Plaintiffs’ strategies vary as most business interruption suits are tossed

As the first wave of COVID-19-related business interruption insurance lawsuits reach the dismissal stage, most were thrown out, but a select few have survived, revealing a potential divergence in plaintiffs' legal strategies.

Over a thousand such lawsuits have been filed against insurance companies in the U.S. since the pandemic hit in March and governments ordered businesses to close and workers and customers to remain at home. Although not all disputed-policies are the same, judges are being asked to address a few common questions in motions to dismiss: Do government closures trigger coverage? What constitutes "physical loss or damage" to property? Do any virus exclusions apply?

While insurers have almost unanimously denied every claim across the country, arguing that COVID-19 does not constitute "direct physical loss or damage" because the virus does not, like a fire or flood, physically alter or tangibly destroy the property, plaintiffs' arguments have differed in some key places.

The line seemingly being drawn, is between policyholders who have virus and pandemic exclusions baked into their policy and those who do not.

Those with an exclusion seem to focus their argument on government imposed shutdown orders, not the actual coronavirus itself.

Plaintiffs' attorney Brian S. Kabateck of Kabateck LLP, who is engaged in a business interruption suit brought by Mexican-style restaurant group Pez Seafood DTLA LLC in May against The Travelers Indemnity Co., argues it is the government order, not the virus itself, which caused the business loss. Pez Seafood DTLA LLC v. The Travelers Indemnity Company, 20-cv-04699 (C.D. Cal., led May, 2020).

"Does the deprivation of your business constitute property damage for it to be covered under the policy? That is a threshold question that needs to be answered before you reach the virus exclusion, in my humble opinion. If it doesn't constitute property damage, these are going to be very difficult claims," Kabateck said in a phone interview Friday. "Ultimately a court of appeal is going to decide this, not a trial court."

However some -- perhaps the minority of policyholders -- whose policies do not have virus exclusions, often argue the virus itself, was indeed present on the property and thus the property was physically altered.

The most notable example of this, comes out of a federal court in Missouri. A proposed class of hair salons and barbershops claimed the insurer unfairly denied their business interruption claims because the virus, rather than the government, forced them to close. Studio 417 v. The Cincinatti Insurance Company, 20-CV03127 (W.D. Missouri., led April 27, 2020).

U.S. District Judge Stephen R. Bough of the Western District of Missouri allowed the action to proceed because, among other reasons, the shop owners specifically alleged that visitors to the property were likely infected with the virus and thereby infected the insured property.

"Plaintiffs allege that COVID-19 'is a physical substance,' that it 'live[s] on' and is 'active on inert physical surfaces,' and is 'emitted into the air,'" Bough wrote in his order denying the insurer's motion to dismiss. "Plaintiffs further allege that the presence of COVID-19 'renders physical property in their vicinity unsafe and unusable,' and that they 'were forced to suspend or reduce business at their covered premises.'"

In denying the insurer's motion to dismiss, Bough said the plaintiffs' amended complaint "plausibly alleges a 'direct physical loss' based on 'the plain and ordinary meaning of the phrase.'"

On the other hand, in one of the many actions dismissed thus far, U.S. District Judge Stephen V. Wilson in Los Angeles found recently The Travelers Indemnity Co. of Connecticut did not need to cover a Los Angeles restaurant's claims focusing on a government-ordered shutdown.

In granting Travelers' motion this month, Wilson found the 10e restaurant did not show it is entitled to business interruption coverage after Los Angeles Mayor Eric Garcetti prohibited it from offering in-person dining since it did not suffer any "direct physical loss or damage."

"Physical loss or damage occurs only when property undergoes a 'distinct, demonstrable, physical alteration,'' Wilson wrote. "'Detrimental economic impact' does not suffice."

The restaurant filed a second amended complaint last week. However, it still very much focused on Gov. Gavin Newsom's and Garcetti's shutdown orders. If a policyholder successfully convinces a judge a government ordered shutdown should be considered a covered cause of loss, insurance companies will be in serious trouble. However until then, insurers appear to be in a good position, collecting more and more granted motions to dismiss.