Since the outbreak of the COVID-19 pandemic, most insurers throughout the country have denied business interruption (BI) claims received from their policy holders based on the economic losses they have suffered as a result of the virus. Many insurers rely on specific language contained in their policies that exclude claims arising from losses due to viruses, bacteria or “contamination”. Even when such precise language is not included in the policies, insurance carriers throughout the industry have denied the claims based on their contentions that the claimed losses did not result from “property damage” because there was no physical damage to the structures or covered property.
Despite billions of dollars in losses claimed by businesses, the public sentiment supporting coverage and the outcry of private citizens, insurance regulators and many politicians, the demands that the government intercede to mandate that insurers cover these claims have largely been unsuccessful. Moreover, although litigation has been threatened throughout the nation, relatively few lawsuits have been filed in proportion to the number of potential claims. In the suits that have been filed, the presiding judges in all but a couple of cases have granted the defendant insurers’ motions to dismiss these legal actions. Most of the decisions support the insurers’ position that the claims are not covered because of the absence of some physical damage to the covered property.
In a suit pending in the Superior Court of New Jersey, Bergen County, the Hon. Michael N. Beukas recently denied Franklin Mutual Insurance Company’s motion to dismiss a lawsuit filed by Optical Services USA. In that case, Optical conceded that its business did not suffer “physical” damage i.e. a material alteration or damage but asserted that it suffered business income losses as a result of the state’s coronavirus quarantine and stay at home orders. During telephonic oral argument of Franklin Mutual’s motion to dismiss conducted on August 13, 2020, Judge Beukas stated that “the term “physical” can mean more than material alteration or damage.” Judge Beukas was receptive to Optical’s claim that it suffered a covered physical loss due to Governor Murphy’s Executive Orders and permitted the case to proceed. Significantly, Judge Beukas ruled that it is the insurer’s burden to prove that the claim is not covered.
Judge Beukas’ ruling is inconsistent with the rulings of many state and federal judges in other jurisdictions including Michigan, Texas, California, New York and the District of Columbia. In those cases, the jurists ruled that coverage is excluded unless the policy holder’s losses derived from some tangible physical damage to property. Judge Beukas’ decision is, however, consistent with another by the Hon. Stephen R. Bough of the United States District Court, Western District of Missouri issued in the class action suit, Studio 417 v. Cincinnati Ins. Co. Judge Bough denied Cincinnati’s motion to dismiss filed pursuant to FRCP 12(b)(6). A motion under this statute seeks a dismissal based upon the defendant’s claim that the complaint failed to state a cause of action upon which relief may be granted. In deciding such motions, the court is constrained to accept all allegations set forth in the complaint as true. In the Studio 417 case, Judge Bough gave policy holders hope when he ruled that the complaint, on its face, sufficiently stated a claim that may have merit. Significantly, Judge Bough emphasized that the policy by Cincinnati Insurance Co. did not include a virus or bacteria exclusion. He noted that the policy holders contend that the subject policies were “all risk” policies that provided coverage for economic losses due to a covered “physical loss or physical damage” and that the policies did not define the terms “physical loss” or “physical damage”. The Court was clearly receptive to the claimants’ arguments that a physical loss may be different than physical damage. He also was receptive to the viability of a claim that the coronavirus was physically present on the covered property. Although Judge Bough did not rule Cincinnati is required to cover the claimed losses in that case, he permitted the case to proceed.
Although Judge Beukas’ ruling provides hope and optimism for policy holders who have suffered business interruption losses as a result of executive orders, business owners should appreciate that his ruling may not have the precedential effect they hope for. In the Optical case, Franklin Mutual Insurance Company’s counsel apparently conceded that the virus exclusion in its policy does not apply. This contention is seemingly in contrast with the positions taken by most other insurers who have successfully argued that the unambiguous language of their policy exclusions must be strictly interpreted and enforced. That fact notwithstanding, discovery in the suit will proceed and the case will continue with discovery and possibly a trial. These facts potentially open the door for millions of business owners to seek recovery for their losses.
Questions concerning this publication, or the handling of COVID-19 claims should be directed to Kenneth S. Merber, Esq. who is a partner of Gallo Vitucci Klar, LLP and who is leading GVK’s COVID-19 Response Team at 201-683-7100 ext. 106 or firstname.lastname@example.org.