies provide coverage for COVID-19 related losses. The court ordered the insurance providers to provide coverage for the increased expenses policyholders had to incur as a result of the pandemic, and for the loss of income to the policyholders due to being forced to close their premises during the pandemic.
The legal disputes over business interruption insurance frequently turn on the court’s evaluation of whether being mandated to temporarily close a business because of the pandemic constitutes a “physical loss.” In North State Deli, LLC, the North Carolina superior court stated that “the ordinary meaning of the phrase ‘direct physical loss’ includes the inability to utilize or possess … the full range of rights and advantages of using or accessing their business property.” No. 20-CVS-02569, slip op. at *6. As the businesses in this case were “expressly forbidden” by a government order to access their properties and use their business premises to generate income, the court concluded that this was a “direct physical loss” that the defendant insurance companies must provide coverage for. While the court determined that the businesses did not suffer any “physical damage,” the court determined that the plaintiffs suffered a “physical loss.” The court stated that the government orders “resulted in the immediate loss of use and access without any intervening conditions,” which constituted a “direct physical loss.”
Additionally, in Urogynecology Specialist of Fla. LLC v. Sentinel Ins. Co., No. 6:20-cv-1174-Orl-22EJK, 2020 U.S. Dist. LEXIS 184774 (M.D. Fla. Sept. 24, 2020), the court denied the insurance providers’ motion to dismiss plaintiff gynecologist’s claim to demand coverage under his business interruption insurance policy. Even though the insurance policy stated that any loss or damage regarding the “presence, growth, proliferation, spread, or any activity of … [a] virus” is excluded, the court stated that denying coverage for “losses stemming from COVID-19 … does not logically align” with the exclusions listed in the provision, such as “fungi, wet rot, dry rot, [and] bacteria.” The court also emphasized that COVID-19 has had a dire effect on our society, and therefore is distinguishable from prior cases that have analyzed exclusions to business interruption insurance.
The primary factor in these cases is the interpretation of “physical loss” and “physical damage.” Some states have determined that “physical loss” can exist “even in the absence of structural damage,” while other states have adopted narrower interpretations. David Yaffe-Bellany, U.S. Businesses Are Fighting Insurers in the Biggest Legal Battle of the Pandemic, Bloomberg Businessweek (Nov. 2, 2020), https://www.bloomberg.com/news/ features/2020-11-02/should-insurers-have-to-compensate-businesses-for-coronavirus-lockdowns. If the court determines that the business suffered “physical loss,” the court will then analyze whether the insurance provider intended to exclude a virus such as COVID-19 from the policy.
The fight over business interruption insurance providing coverage for COVID-19 related losses is still in the early stages. As of October 5, 2020, there are 1,288 lawsuits in the United States alleging that the plaintiff businesses should be provided coverage for COVID-19 related losses. Covid Coverage Litigation Tracker, U. Penn. L. Sch. (last updated Oct. 5, 2020), https://cclt.law.upenn.edu/. While 71.6% of the 60 cases that have entered the motion to dismiss stage have been dismissed, courts have sided with the policyholders on multiple occasions.