The federal Sixth Circuit (which covers Ohio, Michigan, Kentucky and Tennessee) recently tackled a pressing question to many businesses throughout the country – what does the uncommon language of their business interruption insurance cover as it relates to the shutdowns caused by COVID and the subsequent governmental closing of business? Joining the Eighth and Eleventh Federal Circuits, the Sixth Circuit Court did not find in favor of such business interruption claims in the case of an Ohio restaurant.
Court Rules That Business Insurance Policy Not Cover Pandemic Losses
On Sept. 21, 2021, in the case of Santo’s Italian Café, LLC v. Acuity Insurance Co., a three-judge panel of the Sixth Circuit Court of Appeals unanimously affirmed the District Court’s dismissal in favor of the insurance carrier. The Court held that the terms of the policy did not provide coverage for this type of peril. Simply put, despite the business lost to COVID and shutdowns, the “restaurant has not been tangibly destroyed, whether in part or in full.” Stating that the policy language of “direct physical loss” is the “North Star of this property insurance policy from start to finish,” the Court held that “a loss of use is simply not the same as a physical loss.”
The Acuity policy in question also contained both a “Virus Exclusion” and “Ordinance or Law” exclusion. The Court noted that the clear language of the policy did not require the Court to rely on either exclusion to deny coverage of the policy to the restaurant.
The Ohio Supreme Court Has Yet To Weigh In
As we previously reported, the Ohio Supreme Court has accepted a Certified Question of State law from the Federal District in Cleveland to determine if COVID “constitutes direct physical loss or damage to property” at a business premise. While not binding on the state Supreme Court, the unanimous decision in Santo’s will certainly hold significant sway the outcome of the Ohio Supreme Court case. That case is still in the briefing stage and may be set for oral argument before the end of 2021.
Ever since COVID 19 ravaged the world in early 2020, causing governmental shutdowns and restrictions of virtually every aspect of life as well as the normal course of business, insurance carriers throughout the world have been litigating claims brought by a myriad of different business. Every insurance policy is different – yet the vast majority of policies share common language due to the use of industry standard language derived from the Insurance Service Office (ISO). While insurance law is determined on a state-by-state basis, the ISO language dominates throughout all 50 states – and is often identical in key provisions within insurance policies used (oftentimes verbatim) by the largest commercial providers.
In both state and federal courts in the United States, more than 2,017 cases have been filed as of mid-August 2021, according to statistics maintained by the University of Pennsylvania – Penn Law Center. Roughly 70% of the cases have been filed in the federal District Courts. While there are many theories of recovery being asserted, most of these cases claim coverage for the plaintiff businesses under the Business Income, Extra Expense and Civil Authority coverage provisions within the policies.
Plaintiffs in these claims have generally (78%) filed single claims against their insurance carriers, leaving the remaining plaintiffs to file various state and federal class actions against insurance carriers. It is likely that even the smallest insurance carrier has been sued. However, the largest number of filings are against (in order) – The Hartford, Zurich, Cincinnati and Lloyds of London. The plaintiffs range throughout the full business spectrum. The largest segment of business filings (37%) has named plaintiffs representing the food service and drinking establishment industries.
The filing of these lawsuits reached its peak shortly after the government shutdowns – in late April/early May 2020. There was a large spike of filings in March 2021, likely due to the fact that many insurance policies contain a one (1) year statute of limitations from the date of loss. Regardless, now that these cases have been litigated throughout the country – it is possible to see the general proclivity of Courts in handling these claims. And the news is not good for plaintiff/businesses, especially in those cases filed in the federal court system.
- In state court filings, 71% were fully dismissed by the courts.
- 26% survived the early Motion to Dismiss stage.
- In federal court filings 93% were fully dismissed by the courts.
- 5% survived the early Motion to Dismiss stage.
Federal and State Courts Not Looking Favorably on Claims
The most significant distinction between business income claims comes from the policies that have virus exclusions in the policy – and those policies that do not have virus exclusions. Either with or without, courts have not looked favorably on the claims:
- 96% of claims with Virus Exclusions were dismissed by federal courts.
- 81% of claims with Virus Exclusions were dismissed by state courts.
- 92% of claims without Virus Exclusions were dismissed by federal courts.
- 65% of claims without Virus Exclusions were dismissed by state courts.
Successful litigants to date have been able to convince trial courts that the COVID virus did in fact constitute a physical loss that caused damage, not only to their business property – but that also resulted in loss of income and extra expenses that should be covered under the terms of their policies. The vitality of these rulings will be tested at the highest court levels.
The stakes are extremely high. The American Property Casualty Insurance Association (APCIA) estimates that business continuity losses for small business alone could reach $383 billion per month if allowed under the policies. This means the potential exposure from claims already asserted would top almost $7 trillion to date for small business alone!
As such, we can expect that the litigation of these claims will continue until the very last verb, noun and adjective of every policy has been analyzed by the highest court available. The determination by the federal Circuit Courts will present guidance to litigants throughout the country as to the viability of these claims.
Any client who believes they may have a claim to assert against their insurance policies should ensure that their claim is asserted timely, and their policy reviewed against the daily developing case law that applies to their policy. If you have questions or would like to discuss further, please reach out to Jim Sammon at firstname.lastname@example.org or 216.736.7235.