A recent decision in the Western District of Missouri may have set the stage for “business interruption” coverage for businesses for losses resulting from COVID-19. Business interruption insurance replaces lost income when a business has to temporarily close. The policies generally apply when there’s “direct physical loss or damage.” “Direct physical loss or damage” typically applies to events including burst pipes, fires, or damage from other disasters. In the midst of the coronavirus pandemic, the question becomes whether or not the insurance applies when businesses are required to close under government orders.
While previously courts in Michigan and Washington, D.C. sided with insurance carriers and held that such coverage wasn’t warranted because COVID-19 doesn’t cause “physical loss or damage,” a Missouri court held that a group of nail salons and restaurants may pursue claims for business income losses due to COVID-19. The plaintiffs in Studio 417 Inc. v Cincinnati Insurance Co. followed city and state shutdown orders from Kansas and Missouri that went from March to May and resulted in loss of business income. The court found that “physical loss” should be broadly construed. The plaintiffs argued that COVID-19 particles were a “physical substance” which attached to and damaged their property, resulting in the property being unsafe and unusable.
The Court determined that the plaintiffs “adequately stated a claim for direct physical loss,” holding that “because the Policies do not define a direct ‘physical loss’ the Court must ‘rely on the plain and ordinary meaning of the phrase.’” The Merriam-Webster dictionary defines “direct” in part as “characterized by close logical, causal, or consequential relationship.” Since “physical” is defined as “having material existence: perceptible especially through the senses and subject to the laws of nature” and “loss” is “the act of losing possession” and “deprivation,” the court held that the plaintiffs alleged a direct physical loss. It’s important to note that the plaintiff’s policies had no exclusion for economic fallout from viruses. Business owners with policies that do include such an exclusion will likely face an additional hurdle.
Across the county, business owners have been submitting claims for business interruption for loss of business income due to COVID-19 related closures. Insurance companies have largely denied these claims, similarly reasoning that the presence or risk of the virus, and related business closures, to not rise to the level of “direct physical loss or damage.” This has resulted in hundreds of lawsuits being filed across the country.
This decision seems to be the first known victory for policyholders in suing their insurers for improperly denying claims related to losses caused by the shutdowns due to COVID-19. While the court here did not decide on the merits of the ultimate claims, the decision is a significant step for policyholders seeking to secure business interruption coverage for lost profits and other expenses resulting from the COVID-19 pandemic. The court’s ruling here could have broad implications for other businesses as they begin to sue their insurance carriers for denying similar claims. This decision can be used as persuasive authority for business owners trying to establish the “direct physical loss” requirement.
If your business was forced to close, or otherwise affected by COVID-19 related shut-down orders, you may be entitled to insurance proceeds based on your lost business income. Attorneys at General Counsel, P.C. can help you understand and protect your rights. Call us today at 703-991-7973.