Federal Court Denies Motion to Dismiss Action for COVID-19 Related Losses under an All-Risk Policy

ABSTRACT: U.S. District Court for the Western District of Missouri denies Defendant insurer's Motion to Dismiss Plaintiffs' breach of contract claims based the insurer's denial of coverage for COVID-19 related business income losses.

On August 12, 2020, the United States District Court for the Western District of Missouri, Southern Division, in Studio 417, Inc., et al. v. The Cincinnati Insurance Company, denied defendant Cincinnati Insurance Company’s Motion to Dismiss Plaintiffs’ First Amended Complaint. Plaintiffs alleged losses due to COVID-19 and resulting from COVID-19 county Closure Orders in the Springfield and Kansas City metropolitan areas. Plaintiffs filed suit against Defendant after Defendant denied coverage for Plaintiffs’ COVID-19 related losses.

Plaintiff Studio 417, Inc. operates hair salons in the Springfield, Missouri metropolitan area. The remaining plaintiffs own and operate full-service restaurants in the Kansas City metropolitan area. Plaintiffs purchased “all-risk” property insurance policies from Defendant. The policies provided payment for direct loss unless the loss was excluded or limited. Under the policies, a “Covered Cause of Loss” was defined as an “accidental [direct] physical loss or accidental [direct] physical damage.” None of the policies included any exclusion for losses caused by viruses or communicable diseases.

Plaintiffs alleged that their businesses were rendered unusable by the presence of COVID-19 and the issuance of Closure Orders forcing them to either suspend or reduce their business, causing a direct physical loss or damage to their premises. Plaintiffs sought a declaratory judgment against Defendant and sued Defendant for breach of contract based on the following policy provisions: Business Income coverage; Extra Expense coverage; Dependent Property coverage; Civil Authority coverage; Extended Business Income coverage; Ingress and Egress coverage; and Sue and Labor coverage. Plaintiffs also sought class certification for 14 nationwide classes and a Missouri subclass for Defendant’s Missouri policyholders that were denied coverage due to COVID-19 losses.

Defendant filed its Motion to Dismiss primarily arguing that the policies only provide coverage for “income tied to physical damage to property[.]” Plaintiffs emphasized that the policy expressly covered for “loss” or “damage”, distinguishing the two terms for use of the disjunctive. Neither “physical loss” nor “physical damage” was defined by the policy.

The Court found, based on the record, that Plaintiffs adequately stated a claim for direct physical loss, relying on the plain and ordinary meaning of the phrase. In so finding, the Court relied on other court cases that recognized a physical loss may occur when the property has been determined to be uninhabitable or unusable. The Court did, however, acknowledge that case law exists to support Defendant’s proposition that physical damage is required to show a physical loss. However, the Court found that those cases were distinguishable from the present case in that the cases cited by Defendant were decided at the summary judgment stage and the Plaintiffs here adequately plead the existence of physical and active substances, whether on surfaces or in the air, to have plausibly met their burden. The Court denied Defendant’s Motion to Dismiss in its entirety, but the Court made clear that it was not holding that physical loss would be found whenever a business suffers any economic harm, rather under the circumstances this case.

Though Defendant’s Motion to Dismiss was denied, the Court’s ruling is not the final determination in this case on the issue of whether Plaintiffs’ COVID-19 losses will be covered by the policy. Here, the Court emphasized that to survive a Motion to Dismiss, Plaintiffs must have merely pled enough facts (which are accepted as true) to proceed to discovery. The Court found that they did. Defendant will likely take another bite at the apple and file a motion for summary judgment later in the case.