Nation’s 1st COVID-19 Business-Interruption Suit Headed to Trial [Update]

By Jim Sams | November 12, 2020

A trial will begin Monday in what is thought to be the first lawsuit to be filed against an insurer for denying coverage for business-interruption losses caused by COVID-19 shutdown orders.

Judge Paulette R. Irons ruled against a motion for summary judgment filed by Lloyd’s of London underwriters that sought dismissal of a suit filed by the owners of Oceana Grill, New Orleans attorney John Houghtaling III confirmed in an email Tuesday.

The judge said there is a genuine question of material fact whether the restaurant, located in the heart of New Orleans’ French Quarter, suffered a direct physical loss because of the presence of coronavirus in the environment. She said in an order dated Nov. 4 that a liberal interpretation of covered losses is appropriate in light of Chinese drywall litigation, where federal judges ordered insurers to cover damages to thousand of homeowners in Louisiana, Mississippi, Florida, Virginia, Texas and Alabama who installed effective drywall that emitted odors and sometimes corroded wiring and plumbing.

“The question of whether COVID is a Covered Cause of Loss is a genuine issue of material fact, and Plaintiffs have alleged its presence at locations surrounding its insured premises, including a hospital,” Irons wrote.

“Whether the Orders prohibited access to the insured premises is also a genuine issue of material fact. The restaurant had to drastically change its operations to exclude sit-down patrons, which was previously the heart of its business, because the Orders restricted their presence in the building.”

Houghtaling said a trial in the Civil District Court for Orleans Parish is scheduled to begin on Monday. He declined further immediate comment.

Cajun Conti, which does business as Oceana Grill, filed suit against Lloyd’s on March 16, even before it was known whether emergency orders by Gov. John Bel Edwards would impact the restaurant’s revenues. Houghtaling told the Claims Journal at the time that he was seeking a declaration that coverage was owed for any lost income under his client’s pricey all-risk policy because insurers at that time were signaling that they would categorically deny any business-interruption claims caused by COVID-19 restrictions.

Since then, business owners who purchased policies without any virus exclusion have been winning against insurer motions to dismiss more than half the time, according to a COVID-19 litigation tracker maintained by the University of Pennsylvania’s Carey Law School. As of Tuesday, state and federal courts had denied 10 motions to dismiss in claims involving policies with no virus exclusion and granted nine.

On the other hand, insurers that issued policies with virus exclusions are winning most of the time. Just this month, federal courts dismissed at least seven lawsuits by policyholders seeking business-interruption coverage because of COVID-19 shutdowns. Each of the policies excluded coverage for viruses.

In total, state and federal judges have granted 31 motions to dismiss and denied seven in cases involving policies with virus exclusions.

“Bottom line: insurers are winning, overwhelmingly, when their policies have virus exclusions,” Carey Law School Professor Tom Baker wrote in an Oct. 22 blog post. “But they are losing, at least at the motion to dismiss stage, when their policies do not have virus exclusions.”

The trend has become even more pronounced since that blog was posted.

The ruling in the Oceana Grill case marks another initial win for business owners with no virus exclusions in their policies.

Two cases have been decided on their merits. A state judge in Durham County, North Carolina ruled Oct. 7 that coronavirus orders that restricted the use of a group of 16 restaurants in the Raleigh-Durham area constituted a “direct physical loss” that was covered by the policy. The restaurant’s policies did not have a virus exclusion.

The Superior Court of the District of Columbia on Aug. 6 granted a motion to dismiss filed by Erie Insurance Exchange against a lawsuit filed by a restaurant chain that sought coverage because restricted use caused by public health orders. The policy did not have a virus exclusion, but the judge’s order focused on the lack of any tangible change to the insured properties.

Judges made similar comments in rulings this month that dismissed lawsuits from businesses with policies that had virus exclusions. The Crowell Moring law firm provided excerpts from those orders in a client alert posted on its website:

  • The U.S. District Court for Southern Florida stated “there were no physical harms to the insured premises because plaintiffs’ injuries are purely economic.” The court granted a motion by The Hartford Casualty Insurance Co. to dismiss a dental practice’s lawsuit.
  • The U.S. District Court for Southern Mississippi found that a restaurant had not shown that its property was damaged or the owner had been “permanently dispossessed” by the virus, and the virus exclusion barred coverage anyway. Travelers Casualty Insurance Co. of America won on its dismissal motion.
  • The Superior Court of New Jersey granted Selective Fire and Casualty Insurance Co.’s motion to dismiss a lawsuit filed by a bakery. The court found that the complaint failed to allege any direct physical loss or damage and that the policy’s virus exclusion was clear and unambiguous.

According to an Oct. 22 report by the National Association of Insurance Commissioners, U.S. insurers have received 201,285 claims for business-interruption losses caused by coronavirus orders. Of those, 164,178 were closed without payment, 34,106 remained open and 3,001 were paid.

In a separate report, NAIC said its analysis showed that 83% of policies have exclusions for virus, bacteria and pandemics and 98% require a physical loss for a claim.

“This is not surprising as insurance works well and remains affordable when a relatively small number of claims are spread across a broader group,” NAIC said. “It is therefore not typically well suited for a global pandemic where virtually every policyholder suffers significant losses at the same time for an extended period.”

About the photo: The interior of Oceana Grill in New Orleans is shown.

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