By: Max H. Stern & Holden Benon
Recently, we began to see real decisions being made by the appellate courts on COVID-19 Business Interruption issues. The U.S. Circuit Courts of Appeals have established a uniformly favorable trend for insurance carriers – these courts have affirmed the district court decisions that have ruled in favor of the insurers, and in one case, the Sixth Circuit vacated a district court’s decision that ruled in favor of the policyholder. Since our original blog post on this issue in October, this trend continued in December with a Tenth Circuit decision.
Starting with the Ninth Circuit (where Duane Morris’ insurance group maintains a strong presence), carriers have enjoyed successful outcomes in a trio of much-anticipated decisions. In Mudpie, Inc. v. Travelers Casualty Insurance Company of America, Case No. 20-16858, 2021 WL 4486509, at *1 (9th Cir. Oct. 1, 2021) (applying California law), Mudpie, a San Francisco-based children’s store, brought a proposed class action asserting breach of contract and bad faith against its property insurance carrier. As in many COVID-19 business interruption cases, the carrier had denied its insured “Business Income” and “Extra Expense” coverage in 2020, after government authorities issued public health orders in response to the COVID-19 pandemic. Id. at *2. (For more background on business interruption insurance, please refer to one of our earlier blog posts on this topic.)
Mudpie made the argument that its inability to use its premises amounted to “direct physical loss or damage to” its property, sufficient to bring its claim within the scope of the policy’s business interruption coverage. Id. The court rejected this argument, however, reasoning that the phrase “direct physical loss of or damage to” requires some kind of physical alteration to the property in question. Id. at *5. The court also held that the policy’s virus exclusion bars coverage for the insured’s claims. Id. at *7. As many policyholders have tried arguing, Mudpie claimed that its losses were not subject to the policy’s virus exclusion because its losses were caused not directly by the virus, but by stay-at-home orders that restricted the insured’s use of its property. But the court didn’t buy this argument because Mudpie failed to meet the “efficient proximate cause” test. Id. (“Mudpie does not plausibly allege that ‘the efficient cause,’ i.e., the one that set others in motion was anything other than the spread of the virus throughout California, or that the virus was merely a remote cause of its losses.”) (internal citation omitted). In the end, the court affirmed the district court’s decision ruling in favor of the insurer. Id. at *7.
The Ninth Circuit did not stop with Mudpie. On the same day it issued Mudpie, the court issued Selane Products, Inc. v. Continental Casualty Company, Case No. 21-55123, 2021 WL 4496471 (9th Cir. Oct. 1, 2021), affirming the dismissal of a putative class action seeking coverage for COVID-19 business interruption losses. Following the rationale in Mudpie, the Selane court looked to whether the insured properly alleged a physical alteration of its insured property. Id. at *1. Fatal to the policyholder’s claim was its failure to plausibly allege that SARS-CoV-2 was present on its property and caused any damage, and its failure to allege that the stay-at-home orders caused its property to sustain any physical alterations. Id. Once again, the court affirmed the district court’s decision ruling in favor of the insurer. Id. at *2.
Next at bat was Chattanooga Professional Baseball LLC, et al. v. National Casualty Company, et al., Case No. 20-17422, 2021 WL 4493920 (9th Cir. Oct. 1, 2021). In that case, the court found a policy’s virus exclusion to apply under the law of every one 10 states in which certain insured minor league professional baseball teams were located (California, Idaho, Indiana, Maryland, Oregon, South Carolina, Tennessee, Texas, Virginia, and West Virginia). Id. at *1, n.3. The virus exclusion in the teams’ policy excluded “loss or damage caused by or resulting from any virus . . .” Id. at **1-2. Just as in Mudpie, the court applied the “efficient proximate cause” analysis in determining the scope of this exclusion. Id. at *2. The teams argued that the virus exclusion does not preclude coverage because “their losses were attributable to other causes not implicated by the virus, including the attendant disease, resulting pandemic, governmental responses to the pandemic, and Major League Baseball (MLB) not supplying players.” Id. at *1. Ultimately, it was a strikeout for the teams. The court affirmed the district court’s decision, holding the policyholders failed to plausibly allege that any of these other causes, and not the spread of COVID-19 or the virus that causes it, were the “efficient proximate cause that set others in motion[.]” Id. at *2.
In September, the Sixth Circuit issued back-to-back COVID-19 Business Interruption decisions, both resolved in favor of insurers.
In Santo’s Italian Cafe LLC v. Acuity Ins. Co., No. 21-3068, 2021 WL 4304607, at *3 (6th Cir. Sept. 22, 2021) (applying Ohio law), the court affirmed a lower court’s decision ruling in favor of an insurance carrier, holding that neither loss of use, nor the government shutdown orders, constitute a direct physical loss of property or direct physical damage to it. In particular, the court held that “[d]irect physical loss of” property refers to direct physical loss of property, not the inability to use property. Id. at *2 (“. . . the owner has not been tangibly or concretely deprived of any of [the restaurant]. It still owns the restaurant and everything inside the space. And it can still put every square foot of the premises to use, even if not for in-person dining use.”).
The Santo’s court also dismissed the insured’s argument that potential surplusage in the insurance contract—e.g., some overlap between “direct physical loss” and “direct physical damage”—creates ambiguity sufficient to construe the contract against the insurer. Id. at *6. To that end, the court emphasized the context in which the words appeared. The insurance contract, the court noted, employs a “specialized field of language” in order to capture risk and “pric[e] unknowable future perils in a fair and predictable way.” Id. at *2 (“Hence the 26 pages and many words, sometimes overlapping words, needed to complete this contract.”). The court concluded that, essentially, “some surplusage” was inherent in any insurance policy, and this did not render the policy language ambiguous. Id. at *6.
Additionally, in In re Zurich Am. Ins. Co., No. 21-0302, 2021 WL 4473398, at *1 (6th Cir. Sept. 29, 2021), the court held that at “a pandemic-triggered government order, barring in-person dining at a restaurant” does not qualify as “‘direct physical loss of or damage to’ the property” under Ohio law. As such, the court granted the insurer’s 1292(b) appeal, vacating the district court’s decision for the policyholders on COVID-19 related business interruption claims. Id. at *2.
Eighth and Eleventh Circuits
Both the Eighth and Eleventh Circuit Courts issued opinions affirming lower court decisions in favor of insurance carriers. See Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141, 1144 (8th Cir. 2021) (applying Iowa law) (rejecting the policyholder’s loss of use argument, reasoning that “there must be some physicality to the loss or damage of property—e.g., a physical alteration, physical contamination, or physical destruction.”); Gilreath Family & Cosmetic Dentistry dba Gilreath Dental Associates, OBO itself and others similarly situated v. Cincinnati Insurance Co., Case No. 21-11046, 2021 WL 3870697, at *6 (11th Cir. Aug. 31, 2021) (dismissing the policyholder’s class action lawsuit because it failed to allege any property damage that would trigger coverage under the “all-risk” policy’s business income interruption, extra expense, or civil authority reasoning that “the shelter-in-place order that [the insured] cites did not damage or change the property in a way that required its repair or precluded its future use for dental procedures[,]” and the court “[did] not see how the presence of those particles would cause physical damage or loss to the property.”).
In December, the Tenth Circuit in Goodwill Indus. Of Central Oklahoma, Inc. v. Philadelphia Indemn Co., Case No. 21-6045 at *16 (10th Cir. Dec. 21, 2021) (applying Oklahoma law), issued a decision affirming the lower court’s dismissal of the policyholder’s complaint. Specifically, the court found “direct physical loss” requires an immediate and perceptible destruction or deprivation of property, and “[a]lthough the COVID orders temporarily restricted the [policyholder’s] use of its property, [it] never lost physical control of its buildings or merchandise from its stores.” Id. at *8. Thus, the court reasoned, the insured was neither deprived of its property, nor did the virus destroy its property. Accordingly, the court held there was no coverage for the claimed insured’s business interruption loss. Id.
With many other COVID-19-related Business Interruption cases currently on appeal, we anticipate there likely will be many new appellate rulings in the coming months. While the outcome of these decisions may depend on policy wording, and the unique allegations set forth in each policyholder’s complaint, it appears the momentum on the appellate front is solidly in the insurers’ favor.