COVID-19 Insurance Coverage Litigation

COVID-19 Insurance Coverage Litigation

March 2021 marks the anniversary of California’s initial shelter-in-place order and reminds us that the novel coronavirus has gripped the nation for a full year. Local and statewide orders to cease nonessential activities forced essential businesses—such as doctors and dentists—to minimize operations and nonessential businesses—like restaurants and retail stores—to close their doors to the public altogether. What followed was a flurry of insurance claims for business interruption and monetary losses sustained as a result of the novel coronavirus and the ensuing shelter-in-place and stay-at-home orders. By and large, insurers have denied claims arising from COVID-related shutdowns and business owners have turned to litigation. This article provides an overview of these claims and their status as the cases work their way through state and federal courts.

Types of Claims

Claims to recover monetary damages caused by the coronavirus and the related shelter-in-place orders arise under various provisions within a business’s commercial or property insurance policy. There are three common coverages that may be triggered: (1) business interruption coverage; (2) extra expense coverage; and (3) civil authority coverage. At a high level, these claims do not assert that employees were ill due to COVID-19, nor do they specifically assert that the virus itself was present at the business; rather, these claims seek recovery for the decrease or interruption to business income caused by the shelter-in-place and stay-at-home orders.

Business Interruption Coverage: The primary claim asserted by business owners in the wake of COVID-related shutdowns is for business interruption or loss of income. Business interruption coverage provides that in the event of a covered loss (e.g., a natural disaster or fire), the insurance company will pay business owners the income lost due to physical damage to a covered structure. Generally, the covered damage must be a distinct, demonstrable, and physical alteration of a building,[1] which has proven to be a hurdle for many plaintiffs.[2] While a few courts have recognized that dispossession of physical property could, in some circumstances, constitute a “loss” without physical alteration of the property, this is overwhelmingly a minority view and no California court has affirmatively found COVID-related shutdowns constitute physical loss or damage sufficient to trigger coverage.[3]

Extra Expense Coverage: Many business owners also seek coverage under extra expense provisions, which insure businesses against costs incurred in excess of normal operating expenses due to a “covered loss.”[4] These covered expenses typically include the costs to rebuild, repair or replace a damaged structure, again requiring physical damage or loss as seen above.

Civil Authority Coverage: Plaintiffs also assert claims under civil authority provisions of their insurance policies but have been largely unsuccessful to date. Civil authority coverage concerns properties other than the property covered by the insurance policy.[5] For instance, where a neighboring building suffers damage that makes it unsafe for surrounding buildings to be occupied, and a civil authority issues an order to the same effect prohibiting a policyholder from accessing a covered building, civil authority coverage will compensate the business owner often for loss of business income and extra expenses.[6] In rejecting these claims, courts reason that the shelter-in-place orders were largely preventative and therefore did not trigger coverage because they were not in response to damage to neighboring property.[7] At least one court left open the possibility that coverage could be triggered where a neighboring property “had an actual coronavirus exposure,” but found those allegations lacking in the case at issue.[8]

Virus Exclusions: There are various other claims that appear in COVID-19 litigation, such as claims under ingress and egress provisions and city ordinance or law provisions of an insurance policy. As opposed to civil authority coverage, these provisions compensate owners that cannot access the insured property as the result of damage to the building or a local ordinance. Troubling to all these claims are specific virus exclusions, which became prominent in insurance policies following several virus outbreaks in the early 2000s. Such provisions generally exclude coverage for any damages caused—directly or indirectly—by a virus or bacteria. As such, courts have rejected plaintiffs’ attempts to circumvent this exclusion by claiming the shelter-in-place orders, and not the coronavirus, caused the losses.[9]

Current Status of California Cases

By far, the majority of California federal courts have dismissed plaintiffs’ lawsuits, finding that the plaintiffs did not suffer physical damage within the meaning of the insurance policy or that the virus exclusion precluded recovery, or some combination of both. However, a small number of courts have allowed cases to proceed where there is no virus exclusion based on the interpretation that dispossession could constitute a loss that triggers coverage.[10] Even when considered on the merits, courts have been loath to affirmatively decide that “the presence of COVID-19 in society” or related government restrictions constitutes loss sufficient to trigger insurance coverage.[11]

In contrast, California state courts, which are not bound by federal court orders, appear to be more lenient in their interpretation of plaintiffs’ allegations. For instance, a Los Angeles Superior Court denied an insurer’s motion for judgment on the pleadings, reasoning that the plaintiff-restaurant’s allegations of “the actual or potential presence of virus in the air,” among others, were sufficient to withstand dismissal.[12] Similarly, an Orange County Superior Court overruled an insurer’s demurrer. In that case, the plaintiff alleged that the coronavirus is transmitted through respiratory droplets “that stay on surfaces and in the air for up to a month” and “physically alter[] the air and surfaces to which [they] attach[].”[13] Thus, the court reasoned that it “cannot determine as a matter of law that these allegations do not show a ‘direct physical loss’” and overruled the pleading challenge.[14] As a comparison, a federal court for the Central District of California found allegations that COVID-19 “can adhere to surfaces of property for several days and can linger in the air in building[s] for several hours” inadequate to state a claim.[15]

The California State Assembly proposed a bill (AB1552) that would establish a rebuttable presumption that COVID-19 was present at the business and that it resulted in direct physical damage.[16] The presumption would have applied retroactively to all commercial insurance policies for business interruption that were in effect on March 4, 2020, but the bill died in the state Senate in late 2020.

Absent action by the California Legislature, insurance claims for business interruption due to shelter-in-place orders will face an uphill battle. If you have a potential insurance claim, you must act quickly as the time to file a claim or lawsuit may be running. Many policies have provisions shortening the time to file a lawsuit[17] and the issue may be further complicated by identifying the triggering event. The attorneys at Wood Litigation can help, please contact us for an initial consultation.

[1] MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal. App. 4th 766, 779-80 (2010); see also Port Auth. of N.Y. & N.J. v. Affiliated FM Ins. Co., 311 F.3d 226, 235 (3d Cir. 2002); Hartford Ins. Co. of Midwest v. Mississippi Valley Gas Co., 181 F. App’x 465, 470 (5th Cir. 2006); 10A Couch on Ins. § 148:46 (3d ed. 2010).

[2] See, e.g., Robert W. Fountain, Inc. v. Citizens Ins. Co. of Am., No. 20-cv-05441-CRB, 2020 WL 7247207, at *3 (N.D. Cal. Dec. 9, 2020); Water Sports Kauai, Inc. v. Fireman’s Fund Ins. Co., No. 20-cv-03750-WHO, 2020 WL 6562332, at *1 (N.D. Cal. Nov. 9, 2020).

[3] Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., No. 20-cv-03213-JST, 2020 WL 5525171, at *4 (N.D. Cal. Sept. 14, 2020) (acknowledging the potential that dispossession of physical property could be a “physical loss,” but finding that California’s shelter-in-place orders were temporary and thus insufficient to constitute permanent dispossession to bring the claim within the scope of coverage); Goodwill Industries of Orange County v. Philadelphia Indem. Ins. Co., No. 30-2020-01169032 (Super. Ct. Orange Cty. Cal. Jan. 28, 2021) (overruling insurer’s demurrer).

[4] Pappy’s Barber Shops, Inc. v. Farmers Group, Inc., No. 20-cv-907-CAB, 2020 WL 5500221, at *4 - *5 (S.D. Cal. Sept. 11, 2020) (citing 10E, LLC v. Travelers Indem. Co. of Connecticut, No. 20-cv-04418-SVW, 2020 WL 5359653 (C.D. Cal. Sept. 2, 2020).

[5] Selane Products, Inc. v. Continental Casualty Co., No. 20-cv-07834-MCS, at *8 (C.D. Cal. Nov. 24, 2020) (dismissing claim for coverage under civil authority coverage because “COVID-19 and its impacts do not constitute ‘direct physical loss of property or damage to property.’”).

[6] Boxed Foods Co., LLC v. California Capital Ins. Co., No. 20-cv-04571-CRB, 2020 WL 6271021, at *4 (N.D. Cal. Oct. 26, 2020) as amended (Oct. 27, 2020).

[7] Mudpie, Inc., 2020 WL 5525171, at *7 (“Because the orders were preventative – and absent allegations of damage to adjacent property – the complaint does not establish the requisite causal link between prior property damage and the government’s closure order.”).

[8] Water Sports Kauai, Inc., 2020 WL 6562332, at *8.

[9] Robert W. Fountain, Inc., 2020 WL 7247207, at *8-*9 (“Moreover, Fountain cannot convincingly argue that its losses were caused by the March 2020 governmental orders while ignoring that those governmental orders were themselves caused by a virus.”).

[10] Kingray Inc. v. Farmers Group, Inc., et al., No. 20-cv-963-JGB (C.D. Cal. Mar. 4, 2021) (denying insurer’s motion to dismiss, in part, as it related to claims arising under a policy with no virus exclusion and recognizing physical dispossession of property could plausibly constitute a loss under the policy).

[11] BA LAX, LLC, et al. v. Hartford Fire Ins. Co., No. 20-cv-06344-SVW (C.D. Cal. Jan. 12, 2021) (granting insurer’s motion for summary judgment, holding “that neither the presence of COVID-19 in society nor governmental restrictions by themselves constitute direct physical loss of direct physical damage under California law” and citing cases). Plaintiffs filed a notice of appeal to the Ninth Circuit Court of Appeals, Docket No. 21-55109 (9th Cir.) and briefing is scheduled to be completed by May 2021.

[12] P.F. Chang’s China Bistro, Inc. v. Certain Underwriters at Lloyd’s of London., No. 30-20STCV17169 (Super. Ct. Los Angeles Cty. Cal. Feb. 4, 2021).

[13] Goodwill Industries of Orange County v. Philadelphia Indem. Ins. Co., No. 30-2020-01169032 (Super. Ct. Orange Cty. Cal. Jan. 28, 2021).

[14] Goodwill Industries of Orange County, No. 30-2020-01169032, at *3.

[15] Selane Products, Inc., No. 20-cv-07834-MCS, at *8.

[16] California Legislative Information, AB-1552 Commercial insurance: business interruption: coverage for COVID-19 (2019-2020), available at:

[17] See, e.g., William L. Lyon & Assocs., Inc. v. Superior Court, 204 Cal. App. 4th 1294, 1306 (2012) (holding that breach of contract action was subject to the statute of limitations period set forth in the buyer-broker agreement).

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