This article has been saved to your Favorites!

Restaurant Virus Coverage Ruling Offers Insight For Insureds

By John Ellison, David Halbreich and Esther Kim · Aug 24, 2020, 6:10 PM EDT

John Ellison
John Ellison
David Halbreich
David Halbreich
Esther Kim
Esther Kim
A federal judge for the U.S. District Court for the Western District of Missouri handed a victory to policyholders by denying Cincinnati Insurance Company's motion to dismiss in Studio 417 Inc. v. The Cincinnati Insurance Company.[1]

In that case, U.S. District Judge Stephen R. Bough held that the plaintiff operators of hair salons and restaurants sufficiently stated a business interruption claim for direct physical loss as a result of COVID-19. This case supports that policyholders may sue insurance companies for physical loss or damage from COVID-19 and provides practical guidance for policyholders.

Be sure to adequately allege that COVID-19 is a physical substance that is readily transmissible and is ubiquitous.

The Studio 417 court based its decision on the plain and ordinary meaning of physical loss and the plaintiff policyholders' allegations to find that they sufficiently alleged COVID-19 losses as physical loss or damage. Under the all-risk insurance policies that the plaintiffs purchased, the insurance company agreed to pay for direct loss, unless the policies excluded or limited the loss.

The policies defined loss as "accidental [direct] physical loss or accidental [direct] physical damage." The court stated that the all-risk insurance policies that the plaintiffs purchased did not define direct physical loss and the court relied on the plain and ordinary meaning of the phrase. Based on the plain and ordinary meaning of physical loss, the court held that the plaintiffs sufficiently pleaded that "COVID-19 particles attached to and damaged their property, which made their premises unsafe and unusable."

According to the plaintiffs' complaint, the district court stated that COVID-19 is a physical substance that lives on and is active on inert physical surfaces, and COVID-19 allegedly attached to and deprived the plaintiffs of their property, resulting in direct physical loss. The court distinguished Social Life Magazine Inc. v. Sentinel Insurance Co. Ltd.,[2] and stated that "the present case is not about whether COVID-19 damages lungs, and the presence of COVID-19 on premises, as is alleged here, is not a benign condition."

The court also distinguished Gavrilides Management Co. LLC v. Michigan Insurance Co.,[3] finding that the Gavrilides court recognized that the complaint did not state "COVID-19 entered the [insured property] ... and in fact, states that it has never been present in either location."

Be sure to emphasize that "physical loss" and "physical damage" in a policy must be given separate meanings.

In response to the insurance company's arguments that the policies require a tangible, physical alteration, the court held that the insurance company conflated "loss" and "damage" and both terms must be given meaning.

The court relied on Mehl v. The Travelers Home & Marine Insurance Co.,[4] a case concerning insurance coverage for a home that was made uninhabitable by brown recluse spiders, to state that "physical loss" is not synonymous with physical damage. The court pointed to other jurisdictions that have similarly held that "even absent a physical alteration, a physical loss may occur when the property is uninhabitable or unusable for its intended purpose."

For instance, in Port Authority v. Affiliated FM Insurance Co.,[5] the U.S. Court of Appeals for the Third Circuit recognized that "[w]hen the presence of large quantities of asbestos in the air of a building is such as to make the structure uninhabitable and unusable, then there has been a distinct [physical] loss to its owner."

The Third Circuit further stated that physical loss or damage occurs "if there exists an imminent threat of the release of a quantity of asbestos fibers that would cause such loss of utility."[6]

In Prudential Property & Casualty Insurance Co. v. Lilliard-Roberts,[7]  a case concerning mold spores in a home, the U.S. District Court for the District of Oregon held that "the inability to inhabit a building [is] a 'direct, physical loss' covered by insurance."

In General Mills Inc. v. Gold Medal Insurance Co.,[8] the Court of Appeals of Minnesota stated, "[w]e have previously held that direct physical loss can exist without actual destruction of property or structural damage to property; it is sufficient to show that insured property is injured in some way."

In this case, General Mills was unable to sell contaminated oats due to U.S. Food and Drug Administration regulations. The court stated that although the oats may have been safe for consumption, General Mills could not legally use them in business. Consequently, the lower court did not error in finding that this "impairment of function and value [was] sufficient to support a finding of physical damage."[9]

Do not overlook the many different coverage grants that may be triggered for losses flowing from the closure orders and the potential or actual impact of COVID-19.

The Studio 417 case opens the door for plaintiffs for potential coverage under various policy provisions. Not only did the district court rule that the plaintiffs sufficiently alleged a direct physical loss under the policies, but also the court held that the plaintiffs sufficiently stated a claim for civil authority coverage, ingress and egress coverage, dependent property coverage, and sue and labor coverage under their policies, and denied the insurance company's motion to dismiss in its entirety.

The district court found that the policyholders sufficiently stated claims under the coverages by refusing to construe the provisions narrowly.

Concerning civil authority coverage, the court found that the policies required that "civil authority prohibits access," but did not specify all access or any access to the premises. The court held that plaintiffs adequately stated that their access was prohibited in the complaint and sufficiently stated a claim for civil authority coverage.

With respect to ingress and egress coverage, the court held that the exclusion in the policies stating that "coverage does not apply if ingress or egress from the 'premises' is prohibited by civil authority" did not apply because plaintiffs stated that both COVID-19 and governmental closure orders rendered the premises unsafe for ingress and egress.

The court held that plaintiffs also sufficiently alleged a claim for dependent property coverage because they sufficiently alleged a suspension of their business due to the lack of material or services from a dependent property.

Lastly, the court held that plaintiffs sufficiently stated a claim for sue and labor coverage by stating that in complying with the governmental closure orders and by suspending operations, they "incurred expenses in connection with reasonable steps to protect [c]overed [p]roperty."

This decision supports that policyholders may sufficiently state COVID-19-related losses under any of the above coverages.

Most importantly, the claims present inherently challenging fact questions that are not appropriate for resolution at a preliminary stage, and courts should grant discovery for COVID-19 insurance claims.

The Studio 417 case strongly supports policyholders and affirms that courts should not dismiss insurance claims alleging physical loss resulting from COVID-19. Whether there is covered physical loss at a given location is a question of fact and warrants discovery, in the least, before there is a dispositive ruling.

Additionally, based on the court's rationale in Studio 417, courts should allow policyholders to amend complaints concerning COVID-19 insurance claims where there are deficiencies in some respects, rather than entirely dismissing the cases with prejudice.

As the district court acknowledges in Studio 417, jurisdictions across the country have decided that a property that is uninhabitable or unusable for its intended purpose qualifies as a physical loss under commercial property insurance policies. The court also correctly recognizes that these claims are intensely factual, and that evidence will need to be explored and presented so they can be resolved properly.

Other courts should adopt Studio 417's holding that policyholders and businesses affected by COVID-19 sufficiently state a claim for coverage when they characterize COVID-19 losses as a physical loss or damage under their policies, and that discovery is necessary for both sides to properly develop and present their claims and their defenses.



John Ellison and David Halbreich are partners, and Esther Kim is an associate, at Reed Smith 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.


[1] Studio 417 Inc. v. The Cincinnati Insurance Company , Case No. 20-CV-03127 (E.D. Mo., Aug. 12, 2020).

[2] Social Life Magazine Inc. v. Sentinel Insurance Co. Ltd., 1:20-cv-03311 (S.D.N.Y. 2020).

[3] Gavrilides Mgmt. Co., LLC v. Michigan Ins. Co., Case No. 20-258-CB (Ingham County, Mich. July 1, 2020).

[4] The court relied on Mehl v. The Travelers Home & Marine Ins. Co. , Case No. 16-CV-1325 (E.D. Mo. May 2, 2018).

[5] Port Authority v. Affiliated FM Insurance Co. , 311 F.3d 226, 236 (3d Cir. 2002).

[6] Id.

[7] Prudential Prop. & Cas. Ins. Co. v. Lilliard-Roberts , CV–01–1362–ST, 2002 WL 31495830, at * 9 (D. Or. June 18, 2002).

[8] General Mills Inc. v. Gold Medal Insurance Co. , 622 N.W.2d 147, 152 (Minn. Ct. App. 2001.

[9] Id.

For a reprint of this article, please contact reprints@law360.com.