Insurers Face Two New Cases Seeking Commercial Property Coverage For COVID-19; One Alleges Extracontractual Claims

By , and on March 31, 2020
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Two Napa-based restaurants and a number of Chicago-area businesses claiming economic losses from closing their doors to prevent the spread of COVID-19 filed suits in California and Illinois, respectively, late last week. The plaintiffs in the Illinois suit allege statutory bad faith based, in part, on a memorandum setting forth the insurance company’s views on coverage and an alleged failure to investigate.

The owners of French Laundry, a prominent restaurant in Napa, California and another Napa establishment owned by prominent restauranteur Thomas Keller filed suit in Napa County Superior Court. See French Laundry Partners, LP d/b/a The French Laundry, et. al. v. Hartford Fire Insurance Company, et. al. The plaintiffs are represented by counsel including the Louisiana-based attorneys who filed the Cajun Conti case, believed to be the first case of its kind seeking coverage under a commercial property policy for business closures related to COVID-19. Additionally, owners of restaurants, pubs, and a theater in Chicago filed suit in the United States District Court for the Northern District of Illinois. See Big Onion Tavern Group, LLC, et. al. v. Society Insurance, Inc. In what appears to be one of the first cases to do so, the Big Onion plaintiffs assert extra-contractual claims based on an alleged failure to investigate and seek statutory penalties.

The French Laundry plaintiffs make allegations similar to the Cajun Conti plaintiffs. However, the French Laundry plaintiffs further allege that their “Property Choice Deluxe Form specifically extends coverage to direct physical loss or damage caused by virus.” The French Laundry plaintiffs further rely on an order of the health officer of Napa County which they assert “specifically states that it is being issued based on evidence of physical damage to property.” The Order states, in part, that it is “issued based on evidence of increasing occurrence of COVID-19 throughout the Bay Area, increasing likelihood of occurrence of COVID-19 within the County, and the physical damage to property caused by the virus.”

The French Laundry complaint goes on to allege that “property that is damaged is in the immediate area of the Insured Properties.” This allegation is apparently aimed at triggering Civil Authority Coverage, which can provide coverage following civil action or order by a civil authority where there is direct physical loss or damage to other or adjacent property. The common allegation in the initial COVID-19 coverage lawsuits that the presence of a virus on any property—whether the covered property or adjacent property—will continue to be a hotly contested issue in the absence of any actual evidence that COVID-19 is present inside the insured premises or nearby properties, let alone causes direct physical loss or damage. Further, the primary bases for the orders that are being issued by various state and local governments and agencies are to prevent the spread of COVID-19 due to public health concerns and to promote social distancing.

The Big Onion plaintiffs allege that they obtained business interruption coverage “to protect their businesses from situations like these, which threaten their livelihoods based on factors wholly outside of their control.” The Big Onion complaint cites to the lack of a virus exclusion in the subject policies. According to the Big Onion plaintiffs, such exclusions typically provide that the insurer will “not pay for loss, cost, or expense caused by, resulting from, or relating to any virus. . . that causes disease, illness, or physical distress or that is capable of causing disease, illness, or physical distress.” Some exclusions go on to provide that the policy does not apply to any expense incurred as a result of contamination or “denial of access to property because of any virus. . . .” The plaintiffs in Big Onion appear to focus more on the lack of an exclusion for viruses for the proposition that the presence of a virus should be viewed to involve physical harm, rather than on specific allegations that COVID-19 is present within any covered premises or other or adjacent property. They contend that if viruses could never cause “physical harm,” there would be no need for a virus exclusion, which is a debatable proposition at best.

Of note, the Big Onion complaint cites to and attaches a memorandum purportedly issued “before many of the Plaintiffs had submitted their claims” by “the CEO of Society Insurance . . . prospectively concluding that Society Insurance’s policies would likely not provide coverage for losses due to a ‘governmental imposed shutdown due to COVID-19 (coronavirus).’”1 The complaint asserts a claim for “Statutory Penalty for Bad Faith Denial of Insurance Under 215 ILCS 5/155” based on an alleged failure by Society Insurance to conduct an investigation as well as the referenced memorandum. The Big Onion plaintiffs allege that “[t]o make matters worse, based on information and belief, Society Insurance directed its insurance agents, who are not Plaintiffs’ agents, to make sham claim notifications before Society Insurance’s policyholders even noticed their claims. Society Insurance took these actions, before claims were even submitted, as part of its plan to discourage claim notifications and to avoid any responsibility for its policyholders’ staggering losses. . . .”

It remains to be seen whether the insurer defendants in these cases will seek to dismiss these complaints based on the lack of a triggering event. Indeed, without any evidence that COVID-19 contaminated covered property or adjacent property, the mere order to close a business to prevent the spread of the virus should be insufficient to trigger coverage. This is in addition to the fact that case law across the country supports the conclusion that the presence of a virus, which can be removed with ordinary cleaning products, does not constitute physical harm. Nonetheless, insurers should take heed of the inclusion in the Big Onion complaint of the memorandum, possibly prepared in anticipation of a request for such a statement from state regulators, before preparing such statements for public distribution.

Visit our COVID-19 Hub for ongoing updates.

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1 The risk of—and due process implications of—states such as New Jersey attempting to require insures to issue such advance statements is demonstrated by the Big Onion complaint. The Maryland Insurance Administration took a different approach and on March 18, 2020 issued an Advisory on Business Interruption Insurance that states, in part:

“Business Interruption coverage is typically triggered under a commercial insurance policy when a covered risk / peril causes physical damage to the insured premises resulting in the need to shut down business operations. . . . Some commercial policies provide Business Interruption coverage when a business is shut down due to an Order by a civil authority. However, the policy still typically requires a physical loss from a covered peril as the underlying cause of the business shut down to apply.”

Filed under Coronavirus, COVID-19, Property Insurance Coverage

COVID-19 Is Not Direct Physical Loss Or Damage

By , and on March 27, 2020
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Is a cash register that is not being used damaged property? When you need to wash a table, a chair, or a section of flooring with readily available cleaning products to make them safe and useable, are you repairing damaged property? Is a spilled cup of coffee waiting to be wiped up actual damage to the premises? If your customers stay home to help stop the spread of a virus, has there been a physical loss inside your shuttered store or restaurant?

The insuring agreements typically found in commercial property insurance policies require “direct physical loss of or damage to” covered property as the triggering event. Without establishing direct physical loss or damage a policyholder cannot meet its burden to trigger coverage for a purely economic loss of business income resulting from shuttering its business due to concerns over exposure to—or even the actual presence of—COVID-19. Despite this well-understood policy language, it is already beyond question that insurers will confront creative—albeit strained—arguments from policyholder firms attempting to trigger coverage for pure economic loss. The scope of the human and economic tragedy we all face will be matched by the scope of the effort to force the financial harm onto insurance companies.

The plaintiffs in what appears to be the first-filed case seeking a declaratory judgment in the context of first-party insurance coverage rely on the assertion that “contamination of the insured premises by the Coronavirus would be a direct physical loss needing remediation to clean the surfaces” of its establishment, a New Orleans restaurant, to trigger coverage for business interruption.[1] See Cajun Conti, LLC, et. al. v. Certain Underwriters at Lloyd’s, London, et. al. Civil District Court for the Parish of Orleans, State of Louisiana. The complaint alleges that the property is insured under an “all risk policy” defining “covered causes of loss” as “direct physical loss.” The plaintiffs rely on the alleged presence of the virus on “the surface of objects” in certain conditions and the need to clean those surfaces. They go so far as to claim that “[a]ny effort by [the insurer] to deny the reality that the virus causes physical damage and loss would constitute a false and potentially fraudulent misrepresentation. . . .”

The complaint cites a case from the Court of Appeal of Louisiana, Widder v. Louisiana Citizens Property Insurance Corporation, 82 So. 3d 294 (La. App. 2011), writ denied, 76 So. 3d 1179 (La. 2011), for the proposition that “[s]imilar to the Coronavirus, Louisiana Courts have interpreted that the intrusion of lead or gaseous fumes constitute a direct physical loss under insurance policies that would need to be remediated.”

The assertion of fraudulent misrepresentation seems to be largely a matter of projection, as the truth seems to have been stretched by the claims that the possible presence of an easily cleaned virus damaged the restaurant sufficiently to trigger coverage for business interruption at the plaintiffs’ restaurant. As an initial matter, Widder involved a house contaminated with “inorganic lead which makes it uninhabitable until it has been gutted and remediated.” 82 So. 3d 294, 296. Gutting and remediating a home to remove materials which must be treated as hazardous waste is a far cry from cleaning property with disinfectant. In Widder an inspection revealed the presence of lead dust on walls, which originated in part from lead paint outside of the house. Id. at 295. Apparently without any scientific foundation, the Widder court compared the loss before it to the emission of gaseous fumes from Chinese drywall and reversed the trial court’s summary judgment in favor of the insurer.

Glaringly, the alleged presence of a virus on objects is not analogous to noxious odors or gaseous releases. In Widder the alleged physical harm involved tangible damage. Further, gaseous emissions from Chinese drywall corroded building components and in some instances required demolition and rebuilding of entire physical structures to remediate the condition. The proposition that the alleged presence of Coronavirus is somehow analogous to this type of harm is, at best, a contrived argument to attempt to trigger coverage. Indeed, whether and to what extent Coronavirus stays present on physical surfaces is as yet untested under Daubert. We do know that government health officials believe that proper cleaning with standard disinfectants will kill the virus. In any event, there is no indication or evidence that the virus corrodes physical surfaces.

Courts in other jurisdictions have addressed more analogous circumstances and found a lack of coverage. For instance, a federal district court applying Michigan law found that the presence of mold and bacteria in ductwork and a resulting odor did not constitute direct physical harm despite that the ductwork needed to be physically cleaned as part of remediation. Universal Image Productions, Inc. v. Chubb Corp., 703 F. Supp. 2d 705 (E.D. Mich. 2010). A water leak caused the mold, bacteria, and odor, and the policyholder argued that the “pervasive odor, mold and bacterial contamination (both visual and aerosolized), as well as water damage” constituted direct physical loss. The court concluded that the policyholder did not demonstrate “that it suffered any structural or any other tangible damage to the insured property. Rather, the bulk of [the policyholder’s] argument relies upon proof that it suffered such intangible harms as strong odors and the presence of mold and/or bacteria in the air and ventilation system within its Building which, in its judgment, rendered the insured premises useless.” Id. at 719. Citing a case from Oregon, the court stated that “even physical damage that occurs at the molecular or microscopic level must be ‘distinct and demonstrable.’” Id. (citing Columbiaknit, Inc. v. Affiliated FM Ins. Co., No. Civil No. 98-434-HU 1999, U.S. Dist. LEXIS 11873 (D. Or. Aug. 4, 1999)).

At least two courts—a federal court in Florida and an appellate court in Ohio—have recognized that if the alleged physical harm can be cleaned, then there is no physical harm. Mama Jo’s, Inc. v. Sparta Ins. Co., No. 17-CV-23362-KMM, 2018 U.S. Dist. LEXIS 201852 (S.D. Fla. June 11, 2018) (debris and dust from road work required the insured to clean its floors, walls, tables, chairs, and countertops and the court held that “cleaning is not considered direct physical loss.”); Mastellone v. Lightning Rod Mut. Ins. Co., 884 N.E.2d 1130 (Ohio 2008) (affirming lower court’s ruling that dark staining from mold did not constitute “physical loss” where plaintiff’s expert testified that mold could be removed from wood surface by cleaning).

Further, the mere risk of contamination has been deemed insufficient to trigger coverage. Specifically, loss of income due to an embargo by the United States Department of Agriculture because of the risk that “mad cow disease” contaminated beef product was not “direct physical loss” to beef product. Source Food Tech., Inc. v. United States Fid. & Guar. Co., 465 F.3d 834 (8th Cir. 2006) (applying Minnesota law). The Eighth Circuit distinguished between the actual presence of contamination and the inability to sell a product because of the fear of contamination. “Although Source Food’s beef product in the truck could not be transported to the United States due to the closing of the border to Canadian beef products, the beef product on the truck was not—as Source Foods concedes—physically contaminated or damaged in any manner. To characterize Source Food’s inability to transport its truckload of beef product across the border and sell the beef product in the United States as direct physical loss to property would render the word ‘physical’ meaningless.” Id. at 838.

As of this writing the insurers had not yet moved to dismiss the Cajun Conti complaint. However, we believe that on the face of the complaint, which expressly incorporates the policy language requiring direct physical loss or damage, there is no triggering event. Even assuming that COVID-19 is, at a molecular level, present on physical surfaces, we also believe that disinfecting of surfaces does not constitute physical harm sufficient to trigger coverage.

Gordon & Rees is carefully tracking the coronavirus (COVID-19) pandemic and working to assist clients with the evolving legal ramifications of the outbreak to their businesses.

Visit our COVID-19 Hub for ongoing updates.

Filed under Coronavirus, COVID-19