Commentary: Despite initial win in court, insureds face tough challenge in citing COVID-19 as reason for business interruption claims

Nick Daugherty

As COVID-19 continues to wreak havoc upon our communities, businesses throughout the country are attempting to rebound from the effects of extensive shutdowns and suspensions of operations. However, many are encountering major setbacks with respect to business interruption insurance coverage claims which were filed in an effort to recoup lost revenue as a result of the coronavirus.

Although business interruption insurance generally covers losses associated with temporary suspensions of operations, most insurance policies require that such suspension result from some kind of direct physical loss to the insured property. Accordingly, with the massive wave of litigation that has emanated from such claims, courts across the country have been left to grapple with the question of whether the mere threat of COVID-19 being present on insured property qualifies as direct physical loss to property so as to trigger coverage.

On that question, the overwhelming majority of courts have outright rejected any such notion, thereby leaving insured businesses with no coverage for their coronavirus-related losses.

Missouri authority on the question is no different, although results were initially mixed in the state’s federal courts. For example, in Studio 417, Inc. v. Cincinnati Ins. Co., a judge in the United States District Court for the Western District of Missouri refused to dismiss a business interruption claim where the insured alleged that the presence of COVID-19 physically deprived the insured of its ability to use its business property.

According to the Studio 417 court, that mere loss of use of the property arguably qualifies as direct physical loss so as to implicate coverage, notwithstanding the fact that no actual physical damage was alleged to have occurred at the property. Importantly, however, the Studio 417 court reserved its judgment on the question, noting that “[s]ubsequent case law in the COVID-19 context, construing similar insurance provisions, and under similar facts, may be persuasive.” For that reason, the court expressly stated that its ruling was subject to further review.

Since the Studio 417 decision, more and more Missouri federal judges have begun to disagree with its rationale. For example, contrary to the Studio 417 court’s analysis, the United States District Court for the Western District of Missouri held in Zwillo V, Corp. v. Lexington Ins. Co. that mere loss of use of property as a result of measures designed to prevent the spread of COVID-19 is insufficient to trigger coverage.

Instead, the court held that the insured was required to demonstrate “actual” or “demonstrable” harm to some portion of “the premises itself” in order to trigger coverage.

Similarly, in MMMMM DP, LLC v. Cincinnati Ins. Co., the United States District Court for the Eastern District of Missouri explained that, under applicable Missouri precedent, “physical alteration” of property was required to satisfy the direct physical loss requirement of business interruption coverage. Because the coronavirus simply “does not physically alter property,” the court rejected the Studio 417 decision as “an outlier” despite both cases involving “almost identical” allegations.

Finally, the United States District Court for the Eastern District of Missouri in Monday Restaurants LLC v. Intrepid Ins. Co., came to the opposite conclusion as the Studio 417 court.

There, the court noted that the “weight of authority” under Missouri law requires insureds to demonstrate some “physical event or physical injury” to their property in order to trigger coverage. By contrast, mere “loss of intended use” as a result of COVID-19 shutdowns is insufficient. Many other Missouri federal decisions have followed suit in rejecting insureds’ claims for business interruption coverage for COVID-19 losses.

The vast majority of federal courts in other jurisdictions have likewise expressly rejected the Studio 417 court’s rationale, characterizing the Missouri court’s decision as either an “outlier” or as espousing “the minority view.” In fact, one court went as far as stating that Studio 417 was, as far as the court was aware, “the only COVID-19 business interruption case where a federal court denied the insurer’s motion to dismiss.” 

In fact, contrary to Studio 417, the overwhelming consensus among federal courts throughout the country is that some actual, physical element of loss must first be sustained to the insured property before potentially triggering an insurance policy’s business interruption coverage. As one court put it bluntly, “common sense tells us that COVID-19 is incapable of causing a tangible injury to property. COVID-19 is a virus that harms people, not structures.”

With most courts outright dismissing COVID-19 business interruption claims, the door appears to be closing for insured businesses looking to insurance coverage to recoup coronavirus-related losses. And with more and more Missouri decisions falling in line with this majority view, it appears that the Studio 417 court will have plenty to consider in reviewing its ruling in favor of insured businesses.

Consequently, it remains critical to monitor continuing developments in the arena of COVID-19 business interruption litigation, as many insureds pursue appeals of unfavorable rulings, allowing federal appellate courts the opportunity to weigh in on the question.

Nick Daugherty is an associate at the law firm Seyferth Blumenthal & Harris. His practice focuses on commercial litigation and counseling in all stages of litigation, with an emphasis on insurance-related issues, representing insurers in various coverage-related cases.