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Law360 (July 31, 2020, 5:00 PM EDT) --
Recently, the Houston Rockets and the operators of the Toyota Center — the arena in which the team plays its home games — filed suit to force their first-party property insurer to cover the team's and the venue's business interruption losses due to the COVID-19-related shutdown of National Basketball Association play.
The newly filed complaint raises some serious issues that make it difficult to predict which side's bubble will burst when the case eventually goes to a judge or jury. Although the complaint pleads causes of action under various policy provisions, this article will address only the claims made under the business interruption coverage form.
The lawsuit was brought in the Superior Court of Rhode Island. The complaint, which is 30 pages long, sets forth causes of action for breach of the insurance contract, a declaratory judgment of coverage and insurance bad faith. Despite the complaint's length and its complicated arguments, the plaintiffs' allegations can be summed up in one question: Does their policy provide business interruption coverage for the suspension of the team's play due to COVID-19 concerns?
The answer to that question is not so simple because the Affiliated FM Insurance Co. policy business interruption form is complex and does not contain the typical collection of Insurance Services Office Inc. coverage provisions.
One thing is clear, though: Despite its complexity, like all other business interruption policies, this one does not afford coverage under any of the business interruption coverage features relied upon by plaintiffs unless there is direct physical loss or damage to property.
The plaintiffs' lawyers appear to be aware of the requirement because, throughout the complaint, they repeatedly allege that COVID-19 did, in fact, cause physical loss and damage to the Toyota Center and to other property. These claims may help them avoid dismissal as a result of a motion to dismiss for failure to state a cause of action, but will they be able to survive a motion for summary judgment or prevail at trial?
At first glance, it would appear unlikely that anyone can successfully argue that COVID-19 causes the type of direct physical loss or damage required by the policy. After all, the COVID-19 infection affects people, not property. The existence of the virus on the surfaces of an insured's premises or merchandise does no harm to the property itself. It may pose a hazard to people who touch an infected surface but the science has increasingly focused on aerosol transmission of the virus and placed far less emphasis on surface transmission.
Logically, then, the Rockets' arena, the Toyota Center, which is one of the two named plaintiffs in this suit, is not adversely affected in any tangible way from the presence of the virus. The fact that the virus can be cleaned from objects it lands on also militates in favor of the view that its presence on the Toyota Center's surfaces is not physical damage.
Case law around the country usually requires that there be actual physical damage to property before business interruption coverage is triggered. Therefore, in order to prevail in their suit, the Rockets and the arena must find a way to fit their situation into the parameters set forth in these cases and others like them.
The complaint gives us a preview of how the plaintiffs plan to do this. Their pleading states that the "Toyota Center has lost its functionality and has been impaired by the existence of COVID-19." It goes on to allege that this "loss of functionality is no less physical than the impact of a property having lost its roof to a tornado or hurricane."
In making this argument, the Rockets and the arena are probably drawing on a set of cases that state, in dicta, that if a plaintiff's premises sustain contamination by a dangerous substance, and that contamination rises to such a level that the building's function is nearly eliminated or destroyed, or the structure is made useless or uninhabitable, then the policy requirement for physical loss or damage would be satisfied.
A strong argument can be made that the real reason the team and its venue lost business is not because the Toyota Center suffered physical loss but because the NBA suspended play days before Texas's governor closed down public gathering places to stop the spread of the virus. In other words, contamination by the virus was not the cause of the loss; the NBA's and the government of Texas' attempt to prospectively protect the health of the players and the public was.
This view is supported by Howard Stores Corp v. Foremost Insurance Co., Roundabout Theatre Co. v. Continental Casualty Co. and several other cases. Moreover, we now know that the virus that causes COVID-19 can be cleaned effectively from the arena surfaces. Thus, since the arena's function can be restored in this way and the NBA has prohibited teams from using their home arenas, the "loss of functionality because of contamination" argument is diminished.
The Rockets and the arena will face another problem in making the contamination argument: The policy excludes coverage for contamination of property caused by "pathogen or pathogenic organism, bacteria, virus, disease causing or illness causing agent." There is complete scientific agreement that the novel coronavirus causes the COVID-19 illness. Accordingly, the plain meaning of the exclusion seems to preclude coverage for contamination in this instance, rendering moot any contamination argument by the plaintiffs.
The complaint implies that Texas Gov. Greg Abbott's shutdown orders, not contamination, were responsible for the loss of functionality; in other words, the orders caused the physical damage to the arena. This is a novel contention, especially where the timeline of events reveals the NBA's suspension of league activities predated Abbott's executive orders.
Another argument the plaintiffs are pursuing is based on an unusual coverage extension in the business interruption form in the Rockets' policy, which states:
3. Communicable Disease - Business Interruption
If a described location owned, leased or rented by the Insured has the actual not suspected presence of communicable disease and access to such described location is limited, restricted or prohibited by:
a) An order of an authorized governmental agency regulating such presence of communicable disease; or
b) A decision of an Officer of the Insured as a result of such presence of communicable disease,
This Policy covers the Business Interruption Coverage loss incurred by the Insured during the Period of Liability at such described location with such presence of communicable disease.
The language of this provision seems to favor the plaintiffs, but they will encounter a big evidentiary issue in trying to take advantage of it proving there was "actual not suspected presence of communicable disease" at the facility.
According to the prevailing scientific information, the coronavirus lasts for only a short time on surfaces. It may be impossible for the plaintiffs to prove the presence of the virus in or about the Toyota Center at the time the NBA suspended play and the governor's orders were issued, absent an environmental study taken at that time.
The wording of the provision seems to make coverage contingent on the shutdown orders being based on a finding that the communicable disease was present at the location. There is no evidence that Abbott's various shutdown orders had anything to do with the Toyota Center, per se, but were meant to stop the transmission of the disease in general.
The policy includes not only the business interruption communicable disease coverage extension but a more general property damage communicable disease coverage provision as well. This other provision states that the insurer will pick up certain costs relating to the "[c]leanup, removal and disposal of such presence of communicable disease from insured property."
Therefore, the plaintiffs argue:
[B]ecause the Policy specifically covers remediation of the damage caused by communicable disease, the physical damage to property caused by communicable disease is "physical damage of the type insured" under the Policy.
With this argument, the Rockets' attorneys attempt to use the wording of an unrelated policy provision to establish that COVID-19 causes the physical damage that the business interruption form will cover.
However, we reiterate that there is factual complication that should cause the plaintiffs' shot at coverage under the communicable disease and civil authority business interruption coverage extensions to bounce off the rim. The communicable disease feature requires that the business interruption be due to an order of an authorized governmental agency that limits, restricts or prohibits access to the insured location.
Similarly, the civil authority coverage extension requires that the loss be attributable to a governmental order prohibiting access to the insured location. Leaving aside for the moment the argument that Abbott's executive order of March 19 does not actually prohibit access to the arena, it was not that order or any other governmental directive that shut down the Rockets' team play or the doors to the arena.
According to an NBA communications announcement dated March 11, the league suspended game play following the conclusion of that night's schedule of games and until further notice. Indeed, no NBA matchups have taken place since then.
Abbott's executive order of March 19, which seemingly had the effect of closing the Toyota Center and other large gathering venues, was obviously promulgated more than a week after the NBA put its games on hiatus. In other words, a civil authority did not shut down basketball due to COVID-19 worries, it was the NBA.
As a factual matter, then, the cancellation of the Rockets' home games and the arena's shutdown do not meet the clearly worded policy requirements that the government must be responsible for the closures. This, coupled with the absence of direct physical damage should be enough to cut off the Rockets and the Toyota Center from business interruption coverage.
The Houston Rockets' case illustrates how nuanced the legal issues can be when analyzing coronavirus-related business interruption insurance coverage claims. All things considered, the ultimate resolution of this litigation may have broad implications beyond the Rockets, the Toyota Arena and Affiliated FM Insurance.
The outcome of this case may actually implicate the business interruption insurance coverage for every sports and entertainment entity that carries some form of business interruption insurance, which, in turn, would have a profound impact on a major segment of the economy.
How the court decides the Rockets' case will impact every other business interruption claim and lawsuit brought by every other venue or team against its insurers. Given the very lucrative nature of the sports and entertainment industries, billions of dollars are potentially at stake.
Glenn Jacobson is a partner and Mark Ian Binsky is counsel at Abrams Gorelick Friedman & Jacobson LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 Howard Stores Corp. v. Foremost Ins. Co. , 82 A.D.2d 398, 441 N.Y.S.2d 674 (1st Dept. 1981); aff'd 56 N.Y.2d 991 (1982); Roundabout Theatre Co., Inc. v. Continental Cas. Co. , 302 A.D.2d 1, 751 N.Y.S.2d 4 (1st Dept. 2002); Port Authority of New York and New Jersey v. Affiliated FM Ins. Co. , 311 F.3d 226 (3d Cir. 2002); Newman Myers Kreines Gross Harris, P.C. v. Great Northern Ins. Co., 17 F. Supp.3d 323 (E.D.N.Y. 2014); Universal Image Productions, Inc. v. Chubb Corp. , 703 F.Supp.2d 705 (E.D. Mich. 2010); aff'd, 475 Fed.Appx. 569 (6th Cir. 2012).
 See, Port Authority of New York and New Jersey v. Affiliated FM Ins. Co. and Universal Image Productions, Inc. v. Chubb Corp., both cited supra.
 The Toyota Center also claims in the complaint that it lost business due to cancellation of NCAA games and some concerts. However, it appears that the NCAA games were cancelled by the NCAA (on March 12, 2020) and the concerts were cancelled by their promoters. If true, then the same argument can be made as to these scheduled events: They were not cancelled by any government authority so such cancellations do not meet the requirements of the policy provisions in question.
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