The presence of virus on the premises that renders the property unsafe can cause physical loss or damage and trigger property coverage without any distinct, demonstrable physical alteration.
Juries, not judges, get to decide whether the Coronavirus causes physical loss or damage.
The receipt of PPP money from the government does not reduce a policyholder’s business interruption loss claim.

In a landmark victory for policyholders seeking business interruption coverage for COVID-19-related losses under their all risk property policies, a Kansas City federal judge has denied the bulk of the insurance carrier’s motion for summary judgment and sent a case brought by an owner of Kansas City bars and restaurants to trial. See K.C. Hopps Ltd. v. The Cincinnati Ins. Co. Inc., No. 20-cv-00437-SRB (W.D. Mo. Sept. 21, 2021). The trial will now begin on October 25, 2021.

In what is perhaps the court’s most important ruling, District Judge Stephen R. Bough ruled that the policyholder’s evidence of the physical presence of the Coronavirus that made its bars and restaurants unsafe for their full, intended use, could lead a jury to find that the policyholder satisfied the policy’s trigger for its business interruption coverage, which required direct “accidental physical loss” or “accidental physical damage” to the insured property.

The judge flatly rejected the mantra advanced by the insurance industry that there can be no physical loss or damage to property without a distinct, demonstrable physical alteration (referred to in the case as an “actual, tangible physical alteration”) to property. Stated simply, under the judge’s ruling, the presence of a harmful substance at the insured premises that makes the property dangerous to put to its full use can be the physical loss or damage required to trigger property coverage without any distinct, demonstrable physical alteration to property.

This holding is particularly important because many federal judges have been dismissing COVID-19 business interruption actions because they find that, as a matter of law, without the benefit of any discovery (let alone a jury trial), that the Coronavirus cannot cause physical loss or damage because it can be cleaned from surfaces using ordinary cleaning (which is false), that it dissipates quickly or that, despite killing more than 600,000 Americans largely from indoor aerosol transmission of the virus, it simply does not make a premises unsafe enough because, for example, essential businesses remained open. These issues are, of course, all factual and scientific questions that can only be resolved by juries who must hear from experts, weigh their credentials and assess the credibility of their testimony. 

These judges have routinely cast aside their limited role in reviewing pleadings motions (which require them to accept the allegations in policyholders’ complaints as true) and usurped the role of juries by making factual and scientific determinations on motions to dismiss. These judges have routinely refused to accept the factual and scientific allegations in policyholders’ COVID-19 business interruption complaints as true and have granted insurer motions to dismiss.

Judge’s Bough decision breaks sharply from these cases. What Judge Bough did is reset the table and recognize the proper role of judges in evaluating cases. His decision acknowledges what had long been settled law: the question of whether a hazardous substance such as a virus is on a premises or not, and the question of what the presence of that virus does to the habitability, the usability and the functionality of that premises, is inherently a pure question of fact that belongs in the hands of the jury. His decision is a powerful reminder to his judicial colleagues that this nation’s judicial system is founded upon a jury trial system where juries—not judges—weigh the credibility of witnesses and determine facts.

There are a number of other important takeaways from this landmark opinion of tremendous value to policyholders with COVID-19 business interruption cases:

  • A policyholder’s receipt of PPP funds from the government does not reduce the policyholder’s loss because those funds are not intended to compensate the policyholder for business interruption loss under the policy but instead to pay salaries of the workers.
  • A property policy’s period of restoration (which by its own language measures the time period of the policyholder’s business interruption damages), is not, as the insurance industry claims, a definition of coverage that somehow requires a distinct, demonstrable physical alteration to property, but instead describes a time period during which loss of business income may be recovered.
  • To survive a motion for summary judgment (a higher standard than a motion to dismiss), the policyholder does not need definitive proof of the virus’s presence but instead must prove that it was more likely than not that the virus was physically present on the premises. This is an important holding because, time and again in their motions to dismiss, insurer counsel argue that policyholders must prove in their complaint to a certainty, that the virus was on premises—ignoring that the standard of proof in a civil case is more likely than not (a preponderance of the evidence).
  • The policyholder may still recover business interruption losses even if its premises were used in a limited capacity where the policyholder had shown that its operations were reduced to limit the spread of the virus on its premises, which mitigated the policyholder’s potential physical loss or physical damage caused by the virus. This is an important holding because insurer counsel argue that if the property was open during the Coronavirus crisis that the property was somehow “safe” or “fit for use” and therefore sustained no physical loss or damage. In fact, most policies provide business interruption coverage for a slowdown of operations caused by unsafe conditions – a total shutdown is not required. 
  • The policy’s “Ordinance or Law,” “Delay or Loss of Use,” and “Acts or Decisions” exclusions were inapplicable as a matter of law because the policyholder’s claims “arise from the presence of SARS-CoV-2 on its premises,” not from these excluded perils.

This decision provides compelling evidence that we are still in the opening battles of a long war toward getting policyholders the business interruption coverage that they paid for and that their carriers are obligated to provide for COVID-19-related losses. And it refutes the insurers’ premature attempts to declare victory. We at Pillsbury are ready to assist affected businesses in pursuing that coverage.

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