Class Actions Quarterly Update: How Have Plaintiffs’ Class Actions Suing For Coverage for Business Interruptions From Covid-19 Fared Thus Far?

The class action cases generally allege one of two theories to support claims for business income losses. Many of the class plaintiffs have alleged that the forced closure of business operations by state and local governments (civil authorities) was sufficient to support a claim, without a showing of damage to covered property. Most of these claims have been decided in favor of the insurer defendants, resulting in dismissals of the initial complaints. 

For example, on September 14, 2020, the Federal Court for the Northern District of California dismissed without prejudice a class action complaint in which the plaintiff policyholder (and putative class representative) was Mudpie, a clothing and home accessory store. Mudpie Inc. v. Travelers Cas. Ins. Co. of Am., No. 20-CV-03213-JST, 2020 WL 5525171 (N.D. Cal. Sept. 14, 2020). While the Court agreed that Mudpie did not need to show physical damage or alteration to its store under the “direct physical loss or damage” insuring agreement provisions of the policy, it found that the temporary dispossession of the insured property due to civil authority closure orders was not a permanent loss. Since Mudpie had alleged that the shutdown orders were issued to prevent the spread of the virus, but had not also alleged the presence/contamination of the virus at its stores, the Court concluded that such civil authority shutdown orders by themselves were not a physical force. Thus, Mudpie had failed to adequately allege that it had sustained a direct physical loss or damage within the meaning of the insuring agreement of the policy. (But the Court has granted Mudpie leave to replead). 

Cases from Florida and Minnesota echo the same reasoning as the court in Mudpie. In a recent case from the Southern District of New York, the Court denied a plaintiff magazine policyholder’s motion for a preliminary injunction, ruling that Covid-19-based civil authority closures did not trigger the insuring agreements of the policy’s business interruption coverage because those closures did not cause direct physical loss or damage to the property of the magazine and its vendors, or prevent them from accessing the plaintiff’s premises. 

Moreover, a Michigan state court judge (applying Michigan law) recently granted an insurer’s summary judgment motion against plaintiff restaurant policyholders, stating that government closure orders may be covered by a policy, but only where the damages sustained were tangible, altering the physical integrity of the insured property. Further, the judge stated that a virus exclusion in the policy would likely have barred coverage even if the claimants had alleged that the virus caused physical loss or damage. Gavrilides Management Co. v. Michigan Ins. Co., No. 20-258-CB-C30, (Ingham Co., MI).

Similarly, in Rose’s 1, LLC v. Erie Ins. Exch., No. 2020 CA 00424 B, 2020 WL 4589206 (D.C. Super. Aug. 6, 2020), the District of Columbia Superior Court ruled in favor of an insurer of several D.C. restaurants, noting that the mayor’s Covid-19 closure orders did not have any effect on the material or tangible structure of the insured properties, and rejecting the proposition that a governmental edict, standing alone, would constitute direct physical loss or damage, as required to trigger coverage under the business interruption provisions of a property insurance policy. Combined, these cases have had a national ripple effect in favor of the insurer.

By contrast, a second group of class actions plead a different theory and allege that the presence of Covid-19 at insured property, or other identified dangerous conditions, constitute direct physical loss or damage to covered property. Notably, plaintiffs pursuing this theory have also asserted the same factual basis in support of their alternative claims for coverage under the Civil Authority provisions of their policies. In these cases, the courts have generally allowed the complaints to survive the motion to dismiss phase of litigation. For example, on August 12, 2020, a federal district judge from the Western District of Missouri denied a motion to dismiss a putative class action of hair salons and restaurants located in Kansas City, finding that the virus was not a “benign condition,” and that it was plausible that virus particles were a “physical substance” that “lives on” and is “active on inert physical surfaces,” which thereby damaged the plaintiffs’ covered properties, rendering them unsafe and unusable. Studio 417, Inc. v. The Cincinnati Ins. Co., No. 20-cv-03127-SRB, 2020 WL 4692385 (W.D. Mo. Aug. 12, 2020). The policies at issue in Studio 417 did not define the phrase “direct physical loss or damage,” so the Court relied upon the plain meaning of the words in the phrase, finding that even absent a physical alteration, a physical loss may occur when covered property is unusable, distinguishing the case from out-of-state decisions finding to the contrary. On that basis, the judge also upheld the insured’s Civil Authority claim. The Court has not yet addressed a motion for class certification.

However, just four months later, on December 2, 2020, in Zwillo V, Corp. v. Lexington Ins. Co., No. 4:20-00339-CV-RK, 2020 WL 7137110 (W.D. Mo. Dec. 2, 2020), the Western District of Missouri again, by a different judge, held that a Kansas City restaurant’s Covid-19 business interruption losses were not covered, questioning the rationale of Studio 417. In Zwillo, the Court agreed with the insurer’s argument that “direct physical loss of or damage to property requires physical alteration of property, or put another way, a tangible impact that physically alters property.” Further, the Court rejected the Studio 417 Court’s reliance on the plain meaning of “physical loss” in the absence of a policy definition, and held that “‘direct physical loss of or damage to’ does not encompass simple deprivation of use.” In addition, the policy contained a virus exclusion which, standing alone, would preclude coverage, making it distinguishable from a spate of other cases in the district which ruled in plaintiffs policyholders’ favor.

Other recent cases, although not class actions, have favored policyholders, including the following:

• In North State Deli, LLC v. The Cincinnati Ins. Co., the insured North Carolina restaurant owners whose restaurants had been ordered closed due to Covid-19 disputed the insurer’s contention that the phrase “direct physical loss” requires actual “physical alteration to property.” The court sided with the insureds, holding that the phrase “direct physical loss” includes “the loss of use or access to covered property even where that property has not been structurally altered.” Applying this plain and ordinary meaning, the Court determined that “[t]his is precisely the loss caused by the Government Orders.” No. 20-CVS-02569, 2020 WL 6281507 (N.C. Super. Oct. 9, 2020).

• In Optical Services USA/JC1 v. Franklin Mut. Ins. Co., a New Jersey state court rejected an insurer’s argument that the “loss of physical functionality and use of [a] business” does not constitute “direct physical loss” on the basis that the argument is unsupported by New Jersey common law. Case No. BER-L-3681-20 (N.J. Super. Ct. Bergen Cnty. Aug. 13, 2020).
• In Urogynecology Specialist of Florida LLC v. Sentinel Insurance Co. Ltd., a Florida federal district court recently rejected an insurer’s motion to dismiss because the policy’s virus exclusion did not unambiguously exclude Covid-19. No. 6:20-cv-1174-ORL-22EJK, 2020 WL 5939172 (M.D. Fla. Sept. 24, 2020).
• In Lombardi’s Inc. v. Indem. Ins. Co. of N. Am., a Texas state court agreed with the policyholders’ allegation that “disruptions to their ability to physically access and utilize portions of the properties were necessary to prevent the spread of COVID-19.” No. DC-20-05751-A (14 Dist. Ct., Dall. Cnty., Tex. Oct. 15, 2020).

We have not yet seen any cases relating to Covid-19 business interruption insurance reach the class certification stage. Because policy terms, state laws and decisions, and individual damages vary, certifying a nationwide class consisting of plaintiffs residing within different states are difficult to mount in this area, much less a class of plaintiffs residing within a single state. We will continue to follow developments and report on outcomes.