Physical loss or damage
Under the all-risk insurance policies that plaintiffs purchased, the insurance company agreed to pay for direct “loss,” unless the policies excluded or limited the loss. The policies defined “loss” as “accidental [direct] physical loss or accidental [direct] physical damage.” The court noted that the insurance policies did not define direct “physical loss” and relied on the “plain and ordinary meaning of the phrase.” Based on the plain and ordinary meaning of “physical loss,” the court held that plaintiffs sufficiently pleaded that “COVID-19 particles attached to and damaged their property, which made their premises unsafe and unusable.”
The district court distinguished Social Life Magazine, Inc. v. Sentinel Ins. Co., Ltd., 1:20-CV-03311 (S.D. N.Y., May 14, 2020), and stated that “the present case is not about whether COVID-19 damages lungs, and the presence of COVID-19 on premises, as is alleged here, is not a benign condition.” The court also distinguished Gavrilides Mgmt. Co., LLC v. Michigan Ins. Co., Case No. 20-258-CB (Ingham County, Mich., July 1, 2020), finding that the Gavrilides court recognized that the complaint did not state “COVID-19 entered the [insured property] ... and in fact, states that it has never been present in either location.” According to plaintiffs’ complaint, the court stated that COVID-19 “is a physical substance” that “live[s] on” and is “active on inert physical surfaces,” and “COVID-19 allegedly attached to and deprived [p]laintiffs of their property,” resulting in direct physical loss.
In response to the insurance company’s arguments that the policies require a tangible, physical alteration, the court held that the insurance company conflated “loss” and “damage,” and both terms must be given meaning. The court relied on Mehl v. The Travelers Home & Marine Ins. Co., Case No. 16-CV-1325 (W.D. Mo., May 2, 2018), a case concerning insurance coverage for a home that was made uninhabitable by brown recluse spiders, to state that “physical loss” is not synonymous with physical damage. The court stated that other courts have similarly recognized that “even absent a physical alteration, a physical loss may occur when the property is uninhabitable or unusable for its intended purpose.”1
Other coverages
Not only did the district court find that plaintiffs sufficiently alleged a direct “physical loss” under the policies, but the court also found that the plaintiffs sufficiently stated a claim for Civil Authority Coverage, Ingress and Egress Coverage, Dependent Property Coverage, and Sue and Labor Coverage under their policies, and denied the insurance company’s motion to dismiss in its entirety.
Concerning Civil Authority Coverage under the policies, the court found that the policies required that “civil authority prohibits access,” but did not specify “all access” or “any access” to the premises. The court held that plaintiffs adequately stated that their access was prohibited in the complaint and sufficiently stated a claim for Civil Authority Coverage.
With respect to Ingress and Egress Coverage, the court held that the exclusion in the policies stating that “coverage does not apply if ingress or egress from the ‘premises’ is prohibited by civil authority” did not apply because plaintiffs stated that both COVID-19 and governmental closure orders rendered the premises unsafe for ingress and egress.
The court held that plaintiffs also sufficiently alleged a claim for Dependent Property Coverage because they sufficiently alleged a suspension of their business due to the lack of material or services from a “dependent property."2
Lastly, the court held that plaintiffs sufficiently stated a claim for Sue and Labor Coverage by stating that in complying with the governmental closure orders and by suspending operations, they “incurred expenses in connection with reasonable steps to protect [c]overed [p]roperty.”
The Studio 417, Inc. case strongly supports policyholders and confirms that courts should not dismiss insurance claims alleging “physical loss” resulting from COVID-19. Whether there is covered “physical loss” at a given location is a question of fact and warrants discovery, in the least, before there is a dispositive ruling. Additionally, based on the court’s rationale in Studio 417, Inc., courts should allow policyholders to amend complaints concerning COVID-19 insurance claims where there are deficiencies in some respects, rather than entirely dismissing the cases with prejudice.
- See Port Auth. of New York and New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226, 236 (3rd Cir., 2002); Prudential Prop. & Cas. Ins. Co. v. Lilliard-Roberts, CV–01–1362–ST, 2002 WL 31495830, at * 9 (D. Ore., June 18, 2002); General Mills, Inc. v. Gold Medal Ins. Co., 622 N.W.2d 147, 152 (Minn. Ct. App., 2001).
- The policies defined “dependent property” as “property operated by others whom [the insured] depend[s] on to ... deliver materials or services to [the insured] ... [a]ccept [the insured’s] products or services ... [or] [a]ttract customers to [the insured’s] business.”
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For more information on the legal and business implications of COVID-19, visit the Reed Smith Coronavirus (COVID-19) Resource Center or contact us at COVID-19@reedsmith.com.
Client Alert 2020-488
