Good news for policyholders arrived last month when a Federal Court in Missouri ruled that a lawsuit brought by business owners (a hair salon and restaurants) against their insurance carrier properly alleged claims for coverage of losses caused by the COVID-19 pandemic and state-mandated closure orders. In Studio 417, Inc. v. Cincinnati Insurance Company, the policyholders sought coverage for their pandemic-related losses under all-risk policies that did not contain a virus exclusion but the insurer refused to provide coverage. Case No. 20-CV-03127-SRB, 2020 WL 4692385 (Aug. 12, 2020). The insurer’s principal argument was that a virus cannot cause the “direct physical loss” required under several of the policies’ coverage provisions including business interruption and civil authority provisions. The court rejected this argument, holding that “physical loss,” which is not defined in the policies, can occur when property becomes uninhabitable or unusable for its intended purpose.
In denying the insurer’s motion to dismiss, the court began its analysis by noting that the policies do not define “direct physical loss” so it looked to the definition in the Merriam-Webster dictionary for each of those words. Reasoning that the policies provide coverage for two distinct types of loss – “accidental physical loss or accidental physical damage” – the court rejected the insurer’s attempt to conflate the terms loss and damage as both requiring tangible, physical alteration. Instead, the court relied upon case law that has “recognized that even absent a physical alteration, a physical loss may occur when the property is uninhabitable or unusable for its intended purpose.”
The court emphasized that the plaintiffs have alleged that the physical substance, which makes up the highly contagious virus COVID-19, is likely on their premises and caused them to cease or suspend operations. Additionally, “the presence of COVID-19 on premises...
