COVID 19: Business Interruption Insurance Coverage Update

COVID 19: Business Interruption Insurance Coverage Update

Insurers for shuttered businesses have almost uniformly denied claims for business interruption.  But, insureds across the country have challenged the denials.  Those lawsuits are starting to come to conclusion and while judges have sided with the insurance companies in many cases, restaurants in two recent cases have received favorable rulings against the insurance companies and are making ‘new law’ in the insurance area.

Between March 16th and November 23rd, 2020, U.S. businesses filed 1,427 business interruption cases against insurance carriers.  While courts previously declined to consolidate cases to be decided on an industry-wide basis because of policy language differences, that may be changing.  The courts recently consolidated many business interruption insurance cases in the Western District of Pennsylvania:  In re:  Erie Covid-19 Business Interruption Protection Insurance Litigation.  The cases consolidated were filed by restaurants, hair salons, hospitality/hotels and spas in Illinois, New York, Pennsylvania and Tennessee Federal District Courts.  Erie Insurance Group is a regional insurance carrier and the action consolidated as the Federal Panel determined that the legal actions all require an assessment of “whether COVID-19 caused any “loss” or “damage” to property, and “whether any of Erie’s policy exclusions apply to preclude plaintiffs’ claims.”  Any discovery concerning the drafting and interpretation of the policies will be common to all actions.

A group of sixteen restaurants in North Carolina sued their insurance carrier in a State Court (not federal) in the case of North Deli LLC, et al. v. The Cincinnati Insurance Company, seeking to force the insurance carrier to cover lost business income and extra expenses under their insurance policies, arguing there was a covered “direct physical loss.”  The judge ruled in the restaurants’ favor, citing the vague term in the insurance policy of “direct physical loss.”

There are established rules for how to interpret insurance policy language.  The court looked to the policy’s building and personal property coverage form and a business income (and extra expense) coverage form, which said that the insurer would pay for business interruption coverage:

We will pay Extra Expense you sustain during the “period of restoration”.  Extra Expense means necessary expenses you sustain … during the “period of restoration” that you would not have sustained if there had been no direct “loss” to property caused by or resulting from a Covered Cause of Loss.”

The judge also analyzed policy provisions stating that “Covered Cause of Loss” means direct loss, unless the loss is excluded or limited; and an additional policy definition that “loss” means “accidental physical loss or accidental physical damage.”  What does that mean?

The restaurants said it means that all of the COVID-19 governmental closure orders forced the restaurants to lose the physical use of and access to the restaurant premises, which is a “direct physical loss” covered under the policy.   But the insurer argued that some form of physical alteration to the property must have happened to get coverage and payment under the policy.

When in doubt about what words mean, courts often go simple and look in a dictionary, which is what the judge did, first citing another state court insurance case of Accardi v. Hartford Underwriters Ins. Co to establish that undefined policy terms in insurance policies should be given their ordinary meaning (i.e. dictionary meaning).  The dictionary provided simple meanings for “direct,” “physical,” and “loss,” to apply to the policy’s term “direct physical loss” and the court ruled that loss of the ability to use the restaurant premises to generate income under the government COVID-19 restrictions, without some other intervening condition, was covered under the policy.  The court rejected the insurer’s claim that the ordinary meaning required some physical alteration to the restaurant property and said that while both meanings proposed by the restaurants and the insurer are reasonable, the term “direct physical loss’ is, at best, ambiguous and under the Accardi case, any ambiguous terms must be construed in favor of the insured.

In a second case in the state of Pennsylvania, Taps & Bourbon on Terrace, LLC. V. Underwriters at Lloyds London, the insurer asserted a specific virus exclusion in the policy to deny coverage.  But, the judge refused to dismiss the case, even in light of this specific exclusion, because new insurance coverage law is currently being made in cases across the country for COVID business interruption claims.

There are more cases to come.  If you have not filed a claim, please let us know if you need assistance.

For more information feel free to contact Dawn:


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Information contained in this Memo is intended for informational and educational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.  While intended as informational and educational, it is considered advertising under laws of some states.  Epps & Coulson, LLP encourages you to call us to discuss these matters as they apply to you or your business.