COVID-19 Insurance Coverage Disputes Reach the Appellate Bench
Since businesses began suffering losses from the COVID-19 pandemic and associated governmental restrictions in early 2020, over 2,300 lawsuits have been filed throughout the country regarding the scope of coverage available for those losses under commercial property and casualty insurance policies. To date, insurers have won most of the dispositive motions that have been decided with respect to business interruption coverage requiring a showing of “physical loss or damage,” particularly earlier cases in the pandemic, which often concerned policies with “virus exclusions” that expressly excluded coverage for losses caused by viruses. Where such virus exclusions are absent from the insurance policy, the question for courts to answer is whether the policyholder’s alleged COVID-related loss satisfies the policy’s requirement of “physical loss” or “physical damage.” Most trial courts have accepted insurers’ arguments that those terms require more than the loss of a property’s use due to the pandemic or government orders to combat it.
Over time, trial courts, and especially state trial courts, have been more receptive to policyholders’ broader interpretations of such language, and have accordingly denied insurers’ motions to dismiss and, on some occasions, granted summary judgment in policyholders’ favor. For example, in May 2021, a Pennsylvania trial court granted summary judgment to a policyholder that had temporarily closed its tavern due to the spread of COVID-19 and the commonwealth’s lockdown orders, holding that the tavern’s closure satisfied the policy’s requirement of “direct physical loss of or damage to” the tavern. MacMiles, LLC v. Erie Ins. Exchange, No. GD-20-7753, 2021 WL 3079941, at *6 (Pa. Com. Pl. May 25, 2021). The court reasoned that the word “loss” would be redundant with “damage” if harm to the property itself were required, and that it was reasonable to conclude that “COVID-19 and social distancing measures” had resulted in a “direct physical loss” because they “caused [the policyholder] to physically limit the use” of its tavern. Id. at *6 (emphasis in original).
Now, attention has shifted to the appellate bench, as hundreds of appeals are pending across the country regarding how similar policy language applies to similar COVID-19 related losses. Federal appellate courts have invariably sided with insurers, holding that loss of a property’s use due to COVID-19 and related government orders does not trigger coverage that requires a showing of direct physical loss or damage. See, e.g., Henderson Rd. Rest. Sys., Inc. v. Zurich Am. Ins. Co., No. 21-4148, 2022 WL 2118912, at *3 (6th Cir. June 13, 2022) (following what it described as “the overwhelming tide of case law” and citing cases from the Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, and Eleventh federal circuits).
But decisions among state appellate courts have not been quite so one-sided. While most of them have agreed with the federal courts, a few have given policyholders victories that they and their counsel hope can turn the national tide. In June of 2022, an intermediate appellate court in Louisiana held that the “slowdown” of a restaurant’s business resulting from its capacity limits “due to the ongoing omnipresence of the coronavirus” triggered coverage under its “‘all-risk’ commercial insurance policy” that had language covering “suspension” of operations caused by “direct physical loss of or damage to the property.” Cajun Conti LLC v. Certain Underwriters at Lloyd’s, London, 2021-0343, 9-15 (La.#App. 4 Cir. June,18,22). In a detailed opinion, the plurality reasoned that the policy was ambiguous as to whether coverage required “full loss of the property’s use” or merely “loss of the property’s full use,” and applied the well-established rule that ambiguities in insurance policies should be resolved in favor of coverage. And in July of 2022, an intermediate appellate court in California held that a suit brought by the owners of a hotel and a restaurant must survive the pleading stage because they specifically alleged they were “required to dispose of property damaged by COVID-19”—a holding that the court acknowledged to be “at odds with almost all (but not all) decisions considering whether business losses from the pandemic are covered by the business owners’ first person commercial property insurance.” Marina Pac. Hotel & Suites, LLC v. Fireman’s Fund Ins. Co., No. B316501, 2022 WL 2711886 (Cal. Ct. App. July 13, 2022).
Those decisions may give policyholders’ some hope of building momentum in state appellate courts across the country: Most states are still without any appellate court rulings on COVID-19 business interruption coverage, and very few states have seen such rulings from their highest appellate courts. Since insurance law is state law, pro-policyholder decisions in state courts would be followed by federal courts interpreting those states’ laws while sitting in diversity. Moreover, state appellate decisions in policyholders’ favor could—at least within their respective states—influence future decisions not only as binding precedent or persuasive authority, but also as extrinsic evidence: “Most courts maintain that a division of judicial opinion is at least evidence of ambiguity,” Williston on Contracts § 49:18 (4th ed.), so a critical mass of policyholder-friendly judicial interpretation of common policy language could be deemed evidence that the language is at least ambiguous (i.e. at least reasonably susceptible to a coverage-yielding interpretation), which will usually result in an award of coverage, see id. § 49:15.
To date, judges generally have not found such a critical mass of pro-policyholder decisions. For example, back in April 2021, a federal court in the Southern District of Florida acknowledged that conflicting judicial interpretations would be an “important indicator” of ambiguity, but held that the policyholder’s citation of only “a thimble’s worth” of non-Florida caselaw supporting its interpretation of “direct physical loss or damage” could not establish ambiguity when a “tsunami of Florida caselaw” supported the insurer’s interpretation. Graspa Consulting, Inc. v. United Nat'l Ins. Co., 2021 WL 1540907, *5-8 (S.D. Fla. Apr. 16, 2021). The same “thimble”-versus-“tsunami” imbalance remains in the caselaw today, but it is not inconceivable that policyholders will be able to change that in future state appellate courts.
With billions of dollars collectively on the line, insurers and policyholders involved in the COVID-related litigation should pay close attention to the development of appellate caselaw. Over the next several months, those decisions—and particularly those of the state appellate courts—could add support to policyholders’ interpretations of their policies that until now have not been widely accepted.