Landlords Draw First Blood in Battle for Coverage of COVID-19 Losses

Do financial losses that a landlord, tenant, or other business incurs as a result of COVID-19 and the resulting government shutdowns count as a “direct physical loss” covered by business interruption insurance?

Literally billions of dollars are riding on the answer to this question that will ultimately have to be decided by the courts. So far at least, the early cases have found that COVID losses are not “direct physical losses.” But now a significant federal ruling has gone the other way. And you can bet that landlords and tenants that have their own business interruption insurance policies are hoping that the case is a harbinger of things to come.

The Controversy

That the government shutdown orders issued in response to COVID-19 interrupted businesses across America is an undeniable fact. The problem faced by the landlords, tenants, and other business that have submitted claims is that business interruption policies typically cover only “direct physical loss or damage” at the covered property, such as fire or storm damage. Insurers have argued that COVID-related losses don’t count as physical losses and denied coverage. As a result, hundreds of policyholders have sued their insurers, either individually or in class action lawsuits.

The Missouri Case

One of these cases was brought by a group of hair salons and restaurants against the Cincinnati Insurance Company asking for what’s called a declaratory judgment—that is, a ruling in which a court makes a legal determination about the rights of the parties in a lawsuit without awarding damages or ordering any action to be taken. Specifically, they wanted the court to declare that their business interruption insurance covered the losses they suffered as a result of the pandemic. Cincinnati naturally disagreed, contending that losses due to COVID and shutdown orders weren’t physical losses.

But the retailers begged to differ. The virus is a “physical substance that lives on and is active on inert physical surfaces” before being emitted into the air, they argued. So, if we could show that persons with COVID-19 had entered and infected our premises and forced us to suspend or reduce our businesses, these would be physical losses covered by the policy, they reasoned.

Cincinnati contended that this was a strained interpretation and that the policies covered only “income losses tied to physical damage to the property, not for economic loss caused by governmental or other efforts to protect the public from disease.” So, it asked the court to dismiss the case.  

The Court Sides with the Policyholders

But the Western District of Missouri federal court smashed Cincinnati’s hopes for a quick and simple solution. It rejected the insurer’s predictable COVID-losses-aren’t-physical losses argument for non-coverage. It then interpreted the policy language very strictly: The policy covered both “direct physical loss” and “direct physical damage.” To avoid conflating the two, the court said it had to “give meaning to both terms.” Then, it parsed the meaning of “direct physical loss,” finding that:

• Direct means, in part, “characterized by a close, logical, causal, or consequential relationship”;
• Physical means “having material existence perceptible especially through the senses and subject to the laws of nature”; and
• Loss is “the act of losing possession” and “deprivation.”

Based on these definitions, the court ruled that the retailers had provided sufficient allegations that the virus’s physical presence at the premises made the property unsafe and unusable. Having met the requirement of direct physical loss, they could now proceed with their case [Studio 417, Inc., et al. v. The Cincinnati Insurance Company, Case No. 6:20-cv-03127-SRB (W.D. Mo.)].

What It Means

Until now, all of the courts that have addressed the issue have ruled that COVID-19 losses aren’t direct physical losses or damages for purposes of business interruption insurance coverage. According to one federal judge from the Southern District of New York in a case involving a publisher, “The virus damages lungs. It doesn’t damage printing presses” [Social Life Magazine v. Sentinel Ins. Co., Ltd., No. 1:20-CV-03311-VEC, May 20, 2020 Hearing for Prelim. Inj., Dkt. No. 24 at 5:3-4 (S.D.N.Y. 2020)]. Cases from Michigan and Washington, D.C., have reached the same conclusion.

But thanks to Cincinnati, the policyholders are finally on the scoreboard. Of course, one case does not a turning point make; but by the same token, for landlords, tenants, and other business interruption insurance policyholders to have any hope of collecting on their claims, somebody had to deliver a blow to the “direct physical losses” obstacle. That blow has now been dealt and by an influential court.

Meanwhile, the retailers in the Cincinnati case still face the task of proving their claims. But the finding that COVID-19 actually is a physical presence for purposes of business interruption insurance is a potentially significant development that may bode very well for landlords, tenants, and other businesses seeking to recover their COVID shutdown losses.