Pandemic-related closures have ravaged small businesses. Many thought they could rely on insurance to step in and cover losses, but that hasn’t been the case. Businesses have been denied lost income coverage almost uniformly. Small business owners have felt helpless.

A federal court in Missouri, however, has breathed life into the possibility of coverage for small business owners. (Read about the details of the case below.) Here’s what this means for you:

1. If you are small business owner, contact your agent or broker;
2. Request a copy of your full policy;
3. If you haven’t made a claim with your insurance company, do not do so until you speak with a lawyer;
4. If you have made a claim and been denied, collect all correspondence from the insurance company, along with your policy.
5. Contact the attorneys at Breakstone, White & Gluck for a free case evaluation. Know your rights and options on how to proceed.

Act promptly so your rights will be preserved!

Business Interruption Claims Score Victory

In an important victory for business owners, a federal court in Missouri permitted the claims of five businesses (restaurants and hair salons) to go forward against their insurance company for business interruption losses due to the COVID-19 pandemic.

On August 12, 2020, the United States District Court in Studio 417, Inc. v. Cincinnati Ins. Co., No. 20-cv-03127-SRB, slip op. (W.D. Mo., Aug. 12, 2020) denied defendant’s motion to dismiss plaintiffs’ first amended class action complaint. The complaint sought to cover losses by small business owners from The Cincinnati Insurance Company for business interruption due to the COVID-19 pandemic. All five plaintiffs sought coverage under their “all-risk” property insurance policies.

The All-Risk Policies

All-risk policies cover all losses except for those specifically excluded. The court noted that all plaintiffs had business income coverage during the applicable time period, which contained the same relevant language.

The plaintiffs’ policies did not include any exclusions for losses caused by viruses or communicable diseases. The policies agreed to cover business income losses sustained “due to the necessary ‘suspension’ of [ ] ‘operations’ during the ‘period of restoration.’”

Further, the policies included coverage for “Civil Authority” decisions; meaning losses incurred “by action of civil authority” that prohibits access to the businesses or surrounding areas.

The policies also included coverage for losses sustained due to dependence on others to deliver materials or services. Each policy required all business to take reasonable steps to protect their business from further damage and to record the losses incurred. Again, the policies did not exclude or limit losses from viruses, pandemics, or communicable diseases.

The Business Owners’ Claims

The business owners articulated the cause of their losses in various ways: that it was likely that a person with COVID-19 visited their premises and infected the property with the virus; that the virus lives on property and is emitted into the air; that the virus rendered their property unsafe and unusable; and that they were forced to suspend or reduce their business.

Furthermore, the virus caused the civil authorities in Missouri and Kansas to order suspensions of business, including the plaintiffs’ businesses, which required the plaintiffs to cease or significantly reduce their operations. Together, the virus and closure orders denied use of the property and damaged the property. Under the various provisions of the business income coverage, the plaintiffs argued they were entitled to be made whole for their losses. Defendant denied their claims.

The Insurance Company’s Denial Explained

The defendant insurance company argued that plaintiffs did not suffer a “physical loss” as required by the policies. In other words, there was no “actual, tangible, permanent, physical alteration of property,” such as in a fire or storm. In this conception, COVID-19 did not damage the plaintiffs’ property. The virus hurts people, defendant argued. Absent physical damage, coverage was rightfully denied.

The Court’s Decision

The case was before the court on defendant’s motion to dismiss the plaintiffs’ claims. Plaintiffs argued the case should not be dismissed; because although defendant’s interpretation of the policy language may be reasonable, so is plaintiffs. Therefore, the court should not dispose of the case before it starts and let it proceed.

The court noted that plaintiffs agreed “physical loss” is a key phrase in the policies, but noted that the policies provided coverage for “physical loss or physical damage.” The court, examining the policy language, stated that “loss” or “damage” was the first requirement for coverage. But given that both phrases were included, “loss” must be distinct from “damage,” the court reasoned. Plaintiffs’ argument that defendant’s focused only on “damage” or physical alteration and ignored “loss” was persuasive. The court acknowledged plaintiffs’ argument that the policies could have defined “loss” and “damage” but did not. As such, the court looked to the plain language of loss and defined it by the dictionary definition as “the act of losing possession” and “deprivation.”

Ultimately, the court agreed with plaintiffs. It held that COVID-19 did present some direct physical loss given that COVID-19 particles attached to and damaged the respective properties. Where the properties became uninhabitable or unusable for their intended purpose, the owners suffered a loss. Because plaintiffs could also not receive materials and services from dependent businesses, plaintiffs suffered a loss. This was enough, according to the court, to survive a motion to dismiss.

Regarding the closure orders by civil authorities, the court held that it was sufficient for plaintiffs to allege that access was prohibited to such a degree as to trigger the civil authority coverage in the policies. Plaintiffs did not have to show that all access was denied. Or any access. Not at this stage. The direct physical loss, together with the  closure orders by civil authorities, caused damage to the properties. Thus, the court held, the case should not be dismissed at this juncture.

Of note, the court concluded its opinion with a nod to other cases also being litigated construing similar insurance provisions. It conceded that those decisions may be persuasive on the court’s future opinion of the case.

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