Business Interruption Insurance Update

On August 13, 2020, the Superior Court of New Jersey denied defendant’s argument that business interruption insurance does not cover financial losses due to the COVID-19 pandemic. Optical Servs. USA/JCI v. Franklin Mut. Ins. Co., No. BER-L-3681-20, (N.J. Super. Ct. Aug. 13, 2020). Defendant’s made two primary arguments. Its first argument was that the COVID-19 pandemic did not create a “physical alteration or change” plaintiffs’ premises, rather the pandemic created only a risk for retail businesses with no physical alteration to the premises. Defendant’s Motion to Dismiss, Optical Servs. USA/JCI, No. BER-L-3681-20, at *3. The second argument was that defendant’s business interruption insurance policy only covers businesses physically unable to access the premises due to events such as a “fire, collapse, or other loss to an adjacent premises,” and the pandemic did not prohibit people from accessing the premises. Id. at *9.

Plaintiffs in Optical Services are one of many businesses looking to have their losses from the pandemic covered by its business interruption insurance policy. Although the court in Optical Services denied defendant’s arguments, most courts so far have agreed with insurers’ legal arguments in concluding that losses from the pandemic are not covered under business interruption insurance policies. As of September 1, 2020, insurers have had policyholders’ claims dismissed in “state courts in California, Michigan, and the District of Columbia, and in federal courts in Texas and California.” Leslie Scism, Insurance Firms Gain Early Lead in Coronavirus Legal Fight With Businesses, Wall. St. J. (Sept. 1, 2020).

According to University of Pennsylvanian Carey Law School’s Covid Coverage Litigation Tracker, business across the United States have filed 1,230 cases seeking coverage from their business interruption insurance. Ten of these cases have been dismissed and decided in favor of insurance companies, while four of these cases have denied an insurance company’s motion to dismiss. Large quantities of insurance policies explicitly exclude coverage of claims arising from viruses, and many policies state that coverage under business interruption insurance require “direct physical loss or damage.” The courts have generally interpreted “direct physical loss or damage” to explicitly require “some form of actual, physical damage to the insured premises to trigger loss of business income and extra expense coverage.” Newman Myers Kreines Gross Harris, P.C. v. Great Northern Ins. Co., 17 F. Supp. 3d 323, 331 (S.D.N.Y. 2014).

Many businesses are attempting to work around the physical-damage requirement by arguing that COVID-19 particles “stick to surfaces and renders workplaces unsafe.” Leslie Scism, Companies Hit by Covid-19 Want Insurance Payouts. Insurers Say No., Wall St. J. (June 30, 2020). A federal court in Missouri agreed with this argument when the court asserted that the plaintiffs “plausibly alleged that COVID-19 particles attached to and damaged their property, which made their premises unsafe and unusable.” Studio 417, Inc. v. The Cincinnati Ins. Co., No. 20-CV-03127-SRB, at *12 (W.D. Mo. Aug. 12, 2020).

While courts have leaned towards insurers on this issue, the court in Optical Services illustrated that coverage of business losses and additional expenses from the pandemic is still an open issue, with many states and federal courts yet to have decided on the issue.