{"id":395,"date":"2021-12-28T11:50:11","date_gmt":"2021-12-28T15:50:11","guid":{"rendered":"https:\/\/blogs.duanemorris.com\/insurancelaw\/?p=395"},"modified":"2023-11-29T16:55:26","modified_gmt":"2023-11-29T20:55:26","slug":"carriers-enjoy-unanimous-success-in-recent-wave-of-covid-19-business-interruption-decisions-in-federal-appeals","status":"publish","type":"post","link":"https:\/\/blogs.duanemorris.com\/insurancelaw\/2021\/12\/28\/carriers-enjoy-unanimous-success-in-recent-wave-of-covid-19-business-interruption-decisions-in-federal-appeals\/","title":{"rendered":"Carriers Enjoy Unanimous Success in Recent Wave of COVID-19 Business Interruption Decisions in Federal Appeals (Update)"},"content":{"rendered":"

By: Max H. Stern<\/a> & Holden Benon<\/strong><\/p>\n

Recently, we began to see real decisions being made by the appellate courts on COVID-19 Business Interruption issues.\u00a0 The U.S. Circuit Courts of Appeals have established a uniformly favorable trend for insurance carriers \u2013 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\u2019s 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.<\/p>\n

Ninth Circuit<\/u><\/strong><\/p>\n

Starting with the Ninth Circuit (where Duane Morris\u2019 insurance group maintains a strong presence), carriers have enjoyed successful outcomes in a trio of much-anticipated decisions. \u00a0In Mudpie, Inc. v. Travelers Casualty Insurance Company of America<\/em>, Case No. 20-16858, 2021 WL 4486509, at *1 (9th Cir. Oct. 1, 2021) (applying California law), Mudpie, a San Francisco-based children\u2019s store, brought a proposed class action asserting breach of contract and bad faith against its property insurance carrier.\u00a0 As in many COVID-19 business interruption cases, the carrier had denied its insured \u201cBusiness Income\u201d and \u201cExtra Expense\u201d coverage in 2020, after government authorities issued public health orders in response to the COVID-19 pandemic.\u00a0 Id. <\/em>at *2. \u00a0(For more background on business interruption insurance, please refer to one of our earlier<\/a> blog posts on this topic.)<\/p>\n

Mudpie made the argument that its inability to use its premises amounted to \u201cdirect physical loss or damage to\u201d its property, sufficient to bring its claim within the scope of the policy\u2019s business interruption coverage.\u00a0 Id. <\/em>\u00a0The court rejected this argument, however, reasoning that the phrase \u201cdirect physical loss of or damage to\u201d requires some kind of physical alteration to the property in question.\u00a0 Id. <\/em>at *5.\u00a0 The court also held that the policy\u2019s virus exclusion bars coverage for the insured\u2019s claims.\u00a0 Id. <\/em>at *7.\u00a0 As many policyholders have tried arguing, Mudpie claimed that its losses were not subject to the policy\u2019s virus exclusion because its losses were caused not directly by the virus, but by stay-at-home orders that restricted the insured\u2019s use of its property.\u00a0 But the court didn\u2019t buy this argument because Mudpie failed to meet the \u201cefficient proximate cause\u201d test.\u00a0 Id. <\/em>(\u201cMudpie does not plausibly allege that \u2018the efficient cause,\u2019 i.e.<\/em>, 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.\u201d) (internal citation omitted). In the end, the court affirmed the district court\u2019s decision ruling in favor of the insurer.\u00a0 Id. <\/em>at *7.<\/p>\n

<\/p>\n

The Ninth Circuit did not stop with Mudpie<\/em>.\u00a0 On the same day it issued Mudpie<\/em>, the court issued\u00a0Selane Products, Inc. v. Continental Casualty Company<\/em>, 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.\u00a0 Following the rationale in Mudpie<\/em>, the\u00a0Selane<\/em>\u00a0court looked to whether the insured properly alleged a physical alteration of its insured property.\u00a0 Id. <\/em>at *1.\u00a0 Fatal to the policyholder\u2019s 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.\u00a0 Id. <\/em>\u00a0Once again, the court affirmed the district court\u2019s decision ruling in favor of the insurer. Id. <\/em>at *2.<\/p>\n

Next at bat was Chattanooga Professional Baseball LLC, et al. v. National Casualty Company, et al.<\/em>, Case No. 20-17422, 2021 WL 4493920 (9th Cir. Oct. 1, 2021).\u00a0 In that case, the court found a policy\u2019s 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).\u00a0 Id. <\/em>at *1, n.3.\u00a0 The virus exclusion in the teams\u2019 policy excluded \u201closs or damage caused by or resulting from any virus . . .\u201d\u00a0 Id. <\/em>at **1-2.\u00a0 Just as in Mudpie<\/em>, the court applied the \u201cefficient proximate cause\u201d analysis in determining the scope of this exclusion.\u00a0 Id. <\/em>at *2.\u00a0 The teams argued that the virus exclusion does not preclude coverage because \u201ctheir 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.\u201d\u00a0 Id. <\/em>at *1.\u00a0 Ultimately, it was a strikeout for the teams.\u00a0 The court affirmed the district court\u2019s 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 \u201cefficient proximate cause that set others in motion[.]\u201d\u00a0 Id. <\/em>at *2.\u00a0 <\/em><\/p>\n

Sixth Circuit <\/u><\/strong><\/p>\n

In September, the Sixth Circuit issued back-to-back COVID-19 Business Interruption decisions, both resolved in favor of insurers.<\/p>\n

In Santo\u2019s Italian Cafe LLC v. Acuity Ins. Co.<\/em>, No. 21-3068, 2021 WL 4304607, at *3 (6th Cir. Sept. 22, 2021) (applying Ohio law), the court affirmed a lower court\u2019s 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.\u00a0 In particular, the court held that \u201c[d]irect physical loss of\u201d property refers to direct physical loss of property, not the inability to use property.\u00a0 Id. <\/em>at *2 (\u201c. . . 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.\u201d).<\/p>\n

The Santo\u2019s <\/em>court also dismissed the insured\u2019s argument that potential surplusage in the insurance contract\u2014e.g., some overlap between \u201cdirect physical loss\u201d and \u201cdirect physical damage\u201d\u2014creates ambiguity sufficient to construe the contract against the insurer.\u00a0 Id. <\/em>at *6.\u00a0 To that end, the court emphasized the context in which the words appeared.\u00a0 \u00a0The insurance contract, the court noted, employs a \u201cspecialized field of language\u201d in order to capture risk and \u201cpric[e] unknowable future perils in a fair and predictable way.\u201d\u00a0 Id. <\/em>at *2 (\u201cHence the 26 pages and many words, sometimes overlapping words, needed to complete this contract.\u201d).\u00a0 The court concluded that, essentially, \u201csome surplusage\u201d was inherent in any insurance policy, and this did not render the policy language ambiguous. \u00a0Id. <\/em>at *6.<\/p>\n

Additionally, in In re Zurich Am. Ins. Co.<\/em>, No. 21-0302, 2021 WL 4473398, at *1 (6th Cir. Sept. 29, 2021), the court held that at\u00a0\u201ca pandemic-triggered government order, barring in-person dining at a restaurant\u201d\u00a0does not qualify as\u00a0\u201c\u2018direct physical loss of or damage to\u2019\u00a0the property\u201d under Ohio law.\u00a0 As such, the court granted the insurer\u2019s 1292(b) appeal, vacating the district court\u2019s decision for the policyholders on COVID-19 related business interruption claims.\u00a0 Id. <\/em>at *2.<\/p>\n

Eighth and Eleventh Circuits<\/u><\/strong><\/p>\n

Both the Eighth and Eleventh Circuit Courts issued opinions affirming lower court decisions in favor of insurance carriers.\u00a0 See<\/em> Oral Surgeons, P.C. v. Cincinnati Ins. Co.<\/em>, 2 F.4th 1141, 1144 (8th Cir. 2021) (applying Iowa law) (rejecting the policyholder\u2019s loss of use argument, reasoning that \u201cthere must be some physicality to the loss or damage of property\u2014e.g.<\/em>, a physical alteration, physical contamination, or physical destruction.\u201d); Gilreath Family & Cosmetic Dentistry dba Gilreath Dental Associates, OBO itself and others similarly situated<\/em> v. Cincinnati Insurance Co.<\/em>, Case No. 21-11046, 2021 WL 3870697, at *6 (11th Cir. Aug. 31, 2021) (dismissing the policyholder\u2019s class action lawsuit because it failed to allege any property damage that would trigger coverage under the \u201call-risk\u201d policy\u2019s business income interruption, extra expense, or civil authority reasoning that \u201cthe 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[,]\u201d and the court \u201c[did] not see how the presence of those particles would cause physical damage or loss to the property.\u201d).<\/p>\n

Tenth Circuit<\/u><\/strong>\u00a0\u00a0<\/em><\/p>\n

In December,\u00a0the Tenth Circuit in Goodwill Indus. Of Central Oklahoma, Inc. v. Philadelphia Indemn Co.<\/i>, Case No. 21-6045 at *16 (10th Cir. Dec. 21, 2021) (applying Oklahoma law), issued a decision affirming the lower court\u2019s dismissal of the policyholder\u2019s complaint.\u00a0 Specifically, the court found \u201cdirect physical loss\u201d requires an immediate and perceptible destruction or deprivation of property, and \u201c[a]lthough the COVID orders temporarily restricted the [policyholder\u2019s] use of its property, [it] never lost physical control of its buildings or merchandise from its stores.\u201d\u00a0 Id. <\/i>at *8.\u00a0 Thus, the court reasoned, the insured was neither deprived of its property, nor did the virus destroy its property.\u00a0 Accordingly, the court held there was no coverage for the claimed insured\u2019s business interruption loss. \u00a0Id.<\/i><\/p>\n

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.\u00a0 While the outcome of these decisions may depend on policy wording, and the unique allegations set forth in each policyholder\u2019s complaint, it appears the momentum on the appellate front is solidly in the insurers\u2019 favor.<\/p>\n","protected":false},"excerpt":{"rendered":"

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.\u00a0 The U.S. Circuit Courts of Appeals have established a uniformly favorable trend for insurance carriers \u2013 these courts have affirmed the district court decisions that have ruled in favor of … <\/p>\n

Continue reading “Carriers Enjoy Unanimous Success in Recent Wave of COVID-19 Business Interruption Decisions in Federal Appeals (Update)”<\/span><\/a><\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[390,381,19,50],"ppma_author":[417,413],"class_list":["post-395","post","type-post","status-publish","format-standard","hentry","category-general","tag-business-interruption-insurance","tag-covid-19","tag-insurance-coverage","tag-max-stern"],"authors":[{"term_id":417,"user_id":6,"is_guest":0,"slug":"duanemorris3","display_name":"Duane Morris","avatar_url":"https:\/\/secure.gravatar.com\/avatar\/843ff6e7a8fe5fc92109b47a45f34b6cf0ea499e6e788db23456c838b0ae6747?s=96&d=blank&r=g","0":null,"1":"","2":"","3":"","4":"","5":"","6":"","7":"","8":""},{"term_id":413,"user_id":6,"is_guest":0,"slug":"duanemorris3","display_name":"Max H. Stern","avatar_url":"https:\/\/blogs.duanemorris.com\/insurancelaw\/wp-content\/uploads\/sites\/12\/2024\/12\/sternmax-100x100.jpg","0":null,"1":"","2":"","3":"","4":"","5":"","6":"","7":"","8":""}],"_links":{"self":[{"href":"https:\/\/blogs.duanemorris.com\/insurancelaw\/wp-json\/wp\/v2\/posts\/395","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.duanemorris.com\/insurancelaw\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.duanemorris.com\/insurancelaw\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/insurancelaw\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/insurancelaw\/wp-json\/wp\/v2\/comments?post=395"}],"version-history":[{"count":0,"href":"https:\/\/blogs.duanemorris.com\/insurancelaw\/wp-json\/wp\/v2\/posts\/395\/revisions"}],"wp:attachment":[{"href":"https:\/\/blogs.duanemorris.com\/insurancelaw\/wp-json\/wp\/v2\/media?parent=395"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/insurancelaw\/wp-json\/wp\/v2\/categories?post=395"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/insurancelaw\/wp-json\/wp\/v2\/tags?post=395"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/insurancelaw\/wp-json\/wp\/v2\/ppma_author?post=395"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}