In a victory for policyholders, a federal district court found that COVID-19 can cause physical loss under business-interruption policies. In Studio 417, Inc., et al. v. The Cincinnati Insurance Co., No. 20-cv-03127-SRB (W.D. Mo. Aug. 12, 2020), the court rejected the argument often advanced by insurers that “all-risks” property insurance policies require a physical, structural alteration to trigger coverage. This decision shows that, with correct application of policy-interpretation principles and strategic use of pleading and evidence, policyholders can defeat the insurance industry’s “party line” arguments that business-interruption insurance somehow cannot apply to pay for the unprecedented losses businesses are experiencing from COVID-19, public-safety orders, loss of use of business assets, and other governmental edicts.

The policyholders in Studio 417 operate hair salons and restaurants asserting claims for business interruption. In suing to enforce their coverage, the policyholders allege that, over the last several months, it is likely that customers, employees, and/or other visitors to the insured properties were infected with COVID-19 and thereby infected the insured properties with the virus. Their complaint asserts that the presence of COVID-19 “renders physical property in their vicinity unsafe and unusable.” Unlike some other complaints seeking to enforce such coverage, it also alleges that the presence of COVID-19 and government “Closure Orders” “caused a direct physical loss or direct physical damage” to their premises “by denying use of and damaging the covered property, and by causing a necessary suspension of operations during a period of restoration.”

The court concluded, after “a review of the record,” that the plaintiffs had “adequately stated a claim for direct physical loss” and thus denied the insurer’s motion to dismiss. The court pointed to the plaintiffs’ allegations of a “causal relationship between COVID-19 and their alleged losses” and allegations that COVID-19 “is a physical substance” that allegedly attached to plaintiffs’ property, making it unsafe and unusable and thus resulting in direct physical loss. The court point to Missouri cases holding that “a loss may occur when the property is uninhabitable and unusable for its intended purpose.”

The Studio 417 decision stands in sharp contrast to earlier decisions regarding COVID-19 claims.  Notably, the court explicitly declined to follow the recent COVID-19 decision trumpeted by insurers in Social Life Magazine, Inc. v. Sentinel Insurance Co., No. 1:20-cv-03311-VEC (S.D.N.Y. 2020). While the defendant, Cincinnati Insurance Co., argued that “Social Life famously states that the virus damages lungs, not printing presses,” the Studio 417 court swiftly dismissed this position, reasoning instead that the policyholders had plausibly alleged that malign COVID-19 particles attached to and damaged their property, which made their premises unsafe and unusable. Suite 417 also specifically differs from two prior seemingly pro-insurer decisions, Gavrilides Mgmt. Co. v. Michigan Insurance Co., No. 20-258-CB-C30 (Mich. Co. Ct. July 1, 2020), and Rose’s 1 LLC, et al. v. Erie Insurance Exchange, No. 2020-CA-002424-B (D.C. Super. Ct. Aug. 6, 2020) (which we have previously discussed here), where the trial courts held that COVID-19 did not constitute physical loss or damage. Namely, the courts in both Gavrilides and Rose’s stated that the plaintiffs there, unlike those in Studio 417, failed to allege or proffer evidence that COVID-19 was present at or had physically damaged their properties.

The Studio 417 decision points out that, in pursuing such coverage, it is key for policyholders to tie the elements of the coverage to the facts of the damage and loss, allegations that a court can use in denying facile arguments by insurers that somehow business-interruption coverages cannot be triggered. The early decisions, both Studio 417 supporting coverage and those thus far that have rejected it, all show that careful analysis of policy language, married to an analysis of the facts and evidence of the loss in question, will help courts recognize that the coverage should apply.

Jorge R. Aviles contributed to this article.