The Gorilla in the Closet: Insurers Take a Superficial View of Covid-19 Science

COVID-19 is the type of all-encompassing loss event that upends the risk calculations on which insurers build their businesses. As the virus has led to the widespread shuttering of businesses, policyholders have turned to their business interruption insurance at previously unheard of scale. Perhaps predictably, insurers have responded by turning to any legal argument available to help them avoid shouldering the full economic toll.

District Court Decisions Avoid Facing the Science Behind COVID-19 Infections

At particular issue in these ongoing coverage debates is whether COVID-19 causes “physical loss,” as business interruption policies typically specify that losses giving rise to a claim must be physical. This puts the legal system in the uncomfortable position of negotiating specialized science. Science confirms that virus exposure causes tangible injury to insured property. Insurer denials of claims premised on ignoring science are not well founded.[1] Nor does case authority that does not consider the science represent cogent legal authority.[2] Insurers have urged that a virus does not cause physical damage, relying on a narrow definition of “physical loss” which requires a manifest alteration of the property in question. Policyholders and their lawyers have responded by stressing that neither the virus’s microscopic size nor its inability to visibly alter property makes it any less “physical” in the broader—and more literal—sense of the word.

Although it is questionable whether physical change is required to establish “property damage”, insurers routinely ignore the vital spike proteins that bind with property surfaces. Moreover, property exposed to SARS-COV2 also become more hydrophobic, repelling water after interaction with the coronavirus spike proteins. The chemical interactions between SARS-COV2 and ordinary property surfaces like metal, wood, fabric, plastic, and glass create a physical change.

The Eighth Circuit Adopts the Narrow, Insurer-Friendly View

Recently, in Oral Surgeons, P.C. v. Cincinnati Ins. Co.,[3] the Eighth Circuit favored the insurer and found that no coverage existed for business interruption loss. The policyholder had alleged that the Iowa government’s mandated restrictions of its dental practice resulted in a direct loss of its property. In rejecting the broader definition of “physical,” the court wrote that “[p]roperty that has suffered physical loss or physical damage requires restoration. That the policy provides coverage until property ‘should be repaired, rebuilt or replaced’ or until business resumes elsewhere assumes physical alteration of the property, not mere loss of use.”[4] Oral Surgeons had not alleged any physical alteration of its property, but merely a suspension of operations in response to public health restrictions.

Because of the lack of an allegation fitting the policy language, the court did not address whether Oral Surgeons might have prevailed with an argument focused on the physical effects of the virus itself, as opposed to those of the government policy.

The case illustrates that using lockdown orders and other mandates as the basis of a business interruption claim is likely to be a losing strategy. Where the policy requires physical damage or loss, insurers will be able to evade coverage if the policyholder does not accentuate the physical nature of the interruption.

Pennsylvania State Court Allows Gym Case to Proceed

In an even more recent case from a Court of Common Pleas in Pennsylvania, a fitness center survived a request for dismissal of its claim against its business interruption insurer.[5] The gym alleged that the coronavirus was a “continuous presence” on its property, which the court agreed was a “direct physical loss or damage” for the purposes of creating a valid business interruption claim.

Proving a fortuitous loss does not require demonstrating the precise cause of damage. Requiring proof of an actual structural alteration of property is not supported by the ordinary meaning of applicable policy language. Simply, preCOVID-19 case law is clear that direct physical loss does not require alteration or destruction of property. The better rule is met with a foreign agent, including a coronavirus renders property uninhabitable or unusable, or destroys it functionality.

Insurers Misrepresent How Exclusion Limits Coverage for Disease-Related Claims

Crunch Fitness argued to a Colorado Federal Court that Hanover Insurance Groups’ owed it coverage on the basis that its 35 franchises suffered due to COVID-19[6]. Crunch Fitness argues that its policy does not require direct physical loss or damage, just physical loss of property and that loss or damage are two distinct concepts. This is especially the case in that any condition that makes a property uninhabitable or destroys its value constitutes physical loss or damage. Crunch Fitness alleged that coverage for losses from disease causing agents was never meant to be offered in property policies like what Nova Causalty sold to Crunch Fitness. In effect, Nova Casualty offered less property coverage without reducing the premium and misrepresented that the virus exclusions would not reduce the coverage available.

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[1] “The Growing Science Behind Direct Physical Loss of Damage from COVID-19” btclicks.voicestorm.com

[2] Rosen v. State Farm Gen. Ins Co. 30 Cal. 4th 1070, 1076 (2003) (“An opinion is only authority for those issues actually considered or decided.”)

[3] 2021 U.S. App. LEXIS 19775 *8 (8th Cir. July 2, 2021).

[4] Id. at *5-6.

[5] Brown’s Gym v. The Cincinnati Ins. Co., 20-CV-3113 (Ct. Common Pleas, Lackawanna County).

[6] Harman Fitness, LLC et al v. Nova Casualty Company, 1:21-CV-01871 (10871 U.S. District Ct. of Colorado).