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1 Year In, Policyholders See Hope In Virus Coverage Battles

By Jeff Sistrunk · Mar 8, 2021, 5:06 PM EST

Courts have sided with insurers in most COVID-19 business interruption coverage disputes since the pandemic brought the country to a standstill, but attorneys for policyholders have been encouraged by a growing number of rulings that coverage can be triggered by loss of use of property as well as visible damage.

Property insurers' widespread denials of coverage for business interruption losses due to government shutdown orders have spawned a litigation tsunami — more than 1,500 suits and counting in state and federal courts, according to a database maintained by the University of Pennsylvania Carey Law School. 

Rhonda Orin, managing partner of Anderson Kill PC's Washington, D.C., office, told Law360 the pandemic has gripped the attention of the insurance bar unlike any event in recent memory.

Orin, who represents policyholders, recounted how her colleague, Anderson Kill shareholder Marshall Gilinsky, first summed up the widespread coverage disputes that followed after state and local COVID-19 stay-at-home orders forced restaurants, retailers and other businesses to close or sharply limit their operations.

"Marshall's initial thought was that there is no way there could be the biggest loss incident in 100 years, that has damaged and re-damaged every facet of life in the United States and globally, and the only industry that would walk away with their hands in their pockets is the property insurance industry," she said. "That cannot be what the intent of the entire property insurance industry was — that if you cannot use your property because of an event like this, there is no coverage. That, to me, frames the entire debate."


To this point, the overall numbers in court have looked bleak for policyholders. As of Monday, judges have issued more than 250 decisions on motions seeking dismissal or partial summary judgment in business interruption coverage cases, with over 80% of those resulting in the dismissal of policyholders' complaints and the remainder either allowing policyholders to proceed with their suits or granting them coverage outright, according to the UPenn data.

Although the scores of cases involve many variations in property policy language, they have largely revolved around courts' interpretation of five key words: "direct physical loss or damage." To secure valuable business interruption coverage, a policyholder must show it suffered direct physical loss of or damage to its insured property. But courts have split on what exactly that means.

The courts that have dismissed policyholders' cases have tended to hold that the direct physical loss or damage language requires a showing of a visible, tangible "physical alteration" to property.

By and large, those courts have found that the novel coronavirus is incapable of causing such damage. In addition, the policies at issue in two-thirds of the rulings favoring insurers contained explicit exclusions for losses resulting from viruses, bacteria or other microorganisms, according to the UPenn data.

Attorneys who represents insurance companies told Law360 the courts that have ruled in insurers' favor reached common-sense results based on logical readings of the core policy terms. Those decisions should stand up to scrutiny on appeal, said Hinshaw & Culbertson LLP partner Scott Seaman.

"We would expect insurers to fare well on appeal overall both with respect to the issue of absence of direct physical loss or injury and with respect to virus exclusions," Seaman said.

But attorneys who represent policyholders told Law360 there is much hope to be found in the 44 decisions that have favored insured businesses. In 37 of those rulings, courts have denied insurers' dismissal motions and permitted the cases to proceed to discovery, according to the data. And seven courts have granted partial summary judgment to policyholders, ruling conclusively they are entitled to business interruption coverage, UPenn found.

Sherilyn Pastor, chair of McCarter & English LLP's insurance recovery, litigation and counseling practice, told Law360 that, in her view, many of the early suits that have been dismissed contained "less robust descriptions of the direct physical loss or damage that the policyholder thought triggered coverage."

Policyholders in a large number of those cases didn't even allege the novel coronavirus had ever been detected on their properties, she noted.

"Insurers were collaborative and decided to focus on some of these early cases for motions to dismiss, and then used favorable rulings to create a narrative that there was no coverage for business interruption claims," Pastor said.

By contrast, policyholders in the cases that have withstood motions to dismiss have typically alleged the virus had been present on their premises at some time, with some providing specific data on the number of infected employees or customers, attorneys noted.

Furthermore, the courts that issued those decisions have often found that the key direct physical loss or damage language is ambiguous — that is, subject to multiple reasonable interpretations. Insurance legal principles dictate that, if both the insurer and policyholder set forth reasonable readings of a disputed policy term, the policyholder's interpretation will win the day.

For instance, U.S. District Judge Edmond Chang of the Northern District of Illinois last month allowed business interruption claims to proceed in multidistrict litigation over Society Insurance Co.'s denials of businesses' pandemic-related claims, after holding a "reasonable jury" could find that Society policyholders' inability to use all or part of their properties is indeed a covered physical loss.

The Society policies at issue lack a virus exclusion, as do a majority of the policies involved in cases with policyholder-friendly rulings, the UPenn data shows.

"We have seen many courts beginning to thoughtfully consider what the physical loss or damage is, and declining — at least at the pleading stage — to jump into decisions about what those words should or should not mean without the benefit of discovery," said Pastor.

Most of the courts that have granted partial summary judgment to policyholders have likewise found that the direct physical loss or damage requirement is ambiguous.

In one such case, North State Deli v. Cincinnati Insurance Co. , a North Carolina judge found in October that a group of restaurants is entitled to business interruption coverage after holding that direct physical loss can include an "inability to utilize … something in the real, material or bodily world, resulting from a given cause."

Orin, of Anderson Kill, said the fact that a significant number of courts have found the direct physical loss or damage language to be ambiguous undercuts insurers' insistence that the phrase can only be interpreted to mean a tangible physical change.

"Honestly, when I read cases where courts say direct physical loss obviously means direct structural, permanent loss, I wonder which words they are reading," she said. "In order for policy language to unambiguously mean something, you shouldn't have to change it."

Orin's Anderson Kill colleague, Gilinsky, said that prior to the pandemic, courts had ruled in several different contexts that a policyholder's loss of the ability to use its premises constitutes a direct physical loss. In those cases, policyholders' losses of use were attributable to a variety of causes, including methamphetamine odor, cat urine odor, asbestos fibers, smoke and other fumes, Gilinsky said.

"For 20 years, insurers have made these arguments that there needs to be a structural alteration to property, and those arguments were mostly rejected," he said. "And over those 20 years, why didn't the words 'structural' or 'alteration' ever get added to any insurance policy? If they wanted to eliminate any potential ambiguity, they could have drafted an insurance policy that explicitly says there must be a structural alteration to property."

Orin added that she expects that, as more courts "think about this carefully and read the words that are actually there, the more they will continue to decide cases in favor of policyholders," while others "may continue to follow the initial federal decisions that were not based in either the policy language or the applicable state's law."

However, Zelle LLP partner Shannon O'Malley, who represents insurers, told Law360 that policyholders have overstated the significance of rulings that have denied insurance companies' motions to dismiss and opened up discovery.

"Decisions granting motions to dismiss are wins for the insurers, but decisions denying motions to dismiss are not truly wins for the policyholders; they are merely allowing the policyholders to proceed with their cases," she said.

O'Malley and other attorneys who represent insurance companies expressed skepticism that policyholders that have defeated dismissal motions will be able to survive past the summary judgment stage, much less win at trial.

Clark & Fox partner Michael Savett said he would not be surprised if "at least half" of the cases that have made it past the motion to dismiss stage are still thrown out on summary judgment "because of what the policyholders will have to show in terms of loss or damage." Policyholders will likely have to show some concrete evidence that the virus was present on their premises for a time and led to a covered loss of or damage to property, he said. 

"I would venture to say that most of the restaurants and other businesses that have filed these claims never had their properties tested for presence of the virus," he said. "I think they have an uphill battle reaching the summary judgment threshold, to show there was physical loss or damage to the premises."

He added: "The exceptions are those restaurants or other businesses that were shut down because an employee, customer or patient had the virus, but even then, I think there were so few remediation attempts early on that it would be difficult for those businesses to now go back and make that showing."

Seaman, of Hinshaw & Culbertson, argued that even if policyholders put forth evidence and expert testimony purporting to show the novel coronavirus was on their premises and survived for a period of time, that may still not be enough for them to ultimately prevail. 

"Such a showing does not mean there was direct physical loss or damage," he said. "Further, the virus is short-lived and will die quickly on its own and instantly upon even a superficial cleaning."

As for the cases in which policyholders won coverage outright on partial summary judgment, O'Malley said those decisions could be vulnerable to reversal on appeal. She described those rulings as "results-oriented" decisions, largely by plaintiff-friendly state courts, that lacked "thorough analysis of relevant state precedent."

For instance, O'Malley said, the North State Deli decision appeared to ignore a North Carolina appellate court's 1997 ruling in Harry's Cadillac v. Motors Insurance Corp. , which held that a car dealership's loss of the ability to access its property due to a snowstorm did not satisfy its policy's direct physical loss or damage requirement.

The situation in Harry's Cadillac mirrors that faced by businesses that have fully or partially shut down because of COVID-19 stay-at-home orders, O'Malley asserted.

Attorneys who represent policyholders, however, told Law360 they have high hopes that the rulings granting partial summary judgment to insured businesses will stand up on appeal. McCarter & English's Pastor said the ambiguity argument is a compelling one and will continue to strengthen as more courts issue decisions favoring policyholders.

"As we get all these mixed results, it does further bolster the argument that these policies can be interpreted reasonably in multiple ways," she said. "These mixed results would not exist if the policies were subject to only one clear interpretation."

With respect to the cases that have survived dismissal and are in the discovery phase, Hunton Andrews Kurth LLP partner Michael Levine said he is confident that factual evidence and expert testimony will support policyholders' stance that the novel coronavirus causes physical loss or damage to property. He said that science supports the stance that the virus can indeed cause physical changes to property, not just the loss of use of that property.

"The experts I've been working with — some of the best in their fields — are very clear about the mechanism by which COVID-19 causes a physical alteration of property, transforming it from a safe condition to a dangerous condition," he said. "Those expert opinions should check the box under most states' laws regarding what is required to meet the direct physical loss or damage threshold. Judges need to let the cases develop to a point where pertinent facts and opinion evidence can be considered."

--Editing by Philip Shea and Emily Kokoll.

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