As the second quarter of 2021 continues, one thing is clear: COVID-19 business interruption claims are here to stay for the foreseeable future. Some legislators have proposed bills that would force insurers to cover certain business losses stemming from COVID-19 only to be met with industry pushback and public policy concerns. Policyholders continue to seek judicial relief under their claims of coverage for COVID-19 related “business interruption,” with decisions being issued almost daily. Policyholders, insurers and the courts agree that lost business income is contingent upon some direct physical loss or physical damage to insured property under an all-risk policy. Questions remain, however, as to what will satisfy the policy triggers of “physical damage to property” as well as what might distinguish between “loss of” and “damage to” in policy provisions.
Before reaching the question of whether an alleged loss was actual “damage to” or “loss of” a business’s property, courts have attempted to distinguish between the policy terms “loss of” and “damage to.” Recent cases have demonstrated that courts are less likely to find in favor of coverage when the policy states that coverage applies to “direct physical damage to property.” In these cases, the courts have made clear that policyholders seeking coverage under this language must prove that COVID-19 was actually present on or in the insured premises. There must be some tangible physical damage to the property.
On the other hand, some courts are willing to find for the policyholder when the policy language covers a broader cross-section of claims: “direct physical loss of or damage to property.” Courts agree that this language is different from “direct physical damage to property.” Some have further concluded that the “loss of” language is relatively expansive. “Loss of” could mean more than being misplaced or unrecoverable. Instead, “loss of” could mean the inability to use the property for one of its core functions. For instance, a district court in California read “loss of” expansively to conclude that a restaurant who was forced to shut its doors and provide only take-out services did experience a “loss of” property. Because dining-in was the restaurant’s primary function — a function the property could no longer serve — the court found that the policy was triggered.
Some courts take a different tack, however, and a number of federal courts have declined to hear such cases pending further development of state law. For example, a district court in Ohio submitted an Order of Certification to the Supreme Court of Ohio effectively asking the court to decide this unsettled question. Specially, the order asked the court to determine whether the general presence of the virus in the community or on surfaces at the premises constitutes direct physical loss or damage, or whether the presence on a person infected constitutes direct physical loss. The Supreme Court of Ohio accepted certification on April 14, 2021, and the first merits brief on the issue must be filed within 40 days. Similarly, a district court in Pennsylvania refused to exercise jurisdiction over a declaratory judgment action because similar issues were pending in state court and because the matter presented unsettled issues of state law.
Even so, the courts continue to grapple with the meaning of “direct physical loss.” There was some hope that a circuit split and a petition for certiorari to the Supreme Court in a case that predated the pandemic would provide guidance to determine exactly what it means. On one side of the split stands the Eleventh Circuit, which held, in a case that did not involve COVID-19, that insured property has not suffered a direct physical loss if the property or surface can be cleaned. Because the surface can be cleaned, then the property remains usable, and no direct physical loss has occurred. On the other hand, some circuits have come to the opposite result, holding that “direct physical loss” does not require tangible damage so long as the property has lost its functionality in some way. The Supreme Court denied certiorari on this circuit split, emphasizing that the outcomes of these cases will be dictated by state law rather than by uniform federal principles. Because each state may interpret these provisions differently, it may be some time before each state’s case law becomes fully developed.
Still other courts are considering provisions that exclude losses caused by viruses. Some policyholders have alleged that the exclusion in their policies for losses “caused directly or indirectly by … presence, growth, proliferation, spread or any activity of … [a] virus” does not preclude coverage for COVID-related losses because the virus exclusion is allegedly ambiguous and may apply only when a virus is physically present at a property, rather than when a virus merely causes governments to issue closure orders. One court recently summarily rejected this argument, holding that there was no ambiguity in the virus exclusion that excluded losses caused “directly or indirectly” by a virus.
As illustrated by these continual developments, business interruption claims stemming from COVID-19 are far from clear-cut, and uniformity in such cases has yet to emerge.