Since the beginning of the coronavirus pandemic, almost 2,000 lawsuits have been filed in federal and state courts throughout the United States by policyholders affected by the public health crisis. In the vast majority of these cases, business owners have sought coverage under commercial property policies for losses arising out of interruptions caused by local and state-wide shutdowns. Historically, commercial property policies only covered losses for direct physical loss or damage to insured property. Over time, however, the scope of coverage under these policies has expanded to include recovery for loss of business income when it is related to the physical loss or damage of insured property, or for expenses taking place during the period of time damaged property is being restored. Accordingly, thousands of policyholders throughout the United States have sought pandemic recovery under their property policies.
In some jurisdictions, policyholders have successfully defeated attempts to dismiss coronavirus lawsuits during the initial stages of litigation. These policyholders have taken the position that the coronavirus is a physical substance that “live[s] on,” “is active on inert physical surfaces” and is “emitted into the air,” making property unsafe and unusable. See, e.g., Studio 417, Inc. v. Cincinnati Ins. Co., 478 F. Supp. 3d 794, 798 (W.D. Mo. 2020). Applying such reasoning, courts have determined these policyholders can proceed with their claims that allege the resulting suspension or interruption of business operations is caused by direct physical loss or damage.
In other jurisdictions, insurers have been successful in obtaining dismissals of coronavirus business interruption claims by arguing that the virus does not cause a “physical alteration” or other damage to property. See, e.g., LexFit, LLC v. W. Bend Mut. Ins. Co., No. CV 5:20-413-DCR, 2021 WL 2382519, at *5 (E.D. Ky. June 10, 2021). In some cases, courts have also determined that commercial property policies containing virus and/or bacteria exclusions can rely on the exclusion to fully preclude coverage, making the analysis of what constitutes direct physical damages irrelevant. See, e.g., Benamax Ice, LLC v. Merch. Mut. Ins. Co., No. CV 20-8069, 2021 WL 1171633, at *4 (D.N.J. Mar. 29, 2021).
The United States Court of Appeals for the Eighth Circuit was the first federal appeals court that tackled the issue of whether commercial property policies will provide coverage for lost income arising out of a business shutdown related to the coronavirus pandemic. In Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141, 2021 WL 2753874 (8th Cir. July 2, 2021), the policyholder submitted a claim for lost business income and certain extra expenses after a two-month suspension of its non-emergency dental operations at four clinics when the Iowa governor declared a state of emergency because of the coronavirus pandemic. The insurer denied the claim, stating the responsive policy did not afford coverage because there was no direct physical loss or physical damage to the policyholder’s property. The policyholder filed suit, and then appealed after the lower district court granted the insurer’s motion to dismiss.
The Eighth Circuit affirmed the Iowa district court’s decision to dismiss the complaint. Scrutinizing the policy, the Oral Surgeons appellate court held the express language required direct physical loss or physical damage to trigger the business interruption and extra expense coverage provided to the policyholder. Accordingly, the policyholder needed to show some physicality to the loss or damage of property – e.g., “a physical alteration, physical contamination, or physical destruction.” Here, there were no allegations of physical alteration of property, as the complaint only pleaded that the policyholder suspended non-emergency procedures because of government-imposed restrictions enacted as a result of the coronavirus pandemic. Consequently, the Eighth Circuit rejected the policyholder’s claims for coverage under the commercial property policy.
Notably, the Oral Surgeons court did not have to address the issue of whether there was “physical contamination” because there were no allegations involving the presence of the coronavirus at any of the policyholder’s business locations. It therefore remains unclear how the Eighth Circuit would rule on the issue of whether the mere existence of the coronavirus itself would be considered contamination.
At least one lower court, however, has already looked to the Oral Surgeons court for guidance and expounded on this issue. In Byberry Services and Solutions v. Mt. Hawley Ins. Company, No. 20-CV-03379, 2021 WL 3033612, (N.D. Ill. July 19, 2021), an Illinois federal judge dismissed a policyholder claim seeking compensation for losses arising out of various coronavirus-related shutdowns involving the policyholder’s gym franchise locations throughout the United States. The Byberry Services court relied heavily on the Oral Surgeons decision, noting that a government shutdown “did not constitute a physical loss or physical damage” and that the mere loss of use of the policyholder’s property was insufficient to state a claim.
In contrast to Oral Surgeons, however, the plaintiffs in Byberry Services further alleged that the coronavirus infested the subject properties, causing them to be lost or damaged. The Byberry Services court was not convinced by this argument. First, the Byberry Services court noted that it was unclear that the presence of the coronavirus itself would even constitute contamination under the applicable Minnesota law as “there can be no dispute that the virus can be easily eliminated with routine cleaning procedures.” Next, the plaintiffs were unable to provide any concrete allegations that the presence of the virus actually resulted in physical damage to property. Additionally, and although the Byberry Services complaint contained vague allegations that certain individuals present at certain gym franchise locations tested positive for COVID-19, such general statements were insufficient to establish the sort of contamination that might give rise to a claim for “direct physical loss” under the relevant policy (citing Torgerson Properties, Inc. v. Continental Cas. Co., No. 20-CV-02184, 2021 WL 615416 at *2 (D. Minn. Feb. 17, 2021)).
The Oral Surgeons Eighth Circuit opinion is the first federal appellate decision that provides guidance as to whether there is coverage for a business interruption coronavirus claim when the underlying complaint does not contain any allegations of direct physical loss or physical damage. It is unclear, however, how the federal appellate courts will address more complicated factual scenarios, where there are specific allegations that the business interruption is due to the actual presence of the coronavirus causing physical contamination. Nonetheless, given the decisions in the Oral Surgeons and Byberry Services cases, it would seem likely that plaintiffs will attempt to argue that there was some type of physical contamination of the subject property at issue, or will attempt to make allegations of such contamination in future or amended pleadings going forward. Additionally, it remains uncertain to what extent, if any, the state courts will look to federal authority for guidance on the merits of these disputes as the immense volume of coronavirus cases in the pipeline continue to wind their way through the litigation process, or whether such courts will decide such cases through their own reasoning.