The Eighth Circuit recently upheld a ruling by the Southern District of Iowa granting a Motion to Dismiss a policyholder’s lawsuit for failure to state a claim, finding that the policyholder failed to allege facts that showed a direct physical loss that would trigger coverage under the policy.
In Oral Surgeons v. Cincinnati Insurance, the policyholder owned and operated oral surgery clinics in and around Des Moines, Iowa. The Oral Surgeons brought suit against the insurer for breach of contract and bad faith in its denial of coverage for losses suffered as a result of the suspension of non-emergency procedures due to COVID-19. The COVID-19 pandemic and subsequent government restrictions forced the clinic to cease its nonemergency procedures from March 2020 until the restrictions were lifted in May 2020. Oral Surgeons alleged that the government restrictions constituted a direct loss to property because Oral Surgeons was unable to fully use its offices. Oral Surgeons argued further that the term “loss”, defined in the disjunctive as “physical loss” or “physical damage”, in the policy, creates an ambiguity and should therefore be construed against the insurer.
The Court of Appeals rejected the policyholder’s arguments, reasoning that the policy as whole refers to “loss” as being physical in nature. Interpreting the policy to require a direct “physical loss” or “physical damage” to trigger business interruption and extra expenses coverage. The court primarily referred to the portion of the policy title “period of restoration” which exclusively discussed physical alterations to the building such as repair or relocation. Nowhere in the policy discussed intangible loss, such as mere loss of use.
The Court of Appeals relied on Pentair v. American Guaranty & Liability Insurance and Source Food Technology v. U.S. Fidelity & Guaranty Company to justify their reasoning. The court likened the clinics’ loss of use of its offices to the policyholder in Pentair who experienced a power outage that shut down one of its supply factories in Taiwan. Although the power outage led to a significant increase in shipping costs, the court said a manufacturing shutdown was temporary and did not cause a direct physical loss of or damage to Pentair’s supplies property. Therefore, the temporary shutdown did not constitute a direct physical loss. To hold otherwise would allow coverage to be established whenever property cannot be used for its intended purpose.
Similarly, in Source Food Technology, a beef embargo prevented Source Food from receiving a major shipment, which ultimately caused the company to lose its biggest customer. The insurance company denied coverage because the shipment of beef was not physically contaminated or damaged therefore, not a direct physical loss. Eighth Circuit compared the government’s COVID-19 restrictions in the present case to the beef embargo between the U.S. and Canada. A governmental regulation, although it impairs the function and value of a product, does not constitute direct “physical loss”.
Applying Iowa and federal law the court found that the government’s COVID-19 restrictions do not constitute direct physical loss. Further, the policyholder did not allege physical alteration of property in their complaint and the policy did not cover Oral Surgeons’ partial loss of use of its office without some type of direct physical damage. Additionally, the Court of Appeals did rejected the policyholder’s argument that the word ‘loss’ is ambiguous, stating, “where no ambiguity exists, the Court will not write a new policy to impose liability on the insurer.”
Following in the footsteps of the U.S. District Court for the Eastern District of Michigan’s ruling that the Government closures do not trigger business interruption coverage and the Western District of Missouri’s ruling that a policyholder could not prevail on claims that were denied under a policy’s Pollution Exclusion clause, the Eighth Circuit found that the government’s COVID-19 restrictions do not constitute direct physical loss and the “loss” is not ambiguous.
That said, there is no shortage of COVID-19 business interruption cases being filed around the country, where coverage has been denied, and the insured has filed suit. See, for example, the lawsuit recently filed by beloved Kansas City barbeque joint, Joe’s Kansas City, against Lloyd’s of London. We will keep our readers apprised of further major developments in this area.
Policyholders Cannot Prevail with Pollution Exclusion | Western District of Missouri Grants Motion to Dismiss in Favor of Insurer on Claims of Losses from the COVID-19 PandemicJune 10, 2021 | Joshua Davis and Kelly Sabatés
The Western District of Missouri’s recent ruling in Zwillo provides yet another basis for insurers to deny coverage due to alleged losses incurred purportedly from the COVID-19 pandemic — certain pollution and containment exclusions.
The issue before the Court was whether or not a policyholder met its burden to show it suffered a “direct physical loss of or damage to property" so as to trigger coverage under the policy. The Court granted the insurance company’s motion to dismiss because the policyholder could not prove actual, demonstrable loss of or harm to some portion of the premises itself. The Court found that even if the policyholder could allege direct physical loss or damage as a result of the COVID-19 shutdown orders, the pollution and contamination exclusion would bar coverage because the provision expressly excluded damage or loss of value and even loss of use of property caused by a virus, like COVID-19.
Loss of Use Does Not Amount to Physical Damage
The policyholder in the case owned and operated the Westport Flea Market and Grill in Kansas City, and brought this putative class action against their insurance provider, Lexington Insurance, based on their allegations of wrongful denial of coverage under a commercial property insurance policy. The policyholder alleged that the COVID-19 pandemic interrupted business, which yielded an 80 percent loss of revenue. Essentially, they argued that their loss of the ability to access the physical property constituted “physical loss.” More specifically, they alleged that because the virus can be spread through respiratory droplets that can infect a person, leave the virus on surfaces, and/or remain in aerosols in the air, COVID-19 prevented them from being able to conduct their business. The Court amounted this to “loss of use” rather than the Policy’s coverage of a loss due to physical alteration or damage of the property.
Pollution and Contaminant Exclusion Barred Coverage
More importantly, the Court also reasoned that even if the Policyholder’s claims could fall within “direct physical loss of or damage to property,” the “Pollution and Contaminants Exclusion” ultimately barred coverage. The Exclusion stated the following:
“This Policy does not cover loss or damage caused by, resulting from, contributed to or made worse by actual, alleged or threatened release, discharge, escape or dispersal of CONTAMINANTS or POLLUTANTS, all whether direct or indirect, proximate or remote or in whole or in part caused by, contributed to or aggravated by any physical damage insured by this Policy....
CONTAMINANTS or POLLUTANTS means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste, which after its release can cause or threaten damage to human health or human welfare or causes or threatens damage, deterioration, loss of value, marketability or loss of use to property insured hereunder, including, but not limited to, bacteria, virus, or hazardous substances as listed in the Federal Water, Pollution Control Act, Clean Air Act, Resource Conservation and Recovery Act of 1976, and Toxic Substances Control Act or as designated by the U. S. Environmental Protection Agency. Waste includes materials to be recycled, reconditioned or reclaimed.” (emphasis added.)
The Policyholder argued that the exclusion was inapplicable for five different reasons; however, the Court found that these reasons merely misread the Policy and/or created ambiguity in the plain language. For example, one of the policyholder’s reasons was that the purpose of the exclusion was based on environmental and industrial pollutions. However, the Court applied Missouri precedent that there is no requirement that the insured be in violation of an environmental law for a pollution exclusion to apply because the policy language must be enforced as written. Another reason the policyholder argued was that the risk industry has developed a “virus-specific exclusion” that would preclude coverage; however, the Court did not entertain the argument because the policy, as stated above, expressly excluded damages caused by a virus.
The Court distinguished the recent holdings in the Western District where policyholders survived a motion to dismiss. (Studio 417, Inc. et al., v. The Cincinnati Ins. Co., No. 20-cv-03127, 2020 WL 4692385 (W.D. Mo. Aug. 12, 2020), K.C. Hopps, Ltd. v. The Cincinnati Ins. Co., No. 20-cv-00437, 2020 WL 6483108 (W.D. Mo. Aug. 12, 2020), and Blue Springs Dental Care, LLC et al., v. Owners Ins. Co., No. 20-cv-00383, 2020 WL 5637963 (W.D. Mo. Sept. 21, 2020)). The Court reasoned that the main distinction between this case and Studio 417, K.C. Hopps, and Blue Springs is the pollution and contamination exclusion.
While we have seen cases denying coverage based on the policyholder’s loss from COVID-19 not meeting a policy’s definition direct physical loss of direct physical loss, this case instructs that pollution and contamination exclusions may also bar coverage for COVID-19 claims, depending on the exclusions plain meaning.
A recent ruling from the U.S. District Court for the Eastern District of Michigan has provided more guidance in predicting how COVID-19 related losses and litigation will be handled.
In Turek Enterprises, Inc., d/b/a Alcona Chiropractic v. State Farm Mut. Auto. Ins. Co., et al, the Court ruled that State Farm Mutual Automobile Insurance Co. did not have to cover a chiropractic office’s losses alleged from government-ordered closures due to COVID-19. The Court held that the insured failed to allege physical loss and that the virus exclusion bars coverage.
This class action lawsuit seeking business interruption coverage was denied because the entire case focused on the definition of “direct physical loss;” however, did not demonstrate any “tangible damage to covered property” that was required as a condition precedent to coverage.
The chiropractor sued State Farm in June alleging the insurer wrongfully applied a virus exclusion to deny coverage. The insured argued the virus exclusion did not relate to the claimed losses, which were solely caused by government-closure orders. To support its position, the insured also argued COVID-19 was not present on its property, negating the “virus” related exclusion.
In Judge Ludington’s Order, the Court noted that even if the chiropractor alleged that the government-mandated closures were the cause of loss, “closure orders” were in response to curbing the spread of COVID-19 and the virus that causes it. Accordingly, the chiropractor’s business losses were barred by the policy’s virus exclusion. The chiropractor’s position disregarded “the anti-concurrent causation clause, which extend[ed] the virus exclusion to all losses where a virus is part of the causal chain.”
Plaintiff argued the exclusion applied only to decontamination costs and State Farm misrepresented that provision of the policy. In reviewing the applicable policy, Judge Ludington found that “[b]y its terms, the policy does not limit the virus exclusion to contamination, and plaintiff has failed to show that the virus exclusion is ambiguous.” Furthermore, “[e]ven if defendants misrepresented the purpose and extent of the virus exclusion in 2006, the plain, unambiguous meaning of the virus exclusion today negates coverage.”
In another creative argument, Plaintiff argued it had experienced “tangible” damage because the business was suspended by government closure orders; therefore, the business necessarily incurred ongoing “passive depreciation,” instead of a direct physical loss. The “passive depreciation” damage argued that all business equipment was continuing to lose value based on age and non-use. The Court rebuffed this argument by reasoning “[t]he plain meaning of direct physical loss to covered property requires that there be a loss to covered property, and not just any loss.”Ultimately, counsel and the plaintiff’s bar are both becoming more creative looking for special policy terms which ambiguity could open the door to such an argument as pleaded in this matter. Carriers should be addressing each claim and litigated coverage file on the individual claim’s separate and distinct terms, facts and application. No two COVID-19 claims are the same, and each coverage issue must be individually reviewed in order to fairly and accurately determine coverage and its application.
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