Coronavirus-Related Coverage Claims Flood Courts as Insureds Seek Advisory Opinions and Parties Dispute Whether Virus Satisfies Physical Injury Coverage Trigger

As anticipated, the coronavirus is generating coverage litigation as governmental bodies across the nation order the limitation of operations or closure of nonessential business. As a result, businesses across the nation are turning to their insurance carriers seeking coverage for the losses sustained only weeks, or sometimes even just days, following the issuance of the orders.

Somewhat unsurprisingly given the relatively short timeline of these losses, the bulk of the declaratory judgment actions filed thus far do not make reference to the filing of a claim, much less a claim denial. Instead, most of the actions “proactively” seek declarations that coverage exists for the purported losses. This may create the opportunity for insurers to move to dismiss the actions on the grounds of a lack of a justiciable dispute. Some insureds are attempting to avoid this outcome by including requests for declarations as to the effect of various governmental orders on the availability of coverage. Without a pending claim, it is not clear that a justiciable dispute exists, as an order from a court opining on the relevance of the orders would be merely advisory. Carriers may also be able to rely upon language in their respective policies limiting the availability of legal action to a certain time period following the denial of a claim or other similar limitation of action provisions.

Many of the actions fail to consider that “all-risk” policies still only provide coverage for business suspensions caused by “direct physical loss or damage,” whether at the insured premises (in the case of business income or extra expense coverage) or at other property (in the case of civil authority coverage). Even under an “all-risk” policy, governmental orders prohibiting the insured business from undertaking its normal operations will generally not trigger coverage absent physical loss or damage. As a result, insureds are characterizing the virus and the governmental orders as being based on physical losses, often claiming that the virus’s alleged capability to infect surfaces for extended periods of time is the cause for the shutdown orders, while stopping short of alleging their own business was contaminated by the virus. In recognition of the potential gap in coverage caused by the physical loss requirement, insureds may have had the opportunity to purchase specific riders or endorsements that contemplate losses caused by viral or pandemic events; one action described below makes a claim under such an endorsement.

Below are summaries of some of the coverage-related litigation filed to date. The Faegre Drinker Property & Casualty Team continues to monitor the dockets to identify new actions and developing trends in this space and will provide updates as appropriate.

Restaurants and Movie Theaters

Florida Sports Bar Seeks Declaration of Rights Under Property Policy Following Denial of Claim Based on Lack of Physical Injury to Trigger Coverage

Prime Time Sports Grill, Inc. d//b/a Prime Time Sports Bar v. Certain Underwriters and Lloyd’s London
U.S. District Court for the Middle District of Florida

A Tampa-area sports bar filed a declaratory judgment action seeking a declaration of coverage under a commercial property insurance policy that purportedly provides coverage for loss of business income and operating expenses. The complaint alleges the sports bar employs 20 to 25 employees with gross receipts in excess of $150,000 against monthly operating expenses of $120,000. The sports bar filed a claim seeking coverage for income losses and expenses, which it says were attributable to Florida Gov. Ron DeSantis’s March 17, 2020 governmental suspension of businesses including restaurants and bars, as well as an April 1, 2020 order instructing Floridians to “stay at home” for 30 days. The carrier denied the claim because both the general policy and the business income provision only provide coverage for losses that result from a “direct physical loss.” While the business income provision provided additional coverage for losses caused by “action of civil authority,” that coverage was also only available where the original loss was the result of physical damage.

Michelin-Starred Restaurants Seek Declaration of Rights Under Property Policy With Additional Business Risk Coverages Following Denial of Business Income Loss Claim

French Laundry Partners, LP, et al. v. Hartford Insurance Company, et al.
Superior Court for the State of California, County of Napa

Two world-famous restaurants located in the Napa Valley region, The French Laundry and Bouchon Bistro, filed suit against their carrier following the denial of a business income claim under a bespoke property policy with additional business risk coverage. The insured restaurants allege they have coverage under an all-risk policy extending coverage to direct physical loss or damage caused by the virus, including coverage under a Civil Authority extension to the coverage. In an effort to tie the business losses to a physical injury, the insureds allege that an order issued by the Napa County Health Officer instructing all individuals to stay at home, with the exception of providing or receiving essential services and/or activities, was necessary because virus “physically infects and stays on surfaces of objects or materials, ‘fomites,’ for up to twenty-eight days.” The insureds thus argue that their losses are based not only on physical damage to the property, as a result of the potentially infected fomites, but also damage to the immediate area of the insured properties. The action seeks declarations that the order constitutes a prohibition of access to the insured premises, that coverage is triggered because the policy does not include an exclusion for a viral pandemic, and that it actually extends coverage for loss or damage due to the virus. It also asks the court to declare that the policy provides coverage for any current or future civil authority closures of restaurants due to physical loss or damage from the coronavirus, and that the policy provides business income coverage in the event the coronavirus has caused a loss or damage at the insured premises.

New Orleans Restaurant Requests Clarification of Scope of Gubernatorial and Mayoral Orders, Declaration of Rights Under Policy in Event of Losses

Cajun Conti, LLC, et al. vs. Certain Underwriters at Lloyd’s London, et al.
Civil District Court for the Parish of Orleans, Louisiana

A New Orleans restaurant, located in the heart of the French Quarter, filed a declaratory judgment action against its carrier seeking a declaration that its “all-risk” policy will provide coverage for losses stemming from various governmental orders prohibiting Louisiana and specifically New Orleans businesses from operating. The insured alleges the policy covers all losses unless specifically excluded by the terms of the policy and, because the policy does not exclude losses arising from a viral pandemic, the policy therefore covers the business’s losses.

Nevertheless, the complaint goes to great lengths to tie the losses to a physical injury, claiming “[t]he virus is physically impacting public and private property[] and physical spaces in cities around the world.” Although filed by different attorneys, the complaint also raises the same infected “fomites” argument raised in the French Laundry and Bouchon Bistro action, adding that the severity of the infection is particularly significant “in humid areas below eighty-four degrees.”

The complaint also seeks declarations related to the applicability of a gubernatorial and mayoral orders restricting the operations of various businesses in New Orleans, as well as a declaration that, if applicable, a civil authority provision of the insured’s policy is triggered. The complaint concedes that it is unclear whether the gubernatorial order applies to the insured’s restaurant and that a local order would still allow the restaurant to operate at a reduced seating capacity. The insured alleges that the orders are likely to become more restrictive since cities such as New York City have been ordered to only operate takeout and delivery operations or close. Thus, the complaint seeks a declaration that any future civil authority shutdowns are 1) due to physical loss from coronavirus contamination, and 2) that the policy provides business income coverage in the event that the coronavirus has contaminated the insured’s premises.

Texas Movie Theaters Seeks Coverage Under “Pandemic Event Endorsement,” Specifically Alleging Action Is One of First Impression

SCGM, Inc. v. Certain Underwriters at Lloyd’s
U.S. District Court for the Southern District of Texas

A group of movie theaters based out of Sugar Land, Texas has filed suit against its carrier in the Southern District of Texas seeking coverage under a Pandemic Event Endorsement alleging its claim is one of first impression for the court. The insured alleges the Endorsement is designed “to provide coverage for insureds who experience financial damages from business interruption during pandemics,” an event allegedly defined as “the announcement by a Public Health Authority that a specific Covered Location is being closed as a result of an Epidemic declared by the [Centers for Disease Control and Prevention] or [World Health Organization].” The Endorsement further lists specific covered diseases, including “Severe Acute Respiratory Syndrome-associated Coronavirus (SARS-CoV) disease.”

The insured alleges this endorsement has been triggered by a March 11, 2020 declaration by the World Health Organization (WHO) that that the coronavirus outbreak constituted a pandemic, as well as a number of governmental orders impacting restaurants, bars, nightclubs, lounges, taverns and private clubs. Following the issuance of these orders, the insured movie theater group “in accordance with the public health recommendations and directives” elected to close all of its locations. Two days later, a gubernatorial order prohibited Texans from gathering in groups of ten or more, and the Texas Department of State Health Services issued a proclamation of a public health disaster across the state.

Following its closure, the insured filed a claim with its carrier. It received a notice indicating that coronavirus-based claims were not covered under the Pandemic Event Endorsement because the COVID-19 virus is not a named disease under the endorsement. The insured concedes it has not received a formal denial of coverage, yet seeks a declaratory judgment of coverage that, among other things, the WHO’s declaration satisfies the definition of Epidemic, that various governmental orders satisfy the term Pandemic Event and that the SARS-CoV-2 pathogen is a Covered Disease under the Pandemic Event Endorsement. The action also alleges counts of anticipatory breach/repudiation, breach of the duty of good faith and fair dealing, and gross negligence.

Los Angeles Sushi Restaurant Seeks Declaration of Rights Following Mayoral Orders Limiting Restaurant Activity, Concedes Physical Loss Is Required to Recover

Scratch Restaurants LLC v. Farmers Group Inc., et al.
Los Angeles County Superior Court, California

A sushi chain with several locations throughout Los Angeles, California filed a declaratory judgment action in California state court seeking a declaration of coverage under a bespoke businessowners’ policy that allegedly provides coverage for actual loss of business income. While the complaint does not specify a start date on which the sushi chain seeks coverage, it makes reference to specific orders from Los Angeles Mayor Eric Garcetti and the Santa Barbara City Council prohibiting dine-in food services and orders from public health departments ordering individuals to “stay at home” except to provide or receive essential services or engage in essential activities. The complaint seeks declarations that the various orders constitute a prohibition of access to the insured premises by a civil authority under the policy and therefore “trigger coverage under the policy if Plaintiff can prove that there has been a physical loss and damage to the property in the immediate area of the Insured Properties.” Thus, this action concedes what the other actions attempt to avoid – that a physical loss is often required to recover under the business income provisions of the policies, particularly where the business income coverage is tied to a property policy. The action also seeks a declaration that the sushi chain is entitled to $10,000 in claim preparation coverage provided by the policy.

Chicago-Area Restaurants, Movie Theaters Allege Bad Faith Action Against Carrier Purportedly Denying Coronavirus-Related Claims as Matter of Internal Policy

Big Onion Tavern Group, LLC, et al. v. Society Insurance Co.
U.S. District Court for the Northern District of Illinois

A group of Chicago-based restaurants and movie theaters seeks a declaration of rights under a commercial property insurance policy that purportedly provides coverage resulting from the “necessary suspension” of business operations as a result of a government order. Like others mentioned herein, the insureds allege the policy is “all-risk” and that, because it does not exclude losses from viruses or pandemics, the policy must provide coverage for their business income losses and extra expenses. The insured does not concede that the business interruption must be caused “by direct physical loss of or damage to covered property at the insured’s premises.” The insureds cite to gubernatorial Executive Orders 2020-07 and 2020-10 requiring all nonessential businesses to close from March 16, 2020 through March 30, 2020. Those orders have since been extended through April 30, 2020. The complaint alleges that the carrier denied the claims as a matter of internal policy and without conducting an investigation of the claim.

The action seeks a declaration of rights pursuant to the policy and a single count of breach of contract based on the denials. The action further includes a claim for statutory bad faith damages based on the carrier’s purported practice of immediately denying claims without a reasonable investigation and a purported plan to discourage claim notifications involving insurance agents.

Illinois Tavern Group Brings Purported Class Action Seeking a Declaration of Coverage

Billy Goat Tavern I, Inc., et al. v. Society Insurance
U.S. District Court for the Northern District of Illinois

An Illinois tavern group with eight locations within the state has filed suit against its carrier following denial of its claim for lost income as a result of the COVID-19 pandemic and various governmental orders limiting business operations. In contrast to other actions, this lawsuit was pled as a class action, and seeks to represent the following class:

All Illinois businesses offering food or beverages for on-premises consumption that: (1) are covered under Society Insurance “all-risk” insurance policies containing policy form number “TBP13 05-15”; (2) have made a claim for lost business income as a result of COVID-19 and Executive Orders 2020-07 and 2020-10; and (3) been denied coverage.

The lawsuit asserts a claim for breach of contract and seeks declarations that the plaintiffs have sustained a direct physical loss of the insured premises because of COVID-19 and the relevant Executive Orders, that the plaintiffs sustained lost business income due to a necessary suspension of operations following a direct physical loss of the premises under the applicable policies of insurance, and that the business income the plaintiffs lost is a covered loss under the applicable policies of insurance.

Other Businesses

Beauty Supply Store Files Suit Against Carrier Following Denial of Business Interruption Claim

Barbara Lane Snowden DBA Hair Goals Club v. Twin City Fire Insurance Company
District Court, Harris County, Texas

A beauty supply store specializing in wigs and other hair pieces based outside of Houston, Texas, has filed suit against its carrier following the denial of its claim for business interruption coverage. The insured sought coverage in connection with losses allegedly suffered as a result of an order issued by Harris County local government. The action was filed in the District Court of Harris County, Texas. Although the complaint provides no facts surrounding the claim or the investigation thereof, the insured alleges that its carrier has breached the policy by denying the claim, and has violated the Texas Unfair Claim Settlement Practices Act by failing to conduct a full and fair claim investigation and make prompt payment of its claim. The complaint also alleges a single count of the breach of good faith and fair dealing. The action seeks actual damages as well as the treble damages, interest and attorneys’ fees made available under the statutory claims. However, presumably to avoid removal to federal court, the plaintiff pleads that the total damages will be less than $75,000.

Scuba Shop Sues Carrier for Statutory Bad Faith Following Denial of Claim

Mace Marine Inc., d/b/a Conch Republic Divers v. Tokio Marine Specialty Insurance Company
Monroe County Circuit Court, Florida

A Florida scuba diving shop experienced a decline in business as a result of various governmental orders restricting tourism and travel in Monroe County, Florida. Later orders restricted public access to businesses deemed nonessential. The plaintiff tendered a claim to its insurer, but the claim was denied. The plaintiff does not allege that its property was ever contaminated by the virus or otherwise experienced a direct physical loss. Rather, the plaintiff alleges that the mere risk of contamination could constitute a direct physical loss under the policy. The plaintiff seeks, among other things, declarations from the court that “a pandemic is a covered cause of loss not subject to any exclusion under the Policy,” “contamination from COVID-19 constitutes a direct physical loss or damage to property,” “the inability to use property because of the risk of contamination from COVID-19 constitutes a direct physical loss or damage to property,” and the “acts of Civil Authority are tantamount to a direct physical loss or damage to property.” The plaintiff further seeks statutory bad faith damages, including attorneys’ fees and interest.

Dental Office Sues Carrier for Statutory Bad Faith Following Denial of Claim

Sandy Point Dental P.C. v. The Cincinnati Insurance Company, et al.
U.S. District Court for the Northern District of Illinois

An Illinois dental office experienced a decline in business as a result of various orders from the state of Illinois aimed at slowing the spread of the COVID-19 pandemic. In particular, the state of Illinois has deemed most routine dental services as not essential, and has further ordered all nonessential businesses to close. As a result of the orders, dentists may only still perform emergency dental services, resulting in a sharp decrease in the amount of work the dental office can perform. The plaintiff does not allege that its property was ever contaminated by the virus. Among other things, the plaintiff seeks a declaration that the losses it has sustained are covered losses, or alternatively, that the insurer has waived its right to deny coverage by issuing a blanket denial without performing an adequate investigation. The plaintiff seeks compensatory and statutory damages, as well as attorneys’ fees and interest.

Tribal Lawsuits

Choctaw and Chickasaw Nations Seek Coverage Under Tribal Property Insurance Programs

Choctaw Nation of Oklahoma v. Lexington Ins. Co., et al.
District Court of Bryan County, Oklahoma

Chickasaw Nation Department of Commerce v. Lexington Insurance Company, et al.
District Court of Pontotoc County, Oklahoma

An Oklahoma City law firm has filed nearly identical declaratory judgment actions on behalf of the Choctaw Nation of Oklahoma and the Chickasaw Nation Department of Commerce seeking declarations of rights under each Nation’s respective “Tribal Property Insurance Program Proposal.” The Programs are purported to implicate 15 insurers each and provide underwriting, claims/risk management and administrative services to the respective nations, along with “all-risk” benefits under the policies that make up the programs. Each complaint merely alleges that as a result of the COVID-19 pandemic:

[T]he Nation’s Property sustained direct physical loss or damage and will continue to sustain direct physical loss or damage covered by the policies, including but not limited to business interruption, extra expense, interruption by civil authority, limitations on ingress and egress, and expenses to reduce loss. As a direct result of this pandemic and infection, the Nation’s Property has been damaged, as described above, and cannot be used for its intended purpose.

Despite alleging no additional facts specific to the losses, nor alleging that any claim has been filed, each Nation seeks a declaration that the “policies cover the Nation’s losses and expenses related to the COVID-19 pandemic and infection and the Defendant Insurers are responsible for said losses and expenses and such further relief which may be appropriate.” The complaints also specify that the complaints are rooted in contract and insurance laws under Oklahoma law and therefore should not be removed to federal court.

As the number of cases around the world grows, Faegre Drinker’s Coronavirus Resource Center is available to help you understand and assess the legal, regulatory and commercial implications of COVID-19.