In our last update, we highlighted a recent case out of the US District Court of Missouri (Studio 417) in which the court issued a preliminary ruling that allowed a group of policyholders to proceed with claims against their insurers based on allegations that the insurers wrongfully denied claims due to losses sustained as a result of the COVID-19 health crisis under business interruption insurance policies. Prior to that ruling, insurers had largely stonewalled policyholders who submitted COVID-related claims under business interruption policies. That case confirmed that these individuals could state facially valid claims for recovery and seek damages from the insurers based on the allegation that the presence of the virus on workplace surfaces constituted loss of or damage to property.
In what is further welcome news to policyholders, a North Carolina court went a meaningful step further, finding the insurers liable for wrongful denial of policyholders’ COVID-related business interruption claims in that case (North State)—claims based on the effect of COVID-prompted government shutdown orders as opposed to the virus’s physical presence at a particular policyholder’s business. The North State case involved a similar set of circumstances as the Studio 417 dispute: a collection of restaurant owners and other retailers filed a lawsuit against their common insurer, alleging a right to recover insurance proceeds to offset losses incurred due to government-mandated shutdowns that affected their respective businesses. The insurer denied coverage, finding that no physical loss or damage had occurred such that coverage would have been triggered as required by the insurance policy.
In finding the insurers liable for breach of the insurance policies, the North State court held that the ordinary meaning of the phrase “direct physical loss” includes the loss of ability to utilize or possess the insured property. According to that court, the “loss” requirement “describes the scenario where businessowners and their employees, customers, vendors, suppliers and others lose the full range of rights and advantages of using or accessing their business property. This is precisely the loss caused by the [g]overnment [o]rders.” Moreover, because nothing in the insurance policies precluded recovery for virus-related causes of losses (which is not always the case in business interruption policies), the court concluded that the ordinary meaning of direct physical loss was either clearly applicable to government shutdowns or, at worst, the proper interpretation of an ambiguous phrase in the policy. This decision represents a major win for policyholders, who now have a final court ruling supporting their claim for coverage despite the “direct physical loss” requirement.
On the whole, insurers remain relatively successful in thwarting policyholder efforts to obtain coverage under their business interruption policies for COVID-related losses. Whether through hardline stances at the claims stage, aggressive litigation tactics, and/or major funding advantages, insurers can often overpower their insureds and cut off these claims before reaching the courts. These recent decisions, however, highlight the potential for recovery for policyholders who maintain their resolve in pursuing insurance coverage during these unprecedented times. While odds of success remain long, desperate and/or persistent individuals may be able to obtain recovery for their COVID-related claims if they have business interruption policies. Only time will tell whether cases like Studio 417 and North State coalesce into a widely adopted judicial perspective on the interpretation of business interruption policies.