St. Louis attorneys Elaine Moss and Katie McCarthy recently obtained dismissal of business interruption coverage claims based upon the COVID-19 pandemic. The insured, owner of several hair salons in the St. Louis area, sued its insurer for breach of contract, breach of the implied covenants of good faith and fair dealing, and declaratory judgment based on the insurer’s denial of Business Income, Extra Expense, and Civil Authority coverages under a Commercial General Liability policy of insurance for losses sustained when the insured closed its properties as a result of COVID-19.
In yet another decision rejecting the insured’s claims for COVID-19 business interruption losses, Judge Henry Autrey of the Eastern District of Missouri held that the insured failed to allege “direct physical loss of or damage to property” necessary for coverage under the policy. The insured argued that it suffered physical “loss of” its properties when it was unable to use them for the hair salon business and its customers suffered a “loss of” the properties when they were unable to access them for salon services. Citing to the Eighth Circuit’s recent decision in Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141, 1144 (8th Cir. 2021), the Court stated that the decision to close the salons did not constitute a “direct physical loss of” its property because did not plead that any physical alteration or tangible impact altered the properties. Rather, the Court noted, there only was a change in circumstances and the “transitory reduction of the properties’ functionality, based on no direct physical occurrence, does not amount to a loss of the properties under the plain meaning of the policies.” In so holding, the Court found support for its conclusion in the policy’s definition for “period of restoration” and rejected the insured’s attempt to create coverage by arguing that the “of” (in “direct physical loss of…”) indicated it was not the property’s loss, but the insured’s loss; the Court found this reading too strained and against the policy’s plain meaning. The Court also held that the insured’s claim under Civil Authority coverage failed because it failed to support its claims that the virus caused damage to other properties or that civil authorities prohibited access to the premises because of such damage. As a result, the insured failed to state any claims for breach of contract or declaratory judgment.
Even assuming the insured did sufficiently allege “direct physical loss of” property, the Court confirmed that the policy’s Virus Exclusion would, nonetheless, bar coverage. Rejecting the insured’s distinguishing between the COVID-19 pandemic and the coronavirus in arguing that a virus was merely an indirect cause of its alleged losses, the Court found that “[g]iven that COVID-19 is nothing more than disease caused by the coronavirus, [Plaintiff’s] argument is untenable.”
Finally, in dispensing with the insured’s claims for breach of implied covenants of good faith and fair dealing, the Court relied upon long-standing Missouri precedent in concluding that an insured’s allegation that an insurer’s exercise of judgment in denying coverage for its claim is not grounds for a claim of breach of implied covenants because under MO law, an insurer’s denial of coverage itself is actionable only as a breach of contract and vexatious refusal to pay. Accordingly, the Court granted the insurer’s Motion to Dismiss all of the insured’s claims against it.
While this decision is not the first one in which courts have interpreted these policy provisions to preclude coverage for similar COVID-related business interruption claims, KNM’s win in the Eastern District will have an impact on how courts across the country interpret these policy provisions in light of the plethora of claims being asserted nationwide by policyholders.