Following up on our prior discussion of Studio 417, Inc., et al. v. The Cincinnati Ins. Comp., a different federal judge in the Western District of Missouri recently ruled in Zwillo V, Corp. v. Lexington Insurance Co. that a Kansas City restaurant could not recover for COVID-19 business interruption losses under an insurance policy and, in the process, questioned the reasoning of Studio 417, Inc. and other recent decisions.

The owner of a restaurant in Kansas City (the “Insured”), purchased a commercial property insurance policy from Lexington Insurance Company (the “Insurer”). As a result of losses stemming from COVID-19, the Insured sought business interruption, extra expense, civil or military authority, ingress and egress, and sue and loss coverages under their policies.

The complaint alleged that “COVID-19 and the resulting response by state and local governments have . . . interrupted Plaintiff’s business,” yielding an 80 percent loss of revenue. The complaint also stated the “virus can be spread by respiratory droplets when an infected person coughs, sneezes, or talks”; a person “can become infected from respiratory droplets or potentially by touching a surface or object that has the virus on it and then by touching the mouth, nose, or eyes”; the virus can live on surfaces for several days and in aerosols in the air.

The Complaint did not allege that COVID-19 was present on the premises. Notably, unlike other cases, the policy contained an exclusion for losses related to pollutants and contaminants.

After the Insurer denied their claims, the Insured brought a putative class action against the Insurer for breach of contract and declaratory judgment.

“Plain and Ordinary Meaning” of “Direct Physical Loss”

As in prior cases, the court noted that “at the heart of the question here is whether Plaintiff can meet its burden of showing it suffered a ‘direct physical loss of or damage to property’ so as to trigger the coverage provisions . . . .” The Insurer argued that “direct physical loss of or damage to property’ requires physical alteration of property, or put another way, a tangible impact that physically alters property.” The court agreed with the Insurer’s argument and found that the Insured’s allegations concerning the impact of COVID-19 and the stay at home orders “do not plausibly alleged ‘direct physical loss of or damage to’ property.”

In reaching that conclusion, the court also rejected the Insured’s argument that “physical loss”, which is not defined in the policy, should be based on the plain meaning of “loss” from the dictionary and that “loss could encompass ‘the act of losing possession’ or ‘deprivation.’” As the court framed the argument, “[Insured] argues that the loss of the ability to access property constitutes physical loss of property.” The court rejected that argument finding that “’direct physical loss of or damage to’ does not encompass simple deprivation of use” and reading the term “loss” in isolation would be contrary to Missouri law that an insurance policy must be read as a whole.

The court also recognized that Missouri state courts have not addressed whether COVID-19 or stay-at-home orders constitute “direct physical loss of or damage to” property, but that several other courts have addressed the issue and reached the same conclusion.

The court saved for last a discussion of the prior decisions in the district denying motions to dismiss: Studio 417, Inc.; K.C. Hopps, Ltd. v. The Cincinnati Ins. Co., No. 20-cv-00437 (W.D. Mo. Aug. 12, 2020); and Blue Springs Dental Care, LLC et al., v. Owners Insurance Company, No. 20-cv-00383 (W.D. Mo. Sept. 21, 2020). The Insured argued that the court should follow those cases and similarly deny the Insurer’s motion to dismiss. The court distinguished those cases from the present situation because the policy here contained a virus exclusion that would preclude coverage and, would alone mandate dismissal. But, the court did not stop there when it stated: “[t]o the extent this Court’s ruling – finding the language in the policy plainly and unambiguously does not cover the claims – conflicts with Studio 417, K.C. Hopps, and Blue Springs Dental Care, this Court respectfully disagrees with those cases.”

Key Takeaway

This decision is yet another set-back for policyholders seeking coverage for COVID-19 related losses under business interruption insurance as it calls into question some of the only decisions to date that have favored policyholders. We will have to wait to see how other courts in the district address similar issues as well as how other courts around the country address such claims that are working their way through the court system. To that end, the first trial related to a COVID-19 claim for business interruption insurance began last week in Louisiana and may provide further guidance to policyholders.