The COVID-19 crisis has had a significant impact on individuals, society, and businesses all over the world. To slow the spread of the virus, many governments shut down businesses, restaurants, hotels, and recreational facilities, and the shutdown had a tremendous impact on the bottom lines of many businesses. To minimize these business income losses, businesses looked to their property insurers to recoup their lost profits and other damages because business interruption or business income coverage (“BI”) typically provides payments for lost earnings to businesses that are forced to close or slow down significantly due to a covered first-party property loss.
This has led to a plethora of litigation seeking to address pandemic-related insurance coverage issues because many businesses faced disruptions in their business operations as an effect of the coronavirus pandemic. Coverage, however, has not generally been triggered by COVID-19 as courts have ruled favorably for insurers finding that alleged business interruptions caused by contagious or communicable diseases do not cause direct physical loss or damage to property.
Many insureds are seeking to appeal these decisions, however, because the odds are stacked against a finding of coverage, insureds are making use of “creative” arguments in an effort to obtain coverage. Unfortunately, the plain language written between the four corners of the property policies is being enforced by courts, and no amount of “creativity” will create coverage where none is available under the relevant polices of insurance.
Most recently, the Supreme Court declined to hear an appeal from a 10th Circuit ruling that denied Goodwill pandemic coverage. Goodwill Indus. of Cent. Okla. v. Phila. Indem. Ins. Ass’n, 21 F.4th 704 (10th Cir. 2021). In their opening brief for the writ of certiorari petition, the insured argued that the lower court was incorrect in ruling that the term “direct physical loss or damage” is too ambiguous. The insured, Goodwill, claimed that the lower court inappropriately implemented the canons of contract interpretation when it construed the ambiguity in the contract in favor of the drafter. Additionally, Goodwill contended that because Oklahoma accepts the “reasonable expectation” of the insured doctrine, the lower court erred when it deemed the insured’s interpretation of the policy contract unreasonable. Goodwill also argued that the holding was a violation of Erie R. Co. v. Tompkins, 304 U.S. 64 (1938), which, among other things, held that a federal court may not create common law on state law issues.
Goodwill framed the issue as whether federal courts are violating principles of federalism in uniformly refusing to seek guidance from a state’s highest court on state law questions relating to COVID-related insurance coverage. The Supreme Court, unconvinced by the insured’s arguments, declined to review the 10th Circuit opinion holding that Goodwill did not “suffer a direct physical loss of property when it suspended operation in compliance with state and local shutdown orders during the Covid-19 pandemic,” and denied certiorari consistent with the McCarran-Ferguson Act (15 U.S.C. § 1011) (Providing that the laws of the states should control the insurance business.)
Likewise, in Bel Air Auto Auction, Inc. v. Great Northern Ins. Co., 142 S. Ct. 635 (2021), the Court declined to hear an auto auctions prayer for review of a 4th Circuit decision not to send the case to the state's top court. In Bel Air, the lower court held that bodily injury claims based on the COVID-19 shutdown generally are not the result of direct physical loss and, therefore, are not covered as business interruption loss. See, e.g., Bel Air Auto Auction, Inc. v. Great Northern Ins. Co., 534 F.Supp. 3d 492 (D. Md. 2021) (granting insurer’s motion for judgment on the pleadings in COVID-19–related insurance coverage case and rejecting plaintiff’s argument that absence of virus exclusion indicated there was coverage).
If the current decisions from the Wisconsin, Massachusetts, and Iowa Supreme Courts are indicators of what state courts will decide in the absence of a Supreme Court opinion reversing the trend towards a finding of no coverage where the policy’s language is clear and unambiguous, the landscape looks positive for insurers. Indeed, in a unanimous opinion, the Wisconsin Supreme Court held that the insurer was not obligated to compensate a group of restaurants because virus particles on surfaces do not amount to “physical loss or damage” as their presence does not require significant repair. Colectivo Coffee Roasters Inc., et al. v. Society Ins., No. 2021AP000463, 2022 WI 36 (June 1, 2022). In Verveine Corp., et al. v. Strathmore Ins. Co., et al., 184 N.E.3d 1266 (Mass. 2022), the Massachusetts Supreme Court also held that insurance policies only cover direct property damage, and the First Circuit affirmed. Additionally, The Supreme Court of Iowa held in two separate cases that the insured did not suffer a “direct physical loss of or damage to” their property as a result of the temporarily suspension of operations required by COVID-19 disaster proclamations. Wakonda Club v. Selective Ins. Co. of Am., 973 N.W.2d 545 (Iowa 2022), Jesse's Embers, LLC v. W. Agric. Ins. Co., 973 N.W.2d 507 (Iowa 2022).
Comment: Most courts adjudicating COVID-related property insurance coverage lawsuits have found that coverage is not triggered absent direct physical loss or property damage. The key language in such policies requires “direct physical loss of or damage to property” and an overwhelming majority of courts have said this requires concrete physical damage; a mere temporary closure to customers is not enough, even if government-ordered for public safety reasons. Because of the lower court rulings, insureds are appealing the decisions, however, appellate courts are upholding the plain language of the policies refusing to accept the “creative” arguments raised by insureds.