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COVID-19 Business Loss Coverage Update

Author: David Kahn

Guest Editors: Wendy Skillman, Ashley Kaye

January 11, 2021 9:00am

Background

According to Law360, there are over 1,400 federal lawsuits fighting denials by insurance carriers for COVID-19 business loss coverage and over 600 such suits in state court. In last month’s Newsletter, we reported the dismissal of the complaint of two Fresno hotels claiming business losses based on the virus exclusion in their respective insurance policies continuing the trend of California courts. (West Coast Hotel Management, LLC v. Berkshire Hathaway Guard Insurance Companies (WL 6440037). As discussed below, two more cases demonstrate the desperation of small businesses straining to interpret insurance policy language to get their lawsuits past the pleading stage.

Plaintiffs Find Difficulty Making Claims under Virus Exclusion

In Franklin EWC, Inc. v. Hartford Financial Services Group et. al., the Northern District Court dismissed the suit of a waxing salon based on the virus exclusion in its insurance policy. Due to Governor Newsom’s mandatory stay at home orders, the waxing salon alleged it had to shut down in March and lay off all of its employees. After its claim for business interruption coverage was denied, the salon sued its insurance carrier, Sentinel, and its holding company, The Hartford. In an earlier ruling, the district court allowed the salon an opportunity to amend its complaint to state facts which might trigger business loss coverage under the policy.

During the hearing on the amended complaint, the salon argued the virus exclusion was intended to apply to viruses that started on the business premises, not to losses from a pandemic. The district judge did not agree, and found the plain meaning of the exclusion applies to any losses directly or indirectly caused by a virus. The court also rejected the salon’s attempt to claim losses under the limited virus coverage provision because the limited virus coverage only applies to a virus which results from another covered loss.  The salon argued the limited virus coverage provision was illusory because none of the other covered losses cause viruses. However, the judge gave an example of a virus transmitted by pigs via a tornado as a scenario which could trigger the limited virus coverage.

Policies Without Virus Exclusions

What about a policy which does not have a virus exclusion?  Such is the issue in Steven Baker et. al. v. Oregon Mutual Insurance Company, a putative class action suit venued in the Northern District Court.  Plaintiff Chloe’s Café claims losses from a partial business closure due to contaminated air from the COVID-19 virus. The relevant insurance policy furnished by Oregon Mutual does not have a virus exclusion.  The café’s argument to trigger coverage is physical damage from floating COVID-19 particulates in the air.

Oregon Mutual in turn argued the case has nothing to do with physical damage because people are the danger, which is why there is a vaccine. The carrier also argued the café has not suffered losses because it is still open for takeout and limited dining depending on state and local orders.  Finally, Oregon Mutual argued all of the federal courts in California so far have held there is no business loss coverage with or without a virus exclusion in the policy. As reported by Law360, the judge expressed sympathy for struggling restaurants, calling the situation caused by the pandemic “distressing.” The judge took the matter under submission.

Takeaway

Businesses are trying to find creative ways to establish coverage for business losses during this unprecedented global pandemic, but courts are strictly interpreting the businesses’ insurance policy provisions and the terms of the applicable policy, even when virus coverage is included.

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