COVID-19 has wreaked havoc on the lives of almost every American. It has also devastated many businesses which were forced to shut down by government order or simple lack of customers. Faced with devastating losses, many businesses have attempted to get insurance coverage to reimburse them. The general idea is: My business closure for COVID-19 reasons is no different from closure because of a fire. So, my insurance should pay for my COVID-19 losses in the same manner as a closure for a fire.
Insurance companies disagree with that basic analysis. In most cases, insurance companies are denying coverage for COVID-19 businesses losses. As a result, businesses around the country are suing trying to get courts to award them coverage. Usually, these claims are litigated in federal court. And, the vast majority of federal courts are holding that COVID-19 business claims are not covered by insurance.
An insurance policy is a contract. So, courts deciding these coverage issues have to interpret the contract. The language of almost every policy only provides coverage for: “direct physical loss or damage.” As a result, most insurance companies differentiate between a “physical loss” to fire and a non-physical loss caused by COVID-19. After all, the brick-and-mortar business is still standing. Additionally, some policies have exclusions — provisions that deny coverage for specific reasons. Many policies specifically exclude any loss or damage caused by a virus. Because of those provisions, most federal judges in Alabama have found that COVID-19 business losses are not covered by insurance.
- Hillcrest Optical, Inc. v. Continental Cas. Co., No. 1:20-CV-275-JB-B, 2020 WL 6163142 (S.D. Ala. Oct. 21, 2020). Judge Beaverstock focused on the word “physical” and found that there must be some “tangible” alteration to the property. Because COVID-19 does not tangibly alter property, business losses are not covered.
- Part Two, LLC v. Owners Ins. Co., No. 7:20-cv-01047-LSC, 2021 WL 135319 (N.D. Ala. Jan. 14, 2021). Judge Proctor found that coverage was precluded by a virus exclusion.
- Pure Fitness, LLC v. Twin City Fire Ins. Co., No. 2:20-CV-775-RDP, 2021 WL 512242 (N.D. Ala. Feb. 11, 2021). Judge Proctor again found coverage barred by a virus exclusion.
- The Woolworth, LLC v. Cincinnati Ins. Co., No. 2:20-CV-01084-CLM, 2021 WL 1424356 (N.D. Ala. Apr. 15, 2021). Judge Maze found that there was no physical damage or loss. “A virus does not physically alter the property it rests on. A virus does not require property to be repaired, rebuilt or replaced. A virus can simply be wiped off the surface with disinfectant, so there is no ‘physical damage,’ no ‘physical loss,’ and no ‘period of restoration’ of property.” Notably, Judge Maze also relied upon a 2020 decision from the Eleventh Circuit Court of Appeals, applying Florida law to hold that “dust and debris” in a restaurant cannot be a “direct physical loss” because it “merely needs to be cleaned.” See Mama Jo’s, Inc. v. Sparta Ins. Co., 823 Fed. Appx. 868 (11th Cir. 2020).
- Ascent Hosp. Mgmt. Co, LLC v. Employers Ins. Co. of Wausau, No. 2:20-cv-770-GMB, 2021 WL 1791490 (N.D. Ala. May 5, 2021). Magistrate Judge Borden found that “direct physical loss must be a loss requiring repair or replacement.” He also applied a contamination exclusion to deny coverage.
- Dukes Clothing, LLC v. The Cincinnati Ins. Co., No. 7:20-cv-860-GMB, 2021 WL 1791488 (N.D. Ala. May 5, 2021). Judge Borden again denied coverage, finding that “direct physical loss or damage required an actual physical change to property that COVID-19 particles cannot cause.”
Against this tide of decisions stands one federal judge in Alabama: Judge Haikala. Each of the foregoing six cases was dismissed immediately after filing. In a recent opinion, however, Judge Haikala refused to follow that trend. See Serendipitous, LLC v. The Cincinnati Ins. Co., No. 2:20-cv-00873-MHH, 2021 WL 1816960 (N.D. Ala. May 6, 2021). Notably, the insurance policy in Judge Haikala’s case did not have a virus exclusion. Thus, she was only confronted with the issue of whether COVID-19 business closure was the result of “accidental physical loss or accidental physical damage.” Judge Haikala focused on “physical loss,” noting that “loss” can be defined as “the act of losing possession.” And, the restaurants in Judge Haikala’s case alleged that they were forced to “close completely” either as a result of government orders or the need to clean when an employee tested positive. Consequently, she refused to dismiss the restaurants’ complaint.
Almost certainly, Judge Haikala’s case will continue and the parties will conduct discovery on the exact nature of damages suffered by the restaurants. And, after discovery the insurance company will again move to dismiss the claim at the summary judgment stage. There is some possibility that Judge Haikala could change her analysis in the interim. Also, the Eleventh Circuit might issue a decision directly addressing the “physical loss or damage” issue. But, for now, Judge Haikala has provided a path that businesses might try to follow to obtain coverage for their COVID-19 losses.