Ruling May Portend Bitter End for COVID Business Interruption Claimants

A federal appellate court ruling that dismissed a dental practice’s COVID-19 business interruption claim might be the beginning of the end for policyholder arguments that income lost because of government shutdowns should be recovered through commercial property insurance policies.

The US 8th Circuit Court of Appeals’ July 2 decision in Oral Surgeons v. Cincinnati Insurance Co. echoed dozens of district court rulings that granted dismissal and summary judgment motions by insurers that argued SARS-CoV-2 did not cause a direct physical loss to property.

Insurers have won more than 90% of the federal court decisions issued so far, according to a litigation tracker maintained by the University of Pennsylvania. Insurers have won 70% of the time in state court if dismissals without prejudice count as an insurer win.

Robert Hartwig, a University of South Carolina economics professor and former head of the Insurance Information Institute, told the Claims Journal during an interview Monday that the Oral Surgeons decision won’t resolve the COVID business-interruption issue in all courts, but will almost certainly stem the flow of litigation.

“The appellate court decision is a very bright line that is going to seen by all of the plaintiffs’ attorneys who are thinking about filing lawsuits,” he said, adding later: “The number of new cases is going to be close to zero fairly quickly.”

Hartwig said the insurer experience with COVID-19 business interruption claims parallels plaintiff efforts to persuade the courts that damages caused by Hurricane Katrina in 2005 were caused by wind instead of flooding. He said it took about two years for insurers to win appellate court judgments that Katrina flood damage was excluded from standard homeowners’ policies. The industry had to contend with unprecedented political pressure from plaintiffs’ attorneys in the meantime.

Back then, Sen. Trent Lott of Mississippi fought a well-publicized court battle with State Farm after the insurer denied his claim for hurricane damage to his home in Pascagoula. The suit was settled before trial.

In 2020, President Donald Trump — after speaking with celebrity chefs and their attorneys — said during a press conference that businesses that purchased insurance policies with no virus exclusions should be paid for business income lost because of government-ordered shutdowns.

Hartwig said both US courts appear to be coalescing around the opinion that the coronavirus does not cause direct physical damage even more quickly than they collectively accepted the insurer argument that most Katrina damages were not covered because of the flood exclusion. He noted that when he testified about pandemic risks during a Senate subcommittee hearing on July 22, none of the members asserted that business income lost because of virus-related shutdowns should be covered.

Hartwig said there may a few court opinions to the contrary, but the direction of the courts is clearly favoring insurers.

“The path to judicial clarity is not a linear path,” Hartwig said. “In the case of business interruption in COVID, we make take 10 steps forward and one step back.”

There have been numerous outlier court decisions, most from state courts. The most recent came on July 12, when a Lackawanna County, Pennsylvania judge rejected Cincinnati’s Insurance Co.’s motion to dismiss a business-interruption lawsuit filed by Brown’s Gym.

But Hartwig said the investment that insurers made defending against COVID-19 business interruption claims is paying off. In fact, he predicted that property and casualty insurers will likely be releasing reserves because their losses were less than expected at the pandemic’s onset last year.

“The industry was necessarily going to have to go to the mat on this issue to defend the integrity of the contract,” Hartwig said. “To not defend the integrity of the contract would have set a horrible precedent.”

The 8th Circuit’s ruling in Oral Surgeons certainly won’t resolve the business-interruption issue. Appeals are pending in 10 other federal circuit courts and 26 state appellate courts, according to the litigation tracker. Hartwig said plaintiffs’ attorneys are very adept at finding jurisdictions that will grant favorable rulings.

Insurance defense attorney Roy A. Mura in Buffalo, New York said the impact of the Oral Surgeons decision will be limited. For one thing, he said the appellate panel did not address plaintiff attorney pleadings that state SARS-Cov-2 was physically present on properties; the court ruled that shutdown orders issued because of the pandemic did not create a recoverable loss.

Mura said in an email that a footnote in the decision notes that it the panel was not rendering any opinion about whether a policyholder can recover if the virus was physically present. What’s more, he said the circuit court decision was based on Iowa law and stated that Minnesota law was very similar.

“The ‘loss of use in and of itself equals direct physical loss’ argument has always been one of the weakest arguments of policyholders in COVID-19 business interruption coverage lawsuits — one made necessary when the policy under which coverage is sought includes a virus exclusion,” Mura said.

On the other hand, Mura said that some of the appellate panel’s statements in its decision will have persuasive value in other jurisdictions. The opinion noted that the policy Cincinnati issued to Brown’s Gym provided coverage for business income lost only until the building is repaired, rebuilt, replaced or the business is relocated. He said insurers have been arguing from the start that business interruption insurance coverage is intended only for the “period of restoration.”

“We now have a federal appellate court agreeing with numerous federal and state trial-level courts that have concluded the same,” Mura said. “I expect insurers will be quoting those sentences in their motion papers going forward, regardless of the venue and jurisdiction.”

Policyholder attorneys say they are worried that the 8th Circuit and other courts are overlooking the strength of their arguments.

K. James Sullivan, a partner with the Calfee Law Firm in Cleveland, said in an email that a federal appellate court decision, because of its high-profile status, can “take a life of its own that is outsized in relationship to the actual content of the opinion itself.” He said the insurance industry surely will trumpet the decisions in legal articles, presentations and lobbying efforts.

But Sullivan said if other courts avoid making knee-jerk reactions, they will see that the facts in Oral Surgeons are distinguishable on the allegations and facts from many of the cases around the country.

“Moreover, there are credible ways for policyholders to argue the 8^th Circuit got it wrong even based on the allegations and facts presented in that specific case, and thus argue that whatever court they are before should wholly disregard Oral Surgeons,” he said. “If policyholders can effectively convey these things to courts, then indeed this ruling may ultimately have limited real-world impact on cases around the country.”

Sullivan said policyholders have strong “linguistic” and “common sense” arguments that business interruptions caused by COVID-19 should be covered.

“The phrase ‘direct physical loss of or damage to property’ is a two-part clause such that ‘physical loss of [property]’ and ‘damage to [property]’ necessarily have different meanings given that courts typically don’t read two clauses in insurance policies as wholly redundant,” he said. “Here, even if a given physical location does not have the virus present on its surfaces or in its air, nevertheless there was a physical loss by virtue of the property being functionally unusable or materially less usable during a significant portion of the pandemic.”

Law professors Erik Knusten of Queen’s University and Jeff Stempel at the University of Nevada argued in a blog post last week that much of the insurer success is attributable to a public relations campaign by the industry, which many judges appear to have subconsciously accepted, that forcing insurers to cover COVID losses would financially ruin the industry.

Knutsen and Stempel first expressed that opinion in an article published in late 2020 titled Infected Judgment.

“The problem we identified in 2020 has only gotten worse in 2021 as federal courts in the most recent decisions largely have eschewed fresh analysis in favor of treating the issue as determined by what one might term the ‘first wave’ of trial court decisions,” the law professors said. “At least in federal court, a cascade effect appears to have taken hold, with attendant reflexive resistance to COVID coverage rather than the closer and more sophisticated analysis the matter deserves.”