Following up on our recent post about a business interruption insurance decision by a Washington D.C. court, a federal judge in Missouri ruled last month, in Studio 417, Inc., et al. v. The Cincinnati Ins. Comp., No. 20-cv-03127-SRB, that businesses can sue their insurance carrier for business interruption losses caused by COVID-19.

Plaintiffs, owners of a hair salon and various restaurants (the “Insureds”) purchased an all risks policy from Cincinnati Insurance Company (the “Insurer”). As a result of losses sustained due to COVID-19, the Insureds sought business income, civil authority, ingress and egress, dependent property and sue and loss coverages under their policies. The policies did not include a virus exclusion. After the Insurer denied their claims for losses related to COVID-19, the Insureds brought a putative class action against the Insurer for breach of contract and declaratory judgment.

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

Unlike in Rose’s 1 LLC, the Insureds alleged, among other things, that COVID-19 “is a physical substance,” that it “live[s] on” and is “active on inert physical surfaces,” and is “emitted into the air.” (Order at 4.) Additionally, the Insureds alleged that the presence of COVID-19 “renders physical property in their vicinity unsafe and unusable” and that the Insureds “were forced to suspend or reduce business” at the covered premises. (Id.) They also alleged that the presence of COVID-19 and the 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.” (Id.)

The Insurer moved to dismiss arguing that the policies provide coverage “only for income losses tied to physical damage to property, not for economic loss caused by governmental or other efforts to protect the public from disease . . . the same direct physical loss requirement applies to all the coverages for which Plaintiffs sue.”

The policy did not define “direct physical loss” and the court, applying Missouri law, relied on the dictionary definitions of “direct,” “physical,” and “loss” to determine the “plain and ordinary meaning” of the phrase “direct physical loss.” (Order at 8.) The court determined that direct means, in part, “characterized by a close, logical, causal, or consequential relationship.” (Id.) It next found that physical means “having material existence perceptible especially through the senses and subject to the laws of nature;” and that loss is “the act of losing possession” and “deprivation.” (Id.) 

Relying on these definitions, the court ruled that the Insureds had provided sufficient allegations of the virus’ physical presence at the premises such that the property was unsafe and unusable and thus satisfied the requirement of direct physical loss. The court also relied on case law from the Eighth Circuit and other courts that held that a physical loss “may occur when the property is uninhabitable or unusable for its intended purpose.” See, e.g., Mehl v. Travelers Home & Marine Ins. Co., Case No. 16-CV-13250 CDP (E.D.Mo. May 2, 2018); Port Auth. Of New York and New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226, 236 (3^d Cir. 2002). (Order at 9-10.) Accordingly, the court denied the motion to dismiss and allowed the case to proceed to discovery.

The court also distinguished the cases relied upon by the Insurer, including the recent decision in Gavrilidies Mgmt. Co., LLC v. Michigan Ins. Co., Case No. 20-258-CD (Ingham County, Mich. July 1, 2020) because, among other reasons, those cases did not allege actual contamination of the premises. (Order at 10-13.)

Key Takeaway

We will have to wait to see if other courts will adopt this position and, if so, what facts sufficiently establish direct physical loss. But, at a minimum, this ruling establishes a road map for insureds to follow in their efforts to invoke coverage for COVID-19 loses. There are hundreds of cases involving business interruption coverage for COVID-19 losses still pending and continue to monitor this space for new developments.