Federal Court Rules for Insureds—COVID-19 Shutdowns May Constitute "Direct Physical Loss" Under Business Interruption Insurance Policies

4 min

Hundreds of lawsuits have been filed across the country seeking business interruption coverage in connection with shutdowns caused by the COVID-19 pandemic. These coverage suits largely revolve around the same legal dispute: whether the COVID-19 pandemic and the related government shutdown orders represent a "direct physical loss" that triggers coverage under the policies. On Wednesday, the Western District of Missouri rejected an insurer's motion to dismiss on these grounds.


In Studio 417, Inc., et al. v. The Cincinnati Insurance Company, Case No. 6:20-cv-03127-SRB (W.D. Mo.), a group of hair salons and restaurants is seeking a declaratory judgment that the COVID-19 pandemic is a covered loss and that their insurer is obligated to provide coverage for business income losses and other costs under various coverage grants. The policies provide coverage in response to a "Covered Cause of Loss," which the court notes "is defined to mean accidental [direct] physical loss or accidental [direct] physical damage." Order at 2 (emphasis and brackets in original). The court further notes that the policies include no definition for "physical loss" or "physical damage." Importantly, the policies contain no virus or pandemic exclusion.

The Dispute

The insurer argued that plaintiffs failed to allege direct physical loss, which "requires actual, tangible, permanent, physical alteration of property." Order at 7. Therefore, there is no insurance coverage.

Plaintiffs argued that the insurer was attempting to blur the distinction between physical loss and physical damage, both of which are covered under the policies:

Plaintiffs emphasize that the Policies expressly cover "physical loss or physical damage." (Doc. #31, p. 11) (emphasis supplied). This "necessarily means that either a 'loss' or 'damage' is required, and that 'loss' is distinct from 'damage.'" (Doc. #31, p. 11.) As such, Plaintiffs argue that Defendant's focus on an actual physical alteration ignores the coverage for a "physical loss." Plaintiffs further argue that Defendant could have defined "physical loss" and "physical damage," but failed to do so.

Order at 7.

The Order

The Order states that "Plaintiffs have adequately stated a claim for direct physical loss." Order at 8. First, the Order explains that the alleged presence of COVID-19 satisfies the plain meaning of "direct physical loss," since the plaintiffs have alleged that the virus is a "physical substance" that "attached to and deprived Plaintiffs of their property, making it unsafe and unusable." Order at 8 (internal quotations and citations omitted). Second, the court agreed with the plaintiffs that the insurer's stance "conflates 'loss' and 'damage'" by requiring a tangible, physical alteration to trigger coverage. The court pointed to existing case law in the Eighth Circuit and elsewhere to support its finding that "even absent a physical alteration, a physical loss may occur when the property is uninhabitable or unusable for its intended purpose." Order at 10.

Also noteworthy, the court found that plaintiffs had satisfied their burden to allege coverage under the policies' civil authority coverage grant, which provides coverage for business income and certain costs "caused by action of civil authority that prohibits access to" the covered location. The insurer argued that access to the restaurant plaintiffs' locations was never prohibited, since these businesses were allowed to remain open for food preparation, takeout, and delivery. The court found that a ban and/or limitation on indoor dining at these establishments could prohibit access "to such a degree as to trigger the civil authority coverage." Order at 14.

The Bottom Line

Insurance carriers have taken a hardline stance against providing coverage for business interruption claims related to the COVID-19 pandemic even if the policies have no virus or pandemic exclusion. This well-reasoned ruling from a federal district court shows that insurers' arguments may be overcome. Venable has previously documented case law across the nation that supports insureds' position that these are covered losses. Several of these cases were relied upon in the court's order discussed above.

Businesses should continue to promptly notify their insurance carriers with regard to losses arising from the ongoing pandemic. Consult with insurance counsel to determine whether you are owed coverage under your policy.

If you would like further information related to the above order, or to discuss the possibility of insurance recovery for your business interruption losses related to COVID-19, please contact one of the authors of this alert.