As of April 16, 2021, at least 1831 lawsuits regarding denials of insurance benefits for COVID-19 claims have been filed nationwide. Rather than slowing, the number of lawsuits filed each month has increased every month since March 2020.
Insurance policies with Business Income, Extra Expense, or Civil Authority coverage typically afford coverage for “direct physical loss of or damage to” insured property or property located within a specified distance from the insured property. See ISO form CP 00 30 10 12 (Business Income And Extra Expense) or ISO form BP 00 30 07 13 (Businessowners Coverage Form, Business Income). To attempt to establish such “direct physical loss of or damage to” insured property, most COVID-19 property insurance complaints allege one of two theories: The “physical contamination theory” or the “loss of use theory.”
Physical Contamination Theory
Under the physical contamination theory, insureds must allege that (1) the virus was physically present on the insured property, and (2) the virus physically damaged that property. Both hurdles have proved difficult to overcome.
Many COVID-19 insurance cases do not allege that the virus was on the insured premises. Despite the passage of time, it seems there is still no reliable test to determine if COVID-19 is present on surfaces. Further, most insureds did not have a laboratory conduct testing to obtain test results that would be admissible in court. Many courts have dismissed suits when the complaint fails to allege COVID-19 is present on the insured property. See, e.g., Travelers Cas. Ins. Co. of Am. v. Geragos and Geragos (C.D. Cal., Oct. 19, 2020, No. CV 20-3619 PSG (Ex)) 2020 U.S. Dist. Lexis 196932, at *4.
Under federal pleading standards, a complaint must contain sufficient factual allegations to show a “plausible” claim for relief. Ashcroft v. Iqbal (2009) 556 U.S. 662, 678. To establish a “plausible” claim, the complaint must contain “more than labels and conclusions” or “formulaic recitations of the elements of a cause of action.” Bell Atlantic Corp. v. Twombly (2007) 550 U.S. 544, 555. Many federal courts have dismissed COVID-19 suits on the ground that allegations that the virus caused physical alteration of the insured premises are not plausible. This pleading standard may account for the higher rate of dismissals in federal versus state courts. According to the University of Pennsylvania, of the trial court decisions that had been rendered as of February 1, 2021 (their latest update), insurers obtained dismissals of over 90% of the cases filed in federal court. In state court, insurers obtained dismissals in just over 50% of the cases. See https://cclt.law.upenn.edu/judicial-rulings/.
Loss of Use Theory
The second main category of COVID-19 property insurance cases allege a “loss of use” theory. This theory is not premised on COVID-19 contamination or any other specific condition of or on the insured premises. Instead, it asserts that the government-imposed restrictions on the manner and degree to which business owners may use their premises are sufficient to establish “direct physical loss” of property.
The overwhelming majority of courts have concluded that neither COVID-19 nor the governmental orders associated with it cause or constitute property loss or damage for purposes of insurance coverage. These decisions have reasoned that the virus fails to cause physical alteration of property because temporary loss of use of property (if any) during a pandemic and while government orders are in effect does not qualify as physical loss or damage. See, e.g., Out West Restaurant Group, Inc. v. Affiliated FM Ins. Co. (N.D. Cal., Mar. 19, 2021, No. 20-cv-06786-TSH) 2021 U.S. Dist. Lexis 52462 at *11.
The Virus Exclusion
Most (but not all) business property insurance policies contain a Virus Exclusion. The ISO form CP 01 40 07 06, entitled “Exclusion Of Loss Due To Virus Or Bacteria” states: “We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” It applies to “coverage under all forms and endorsement that comprise this coverage part or policy, including but not limited to forms or endorsements that cover property damage to buildings or personal property and forms or endorsements that cover business income, extra expense or action of civil authority.”
The majority of courts have found the Virus Exclusion to be unambiguous, but at least one court has refused to dismiss a case despite a Virus Exclusion. One case often cited as finding the Virus Exclusion does not apply to COVID-19 claims is Urogynecology Specialist of Fla. LLC v. Sentinel Ins. Co. (M.D. Fla. 2020) 489 F. Supp. 3d 1297 (insured medical practice “was forced to close its doors for a period of time in March 2020 and could not operate as intended” due to Florida Governor’s executive order issued in response to COVID-19 pandemic).
California Legislative Proposal
In 2020, the legislature considered a bill intended to help businesses that suffered losses due to closure orders. For purposes of property insurance, AB 1552 would have created rebuttable presumptions that COVID-19 was present on the insured premises and that it caused physical damage to the insured’s property. This bill passed 78-0 in the Assembly, but in the Senate, it died in the Insurance Committee.
In 2021, Assembly Member Ramos introduced a new bill, AB 743, that would establish the same rebuttable presumptions. Although intended to help insureds, if such legislation is passed, the rebuttable presumptions may actually help insurers establish the Virus Exclusion applies.
The trial court decisions noted in this article are a tiny fraction of the decisions that have been handed down, and many more are being issued every week. None are binding precedent. Many of these cases are on appeal, but it will likely take up to two years to see the first appellate court decision. Until then, insurers should expect a continued wave of COVID-19 lawsuits.
Want more on this topic? See the lead article in the next issue of CEB’s Real Property Law Reporter (May 2021).
Timothy Sullivan is a partner at McCormick Barstow LLP in Fresno, where he is Vice Chair of the Insurance Coverage and Bad Faith Practice Group. His practice focuses on insurance coverage and bad faith litigation. Mr. Sullivan is a frequent speaker and writer on subjects pertaining to insurance and trial practice.
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