Court Rules That Covid Triggers Business Interruption Insurance

A federal judge has ruled that COVID-19 constitutes a “physical loss or damage” to property, and thus can trigger coverage under commercial property policies. The case, Studio 417 v. The Cincinnati Insurance Co., concerned a group of business in Kansas City, Missouri who had filed suit against their insurer for a denial of coverage for business losses.

After the plaintiffs were forced to close their businesses due to the pandemic and government restrictions, they made a claim to the Cincinnati Insurance Company to cover the losses. The insurer denied the claims, stating that no “physical loss” had occurred and thus, there was no coverage. As a result, the businesses filed a lawsuit.

In response to a motion by Cincinnati to dismiss the lawsuit, the court sided with the plaintiffs. The court founds that a “loss,” based on its plain and ordinary meaning, necessarily encompasses “the act of losing possession” and “deprivation” of property, which is what happened to the plaintiffs. Because covid is technically a physical substance that attaches to surfaces and makes property unsafe and unusable and because this has led to governmental orders prohibiting businesses from remaining open in order to prevent the spread of that physical substance, the losses due to covid met the threshold for a “physical loss.”

There have been conflicting opinions prior to this case, and the insurance industry continues to take the position that there has been no physical loss and that they are not responsible for orders issued by government officials. They have also taken the position that many of these businesses have technically not been “closed” due to government restrictions, since they can continue to operate in a limited fashion, e.g. restaurants may lose the majority of their sales, but they can still operate in a takeout capacity.
Studio 417 v. The Cincinnati Insurance Co. is a big win for businesses, but it remains to be seen how this issue will play out in courts across the country.

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