Insurer Wins First Jury Trial on Coverage for COVID-19 Business Interruption Losses

An insurer has won the first jury trial on coverage for Covid-19 business interruption losses after a federal jury in the Western District of Missouri issued a verdict in favor of The Cincinnati Insurance Company in K.C. Hopps Ltd. v. Cincinnati Insurance Co., Case No. 4:20-cv-437 (W.D. Mo. 2021). In K.C. Hopps, the insured, K.C. Hopps Ltd. (“Hopps”), owned and operated bars, restaurants, catering services, and event spaces in the Kansas City metropolitan area. In response to the Covid-19 pandemic, civil authorities in Missouri and Kansas issued stay-at-home orders in March of 2020. In accordance with the orders, Hopps’ operations were limited to delivery, drive-through, and carry-out services. Hopps submitted a claim to its insurer, Cincinnati Insurance Company, for coverage under its commercial property policy for “Business Interruption due to COVID-19,” and Cincinnati denied the claim. Hopps then filed suit against Cincinnati, seeking coverage under the policy’s Business Income, Extra Expense, Civil Authority, and Ingress and Egress coverage provisions.

The policy at issue provided coverage for “the actual loss of ‘Business Income’ [the insured] sustain[ed] due to the necessary ‘suspension’ of [the insured’s] ‘operations’ during the ‘period of restoration.’” The policy specified that the “suspension” must be “caused by direct ‘loss’ to property at a ‘premises’ caused by or resulting from any Covered Cause of Loss.” The policy further provided coverage for “Extra Expense” sustained during the “period of restoration.” The policy defined “loss” as “accidental physical loss or accidental physical damage,” but did not define the terms “physical loss” or “physical damage.” The policy defined “period of restoration” as beginning at the time of direct “loss” and ending at the time of repair, resumption of business at a new permanent location, or a specified number of months after “direct physical ‘loss.’”

The policy’s Civil Authority provision provided coverage for business income loss and extra expense “caused by action of civil authority that prohibits access” to a premises other than covered property, provided that: (a) access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage; and (b) the action of civil authority is taken in response to dangerous physical conditions resulting from the damage or to enable the civil authority to have unimpeded access to the damaged property. The Ingress and Egress provision provided coverage for business income loss and extra expense caused by “the prevention of existing ingress or egress at a ‘premises’ shown in the Declarations due to direct ‘loss’ by a Covered Cause of Loss at a location contiguous to such ‘premises.’”

Both parties moved for summary judgment. In its motion for summary judgment, Cincinnati argued that Hopps failed to demonstrate that SARS-CoV-2 caused physical loss or physical damage to Hopps’ property because Hopps did not have any evidence that the virus was present on its premises; Hopps used its premises throughout the relevant time; and the virus did not render its property unsafe. Cincinnati further argued that Hopps never sustained an “actual loss” as required for Business Income coverage; was not entitled to Civil Authority coverage or Ingress and Egress coverage; and that certain policy exclusions precluded coverage.

The court granted summary judgment to Cincinnati with respect to Civil Authority coverage and Ingress and Egress coverage, but denied summary judgment to both parties on whether Business Income coverage was triggered. The court observed that, while the stay-at-home orders limited Hopps’ operations, they did not prevent Hopps from accessing its premises. As such, Cincinnati was entitled to summary judgment on Hopps’ Civil Authority coverage and Ingress and Egress claims.

However, the court held that genuine issues of material fact existed regarding the other issues in contention. The court rejected Hopps’ argument that it sustained “physical loss” or “physical damage” simply because the Covid-19 pandemic resulted in stay-at-home orders, but also rejected Cincinnati’s argument that physical contamination at Hopps’ property could never satisfy the “physical loss” or “physical damage” requirement because such an interpretation would render the policy’s contaminants exclusion meaningless. Rather, the court found that physical contamination which rendered the property unsafe could be considered “physical loss” or “physical damage” under the policy.

As to whether coverage was triggered under this standard, the court found that Hopps had sufficient evidence to support the inference that SARS-CoV-2 was present on its premises and that the virus rendered its property unsafe, thus raising genuine issues for trial. The court further found the record supported the inference that Hopps’ operations were reduced to limit the spread of SARS-CoV-2 on its premises, and concluded that the fact that the premises were still used in some capacity did not necessarily preclude coverage. The court held that whether the virus was present on the premises, whether it actually caused a physical loss or physical damage to the premises, and the extent of damages due to that “loss” were questions of fact best left for a jury to decide. The court further found that there was a genuine question of fact whether Hopps suffered an “actual loss” of income required to trigger Business Income coverage.

After a three-day trial, a federal jury issued a verdict in favor of Cincinnati on all of Hopps’ claims. While the verdict sheet offered no details on the jury’s reasoning, the arguments on record indicate that the jury did not believe that Hopps’ business interruption losses resulting from the stay-at-home orders constituted the “physical loss” or “physical damage” to property necessary to trigger coverage under its commercial property policy.

Until now, the vast majority of courts across the country that have addressed this issue on summary judgment or on motions to dismiss have held that business losses resulting from Covid-19 shutdown or stay-at-home orders do not involve “physical loss” or “physical damage” to property. With Hopps, the first jury to address the issue has voiced its agreement. This is a good sign for insurers whose Covid-19 business interruption claims are not resolved at the pretrial stage.

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About The Property Insurance Law Observer
For more than four decades, Cozen O’Connor has represented all types of property insurers in jurisdictions throughout the United States, and it is dedicated to keeping its clients abreast of developments that impact the insurance industry. The Property Insurance Law Observer will survey court decisions, enacted or proposed legislation, and regulatory activities from all 50 states. We will also include commentary on current issues and developing trends of interest to first-party insurers.
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