Insurer Wins Coverage Dispute for COVID-19 Business Losses

In The One Group Hospitality, Inc. v. Employers Insurance Company of Wausau, the United States District Court for the Western District of Missouri dismissed an insured business owner’s claim for the costs of suspending and limiting its restaurant operations during the COVID-19 pandemic under an “all risk” insurance policy. The court’s decision to terminate the litigation at the pleading stage was based on the express language of the policy limiting coverage to “direct physical loss or damage,” as well as a contamination exclusion.

The insured, an owner and operator of restaurants around the country, was forced to shut down its operations for cleaning and decontamination, and otherwise limit its operations, to comply with governmental restrictions on occupancy. The insured had purchased an “all risk” policy that insured against “all risks of direct physical loss or damage.” The policy also contained a “contamination exclusion,” precluding claims for costs and loss of use of property that resulted from contaminants. The policy’s definition of “contaminant” included viruses.  Based on these policy provisions, the court found that there was no coverage, and that coverage would be excluded in any event under the “contamination exclusion,” because although the virus is technically physically present, it did not physically alter any structure it attached to, nor was there reason to think it could. The court also found that governmental orders limiting use of the property did not constitute physical damage.

Given the insured’s presence in various states, the court discussed decisions involving similar facts and policies in eight other jurisdictions where the outcome was the same. For example, the Seventh Circuit, applying Illinois law, held that the loss of use of property alone, without any damage or alteration to the property, was not sufficient to assert a claim for physical damages. The Eighth Circuit, while noting a lack of Missouri precedent, has also required some physical loss, such as alteration, contamination, or destruction.

The court noted that even if the presence of a substance that required cleaning did constitute “physical” damage, the damages would be limited to costs or losses incurred to clean the properties, and would not include damages resulting from government-ordered closures or the mere threat of customers bringing in the virus. Regardless, a contamination exclusion would preclude coverage for costs and damages as a result of a virus present on the property. While some policies might leave the door open to contamination claims because of a covered loss, in cases where the contamination itself is not a covered loss, courts have dismissed claims for coverage.

This decision reflects the ongoing and evolving responses to the COVID-19 claims in courts throughout the country. Each case requires fact-specific application of the applicable policy language. However, despite the toll the pandemic has taken on us all, some courts appear to be reluctant to extend insurance coverage beyond claims for physical damage to property. Additionally, certain policies contain exclusions that may preclude claims based solely on viruses. In litigation involving insurance coverage, one must pay special attention to the wording of the allegations regarding property damage in the context of the applicable policy language.