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A Ray of Hope to Policyholders: Coronavirus Can Amount to “Physical Loss,” Triggering Business Interruption Coverage

Despite some early rulings across the country that were adverse to policyholders, a recent ruling from a federal judge in Kansas City could be the first of many upcoming rulings in support of the business interruption policyholders’ claims against their insurers related to COVID-19.

In Studio 417 Inc. et al v. The Cincinnati Insurance Co., No. 6:20-cv-3127 (W.D. Mo., filed April 27, 2020) (insurance breach of contract class action), the insureds, a group of restaurants and salon owners, argued that coronavirus had likely infected their properties and the presence of the virus had rendered their businesses unsafe and unusable, forcing a shutdown.  The insurer in the case, Cincinnati Insurance, argued that COVID-19 did not trigger business interruption insurance because it did not cause a tangible physical loss or damage to property, similar to that caused by a hurricane or fire.  Moreover, Cincinnati Insurance argued that the plaintiffs had failed to demonstrate the actual presence of the virus within their properties.

Judge Stephen R. Bough in the Western District of Missouri denied the insurer’s motion to dismiss the lawsuit and ruled that the plaintiffs’ case could go forward.  The ruling is significant because it is the first time a judge has held that coronavirus may constitute a direct physical loss, triggering insurance coverage under all-risk business interruption policies.

Judge Bough stated that the ordinary meaning of “physical loss,” that which the policyholders suffered when the spread of the virus led to prohibitions or restrictions on their business, could be satisfied under the terms of the policy.  The important distinction noted by Judge Bough is that insurers cannot conflate “physical damage” with “physical loss” because the policies encompass both.  Businesses can, it necessary follows, sustain physical loss when those businesses are rendered unusable.

It is important to keep an eye on the developments of this case as the judge intimated that discovery could change his mind to the extent the policyholders cannot demonstrate the physical presence of the virus at the businesses.

What’s the takeaway?  Insureds should be careful to argue that their businesses were likely contaminated by the virus as it spread across the country through unseen droplets and the presence of the virus led to physical loss.

The lawyers of LeMaster & Ahmed PLLC are here to help businesses nationwide present the best available arguments for business interruption coverage related to COVID-19 business income and extra expense losses.  Contact us at our Houston location at 832-356-7983 or our DFW location at 972-483-0410. You can also message us any inquiries directly on our website.

***The foregoing is not meant to serve as legal advice relating to your insurance coverage issue. Please contact one of our lawyers if you have questions specific to your particular insurance issue.

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