There Must be Physical Damage to Property to Collect Business Interruption Benefits
Shutting Down a Business Because of the Novel Coronavirus, or COVID-19 is Not Direct Physical Damage in West Virginia
First party property insurance, whether designated as “all risk” or “direct risks of physical loss” not excluded require that there be physical loss to the property, the risk of loss of which is insured. Because of orders from state governments requiring businesses to shut down to avoid the spread of the disease business owners attempt to regain their losses by making a claim under the business interruption provision of commercial property policies.
In Uncork And Create LLC v. The Cincinnati Insurance Company, et al., Civil Action No. 2:20-cv-00401, United States District Court For The Southern District Of West Virginia Charleston Division (November 2, 2020) analyzed the problem as have most courts presented with the issue and decided that the virus caused no physical damage to the property.
The Plaintiff, Uncork and Create LLC, initiated this purported class action against the Defendants, the Cincinnati Insurance Company, the Cincinnati Casualty Company, and the Cincinnati Indemnity Company (collectively, Cincinnati). The Plaintiff is a creative events company with locations in Barboursville and Charleston, West Virginia.
The Plaintiff had an “all-risk” commercial property coverage insurance policy from Cincinnati which was in effect at all relevant times. The Policy provides coverage, with specified exclusions, for a “loss,” defined as “accidental physical loss or accidental physical damage.” In the event of a covered loss, the Policy includes coverage for loss of business income during a suspension of operations, including such a suspension sustained due to a civil authority prohibiting access to the premises.1
On March 16, 2020, the Governor of West Virginia declared a state of emergency related to the novel coronavirus, or COVID-19, pandemic. On March 23, 2020, the Governor issued an Executive Order requiring all non-essential businesses to cease all activities beyond minimum basic operations to maintain inventory, process payroll, etc., effective at 8:00 p.m., on March 24, 2020. Uncork and Create was among the non-essential businesses shut down as a result of the Governor’s order. The Plaintiff incurred and continues to incur a loss of business income and other additional expenses.
The Plaintiff timely notified Cincinnati of its claim based on the interruption to its business. Cincinnati denied the claim stating that the claim did not involve a direct physical loss at the Plaintiff’s premises. The Plaintiff contended that the Governor’s order requiring the business to close constitutes a covered cause of loss under the Policy, and/or that the virus itself causes direct physical loss or damage and is thus a covered cause of loss.
The Defendants moved to dismiss, asserting that the factual allegations do not establish that the Plaintiff is entitled to relief. They argue that physical loss or physical damage to the covered property is a prerequisite to coverage, and closure of a business due to the threat posed by a virus does not constitute physical loss or damage. They point out that COVID-19 harms people, not property.
Under West Virginia law, the scope of coverage provided by an insurance contract, absent factual disputes, is a question of law. Language in an insurance policy should be given its plain, ordinary meaning. Clear and unambiguous provisions are not subject to judicial construction or interpretation.
The novel coronavirus has no effect on the physical premises of a business. Non-essential businesses were ordered to shut down to prevent people from exposing one another.
The majority of courts to address the issue have found that COVID-19 and governmental orders closing businesses to slow the spread of the virus do not cause physical damage or physical loss to insured property. In essence, plaintiff seeks insurance coverage for financial losses as a result of the closure orders. The coronavirus does not physically alter the appearance, shape, color, structure, or other material dimension of the property. Consequently, plaintiff has failed to plead a direct physical loss—a prerequisite for coverage.
While factual allegations drive the analysis of a motion to dismiss, courts are not required to set aside common sense. There is a similar risk of exposure to the virus in any public setting, regardless of artful pleading as to the likelihood of the presence of the virus. Even when present, COVID-19 does not threaten the inanimate structures covered by property insurance policies, and its presence on surfaces can be eliminated with disinfectant. Thus, actual presence of the virus would not be sufficient to trigger coverage for physical damage or physical loss to the property. Because routine cleaning, perhaps performed with greater frequency and care, eliminates the virus on surfaces, there would be nothing for an insurer to cover, and a covered “loss” is required to invoke the additional coverage for loss of business income under the Policy.
COVID-19 poses a serious risk to people gathered in proximity to one another, and the governmental orders closing certain businesses were designed to ameliorate that risk. If people could safely congregate anywhere without risk of infection, the Plaintiff alleged no facts to suggest any impediment to Uncork and Create’s operation. No repairs to the premises are necessary for its safe occupation in the event the virus is controlled and no longer poses a threat.
In short, the pandemic impacts human health and human behavior, not physical structures. Those changes in behavior, including changes required by governmental action, caused the Plaintiff economic losses.
The Court is not unsympathetic to the situation facing the Plaintiff and other businesses. But the unambiguous terms of the Policy do not provide coverage for solely economic losses unaccompanied by physical property damage. Therefore, the motion to dismiss must be granted.
Insurance is a contract, nothing more. A commercial property policy promises to indemnify the insured against the risk of loss of the property that is the subject of the insurance. There is no question that Uncork and Create incurred losses as a result of the virus and the Governor’s orders. The problem is that there was no direct physical damage to the property, the risk of loss of which, was insured. Therefore the is nothing to repair or replace and no physical damage to the property that is the subject of the insurance. Insurers are not eleemosynary society. Insurers do not decide claims decisions on whether it is charitable to do so but must make decisions based on the clear and unambiguous language of the policy.
© 2020 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
Read posts from Barry Zalma at https://parler.com/profile/Zalma/posts
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