On December 9, 2021, the 7th Circuit Court of Appeals followed suit with the 6th, 8th, 9th, and 11th Circuits holding that commercial property insurance policies do not provide coverage for business-related losses related to the COVID-19 pandemic that, unfortunately, continues to linger. The 7th Circuit issued decisions in six cases, three of which were consolidated, all of which required the Court to address whether the applicable commercial property policies provided coverage after COVID-19-related shutdowns impacted business operations. The answer was overwhelmingly “no.”
As businesses struggle to recover from pandemic-related financial losses, policyholders have sought relief from their property insurance policies. Typical commercial property policies include business interruption clauses designed to replace income lost in the event business must cease due to a natural disaster or other catastrophic event that results in physical damage. These business interruption policies often contain endorsements and exclusions that amend existing plans and change the original policy by adding or excluding coverage.
After the SARS outbreak in the early 2000s, business interruption exclusions linked to viral events were created. Because of the influx of business interruption claims during and after the SARS outbreak, many carriers added exclusions for losses caused by viruses or bacteria, which excluded many of the claims made during the current pandemic. Such exclusions protect the insurance industry that is simply not equipped to address issues as widespread as COVID-19 because insurance only works by pooling the risk. With the current pandemic, the impacts of the coronavirus are too widespread. It would be impossible for carriers to pay out many claims at once. Nonetheless, to account for business losses sustained during the pandemic, policyholders filed claims with their insurers seeking coverage under the business loss coverage provisions of their policies. However, most of these claims have been denied, and insurers have successfully defended their denials in courts throughout the country.
In six separate decisions, the 7th Circuit held that damages linked to COVID-19-related restrictions on the use of property were not covered by the respective policyholders’ commercial property policies because the loss of use was not accompanied by any physical alteration of or damage to the property. In Bradley Hotel dba Quality Inn & Suites Bradley v. Aspen Specialty Ins. (21-1173); Crescent Plaza Hotel Owner v. Zurich American Ins. (No. 21-1316); Mashallah et al. v. West Bend Mutual Ins. (21-1507); and the three consolidated cases against Cincinnati Insurance, Sandy Point Dental (21-1186), TJBC Inc. (21-1203) and Bend Hotel Development (21-1559), the policyholders had to either close their businesses or severely limit their operations because of COVID-19-related emergency governmental orders.
In these cases, each policyholder sued its insurer for denial of its claims, but the district courts ruled in favor of the insurers. The policyholders appealed. The 7th Circuit affirmed the district court decisions holding that the commercial property insurance policies did not cover the policyholders’ damages because (1) the loss of use of the respective businesses was “not tethered to any direct physical loss or damage;” and (2) even if the emergency closure orders and COVID-19 were considered two separate causes of the losses, neither was a covered loss. Bradley Hotel dba Quality Inn & Suites Bradley v. Aspen Specialty Ins., No. 21-1173, slip. op. at 6-7 (7th Cir. Dec. 9, 2021), citing Mashallah, Inc. v. West Bend Mutual Ins. Co., No. 21-1507, slip op. at 10 (7th Cir. Dec. 9, 2021) and Sandy Point Dental v. Cincinnati Ins., No. 21-1186, slip. Op. at 7-14 (7th Cir. Dec. 9, 2021). In short, there must be some form of actual, physical damage to an insured premises to trigger coverage.
There has been a sharp decline in the number of insurance-related cases filed due, at least in part, to the fact that many of the claims relating to loss of business use have been denied and such denials have been upheld by courts throughout the country. Many of the cases filed against insurers for pandemic-related claims have resulted in early dismissals. https://cclt.law.upenn.edu/ In addition, the first case to go to trial in federal court (K.C. Hopps Ltd v. The Cincinnati Insurance Co Inc., 4:20-cv-00437 (W.D. Mo.)) resulted in a defense verdict in favor of the insurer.
Insurers now have a number of helpful precedents throughout the country, including in the 7th Circuit, in support of their denial of COVID-19-related claims under the loss of business use exclusion. And for those policies without exclusions for viral-related events, it is almost certain that these policies will be amended to include such exclusions in the future.