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Business Interruption Coverage for Loss as a Result of COVID-19: Finally a Win for the Policyholders

September 08, 2020

By: James Toscano

Many businesses throughout the country have suffered losses resulting from COVID-19, including closures as a result of government orders or because of the presence of the virus. In many cases, businesses have made insurance claims based on their insurance policies that (1) don’t contain an exception for viruses such as COVID-19, and (2) provide business interruption coverage. Most insurance policies that provide business interruption coverage contain language that the policyholder must suffer “direct physical loss or damage” at or in the vicinity of the covered premises before such business interruption coverage will be triggered. The reference to physical loss or damage typically applies to covered events such as storm damage, burst pipes, power outages, etc.

After the onset of the global pandemic, when faced with the question of whether government shutdown orders entered on an emergency basis to slow the spread of an invisible, incredibly resilient and easily communicable virus would trigger business interruption coverage, the insurance companies responded swiftly with a resounding and emphatic, “No” — and quickly denied all such claims. In lock step, the insurance companies all took the same position: i.e., that there must be tangible or structural damage to satisfy the physical loss or damage requirement as a pre-condition for business interruption coverage.

Such denials resulted in hundreds, if not thousands, of insurance coverage lawsuits, including many purported class actions.

Early decisions, including those in Michigan state court, Washington, D.C., and in the Southern District of New York, favored the insurance companies. One judge from the Southern District of New York ruled in favor of an insurance company by concluding that, “[The virus] damages lungs. It doesn’t damage printing presses.” See 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)

A recent decision from the Western District of Missouri, however, in favor of the policyholders, provides a well-reasoned counterpoint to the earlier adverse decisions. In Studio 417, Inc., et al v. The Cincinnati Ins. Comp., No. 20-cv-03127-SRB, Order Denying Mot. to Dism., issued August 12, 2020 (W.D. Mo.), the court determined that, because the coverage trigger is set forth as physical loss or damage, the court “must give meaning to both terms.” The court further stated that to hold otherwise would fail to distinguish between and conflate physical loss and physical damage.

The plaintiffs in Studio 417 alleged that the virus “is a physical substance,” that it “live[s] on” and is “active on inert physical surfaces,” and is “emitted into the air.” Id. at 4. The plaintiffs further alleged that the presence of the virus “renders physical property…unsafe and unusable” and that plaintiffs “were forced to suspend or reduce business” at the covered premises. Id.

In ruling in favor of the plaintiffs/policyholders, the court cited the maxim of contract law that it must give meaning to all words in an agreement, thus including both direct physical loss and direct physical damage, as set forth in the insurance policies. The court then turned to dictionary definitions of direct, physical and loss to determine the “plain and ordinary meaning” of the phrase “direct physical loss.” Id. at 8. Relying on the cited dictionary definitions, the court ultimately ruled that plaintiffs had provided sufficient allegations of the virus’s physical presence at the premises such that the property was unsafe and unusable, thus satisfying the requirement of direct physical “deprivation” or “loss.”

While the landscape of court rulings remains far from settled, at least one court has now ruled in favor of policyholders by finding that the virus has a physical presence, that it caused “deprivation” or “loss” at the subject property, and that such findings are sufficient to invoke business interruption coverage. Retailers finally have at least one favorable ruling to point to in their ongoing efforts to recover COVID-19 losses. 

For the latest COVID-19 updates and information, visit our COVID-19 Resource Center.

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Broken contracts. Bad business practices. Stolen intellectual property. Personal and business catastrophes. These are among the most common disputes that trial attorney Jim Toscano handles, representing both individuals and companies.

Jim's extensive trial experience in high profile litigation has included:

  • defending an NBA team against reverse discrimination and defamation claims – a case that aired on Court TV when first tried and ultimately resulted in a defense verdict;
  • representing a group of prominent former NFL players in suing a Bank for negligence in allowing accounts to be opened based on forged signatures in Federal Court in Miami that settled mid-trial; and
  • successfully defending the Seminole County Supervisor of Elections in the aftermath of the controversial 2000 presidential election against claims of impropriety, a case which garnered national attention.

Jim has a significant track record as lead counsel in federal and state courts throughout Florida, including complex commercial business, real property and banking litigation, class actions, intellectual property litigation, and personal injury and wrongful death cases. Equally noteworthy is his representation of technology companies, helping them protect their intellectual property jewels—patents, trademarks and copyrights—through both preventive measures and, when necessary, litigation.

“My responsibility is to help individuals and companies solve their problems as effectively and as efficiently as possible. Sometimes the best action is to avoid court,” Jim acknowledges, “but the other side also needs to know that I am ready, willing and able to take the case to trial, if necessary, to achieve the best possible result for my client.” As a certified Circuit Court mediator, Jim has represented clients in numerous arbitrations and in hundreds of mediations.

As committed to community service as he is to his clients, Jim served an eight-year term as a member of the Board of Directors of the Second Harvest Food Bank, and has provides hundreds of hours of pro bono work, including not only legal assistance to Second Harvest, but also through serving as a Guardian Ad Litem for children in difficult family circumstances in need of legal representation. Taking on a community service leadership role at Lowndes, Jim orchestrates workplace campaigns to raise money for the Leukemia and Lymphoma Society, United Way, the Meredith Level Foundation/Endowment, and other community and civic organizations. In honor of Meredith, Jim and the firm do their “Level Best” to support the Orlando and Central Florida community, in part through an annual Community Service Day during which firm attorneys and employees volunteer a day of their time.

A huge sports fan, Jim has enjoyed his work with the Florida Citrus Sports Association, including serving on the Associate Board of Directors. Florida Citrus Sports is a not-for-profit membership organization that, through its College Football Bowl Games and other events, is dedicated to stimulating economic development and ultimately benefiting charities, educational institutions and the quality of life in Central Florida through its signature events.

Jim has also volunteered as a middle school basketball coach at St. James Cathedral School and as an Alumni interviewer for both Princeton and Duke.

Putting aside his well-known wit for a moment, Jim reflects on his many roles and activities. “Sometimes I am a trial lawyer; sometimes I am a negotiator. Sometimes I am a conciliatory voice of reason – other times, not so much. Regardless of my role, I am passionate about tackling my client’s – or my community’s – challenges head on, in whatever way is best for them.”

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