Business Insurance Claims for COVID face uphill battle.
There’s no question that COVID-19 hit businesses hard, and continues to be a challenge as the economy opens back up. In Arizona, making business insurance claims for covid due to financial losses related to the pandemic is proving to be a difficult task.
B Street Grill
On March 5, 2021, the U.S. District Court for the District of Arizona issued a 12 page order in B Street Grill and Bar, LLC, et al. v. Cincinnati Insurance Company granting Defendant’s motion to dismiss Plaintiffs’ claims for declaratory judgment and breach of contract based on their denial of coverage due to pandemic losses.
The Plaintiffs have three restaurants in Mesa and Gilbert that were closed for on-site dining by Governor Ducey’s Executive Order 2020-09. They alleged that, according to the CDC, the virus remained viable on surfaces for hours to days, and that several of their employees had tested positive for COVID-19, rendering their premises unusable and non-functioning per the terms of their policy, causing them to suffer direct accidental loss or physical damage, including a substantial loss of revenue and forcing them to lay off and furlough employees. Plaintiffs believed their policy provided coverage for business losses in the event of a shutdown from a virus pandemic. Their business insurance claim for covid to Cincinnati was denied on the grounds that there “was no direct physical loss to property, as required by the Policy.”
In finding that actual physical damage was required under the policy, the court chose to follow White Mountain Communities Hosp. Inc. v. Hartford Cas. Ins. Co. as an example of Arizona law that required actual physical loss, and rejected the case of American Guarantee & Liab. Ins. Co. v. Ingram Micro, Inc., which held that damage could be found where a malfunction caused a computer network’s data to be unavailable.
In its order, the court found that Plaintiffs had failed to allege actual physical damage, and further found that there was no physical loss that could not have been remedied by “simply cleaning.” The court also disregarded Plaintiffs’ argument that the policy didn’t contain an exclusion for viruses or communicable diseases because they had not shown that their injury was even covered by the policy. The court also referred to a similar result in the superior court case of Klos Enterprises, LLC v. Cincinnati Ins. Co., et al., where the court found that an “all risk” policy required “direct physical loss or damage to the property.”
Additionally, the Court denied B Street Grill’s claim under the “civil authority” provision of the policy because the Executive Order did not shut down the business, but allowed continued operation through pick up, delivery, and drive-thru options.
On March 23, 2021, the U.S. District Court for the District of Arizona issued an Order dismissing Plaintiff’s claim for COVID coverage in Cibus LLC v. Capital Insurance Group, et al., on the Magistrate’s recommendation that the claim was precluded under the “pathogenic organisms” exclusion in the policy. The recommendation also included an alternate conclusion that if the pathogenic organism Exclusion did not apply, the motion to dismiss should be denied “because the allegations in the First Amended Complaint are sufficient to state there was a necessary suspension of the business caused by direct physical loss.” In this case, the restaurant alleged that it lost all of its perishable inventory due to state and local orders closing and limiting occupancy at their business.
One of the Defendants, Eagle West, filed an objection to the alternate ruling recommendation, asking the court not to adopt the report’s analysis regarding “business income and extra expenses coverages” and “civil authority” coverages. Because the court accepted the initial recommendation that excluded the claim under the pathogenic organism exclusion, it did not rule on the alternate recommendation regarding physical loss and civil authority and did not adopt those sections.
Arizona courts, both at the state and federal level, seem to be closing the door on COVID claims by requiring “physical damage” and finding that state and local shutdowns weren’t really shutdowns for insurance claim purposes. Companies considering making business insurance claims for covid pandemic losses should carefully review their policies/exclusions and consider their claims carefully. Even with these outcomes, you can expect that future insurance policies will tighten coverage for pandemic events even more. A review of your existing or future policies could be the difference in having coverage or not.
We are here to help if you need business insurance claims advice. We can be reached at at (480) 833-1113.