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Which Court Will Be the First to Decide Whether Business Interruption Insurance Policies Cover Losses Due to COVID-19?

Since March, businesses across the country have closed to comply with various local and state orders entered suspending business operations to prevent the spread of COVID-19.  Some of these businesses have filed insurance claims seeking coverage for the losses associated with the suspension of business. Historically, some insurance policies address coverage associated with viruses and actions taken by the government, but the coverage issues created by the Shelter-in-Place orders are novel in most jurisdictions. In the recently filed lawsuits, the policy language the businesses are invoking vary, but the arguments for coverage are similar.  Accordingly, the ultimate determination of whether the lost business income will be covered under the policies will depend upon the specific policy at issue and prior precedent in the jurisdiction where the case is pending.

The below cases are examples of some of the lawsuits that have been filed since the pandemic started.

Sharecropper LLC d/b/a Ollie Irene v. Farmers Insurance Exchange, Inc. d/b/a Farmers Insurance was filed in the Tenth Judicial Circuit of Alabama (Jefferson County District Court) on April 7, 2020. Ollie Irene is a James Beard nominated restaurant in Mountain Brook, Alabama. Ollie Irene alleges a loss of business income due to declarations and orders entered by state and local authorities prohibiting any restaurant, bar, brewery or establishment that offers food or drink to permit on-premises consumption of food or drink. As a result, Ollie Irene filed an insurance claim seeking coverage for business interruption on March 25, 2020.

The insurance claim was denied, and Ollie Irene sued its insurer, Farmers Insurance, seeking a declaration that the loss is covered under the policy. Specifically, Ollie Irene contends the policy covers losses caused by “acts or decisions of a governmental body” and direct physical losses to the restaurant, thus, the claim is covered because the local and state orders impaired the value and function of the restaurant. The complaint alleges the insurer denied the claims claiming there was no direct physical loss or damage to the restaurant and the policy excludes loss or damage caused by or resulting from any virus. Ollie Irene, however, contends the virus exclusion is not applicable because its claim is not based on the presence of COVID-19 in the restaurant, the claim is based on the direct physical loss caused by the lawful exercise of the government’s police power.

Musso & Frank Grill Co., Inc. v. Mitsui Sumitomo Insurance USA Inc. was filed in the United States District Court for the Central District of California on April 21, 2020, and alleges claims for breach of contract and bad faith. Musso & Frank has been in operation for over 100 years and is the first restaurant to have a star on the Hollywood Walk of Fame.

The restaurant alleges the emergency orders entered in Los Angeles prohibiting restaurants from serving food and alcohol on premises, forced it to suspend its operations because it had never offered “to go” food, resulting in an immediate loss of business income triggering coverage under the policy. Specifically, Musso & Frank alleges that the insurer breached the contract by denying its claim because the loss is covered under the endorsement for loss of business income caused by an act of civil authority and the virus exclusion is not applicable. Musso & Frank further contend the insurer acted in bad faith by not fairly investigating the claim before issuing the denial.

The K’s Inc. v. Westchester Surplus Lines Insurance Co. is a class action filed in the Northern District of Georgia on April 22, 2020, alleging Westchester wrongfully denied coverage for suspension of Sissy K’s business due to COVID-19. Sissy K’s is located in Boston, Massachusetts, and offers drinks, dancing, karaoke, and live music. Sissy K’s alleges it closed in response to local and state orders related to COVID-19, so it filed a claim for lost business income with Westchester.  After the claim was denied, the class action was filed seeking a declaratory judgment that the presence of COVID-19 caused a direct physical loss to the property and the suspension of operations by civil authority is covered. Sissy K’s also seeks the court to declare coverage exists under the “extra expense” and “sue and labor” provisions of the policy. In contrast to other similarly filed actions, the Westchester policy does not contain a virus exclusion.

Chickasaw Nation Department of Commerce v. Lexington Insurance Co., et al. was filed in the District Court of Pontotoc County in Oklahoma on March 24, 2020. The plaintiff is an Indian tribe that operates multiple commercial businesses in Oklahoma. The plaintiff alleges it sustained direct physical loss or damage due to COVID-19 because its businesses cannot be used for their intended purpose.  The plaintiff seeks a declaration that its insurance policies cover the losses and expenses related to the COVID-19 pandemic.

Big Onion Tavern Group, LLC, et al. v. Society Insurance, Inc. was filed in the United States District Court for the Northern District of Illinois on March 27, 2020, arising from the denial of insurance claims related to COVID-19. The plaintiffs allege they are owners and operators of restaurants and movie theaters in Chicago that closed to comply with local and state orders related to COVID-19. The parties seek a declaration that their insurance policies cover the business losses associated with the closures. In support of coverage, the plaintiffs contend prior Illinois cases have held that the presence of a dangerous substance is a covered direct physical loss, and the policies at issue do not exclude losses caused by a virus.  The plaintiffs also allege the insurer acted in bad faith by denying the claims before they were filed and by not investigating each claim. Specifically, the plaintiffs allege that the insurer issued a memorandum indicating that its policies would likely not provide coverage for losses due to a “governmental imposed shutdown due to COVID-19 (coronavirus)” because the suspension of business due to the closure orders does not constitute a “direct physical loss.”

As the pandemic continues across the country, an uptick in these filings is anticipated.  Accordingly, insurers and businesses should closely monitor these early lawsuits because they will likely set the stage for future litigation.