Posted In: Insurance Recovery
Insurance Blog: COVID Coverage Cases Turn On Policy Language
on January 28, 2021
Recent decisions out of the U.S. District Court for the Northern District of Ohio demonstrate the complicated and evolving legal landscape both in Ohio and nationally regarding whether COVID-19 related losses are covered under commercial insurance policies. The central question in these cases is whether COVID-19 and/or the various governmental orders related to COVID-19 constitute direct physical loss or damage to insured property. While the opinions may seem confusing to some, it is the same mantra experienced insurance attorneys have been stating for years: the specific policy language will govern whether a claim is covered.
In Henderson Road Restaurant Systems, Inc. dba Hyde Park Grill, et al., v. Zurich American Insurance Company,1 the court found in favor of coverage. In Santo’s Italian Café LLC, dba Santosuossos Pizza Pasta Vino v. Acuity Insurance Company,2 the court reached a different conclusion. Recognizing the likelihood of differing interpretations, the court in Neuro-Communication Services, Inc. v. The Cincinnati Insurance Company, et al., recently asked the Supreme Court of Ohio to resolve the question of whether, under Ohio law, COVID-19 constitutes direct physical loss or damage to property.3 A ruling by the Supreme Court of Ohio will help clarify —but not entirely resolve—insurers’ coverage obligations for losses related to COVID-19.
These cases and other similar cases across Ohio present similar fact patterns and arguments. Policyholders seek business income coverage for losses incurred as a result of COVID-19 and/or government orders that required businesses to cease or drastically reduce operations, claiming that, among other things, the virus and/or orders caused physical loss of or damage to their property because they were not able to inhabit or use their properties for their intended use. Policyholders have typically taken one of two positions with respect to the presence of COVID-19 at the insured location. In the first line of cases, policyholders take a dual position that the government orders result in physical loss, and if the orders are not a loss, the presence of COVID-19 at the insured location causes damage at the microscopic level. In the second line of cases, policyholders rely solely on the government orders to demonstrate physical loss. Insurers argue that, under Ohio law, the phrase requires some type of tangible, physical damage to insured property, and neither the orders nor the presence of COVID-19 at the microscopic level is sufficient.
The policies in both Henderson and Santo’s covered “direct physical loss of or damage to” insured property. Focusing on the specific policy language, the Henderson court concluded the policy language was susceptible to the insureds’ interpretation that they lost their real property when the state orders prevented them from using their properties as dine-in restaurants.4 The court also agreed with the insureds’ argument that physical loss of the real property meant something different than damage to the real property, questioning why the policy language would include both phrases side-by-side separated by the disjunctive conjunction “or” if the two phrases had the same meaning.
The Henderson court dismissed the insurer’s argument that Ohio law required the phrase to require tangible, physical damage to the insured property. The insurer relied upon Mastellone v. Lightning Rod Mutual Insurance Co., a case interpreting the phrase “physical loss to” in a homeowner’ insurance policy.5 The Mastellone court interpreted “physical loss to” to require a “physical injury” and then defined “physical injury” to mean “harm to the property that adversely affects the structural integrity of the house.”6 The Henderson court rejected applying the Mastellone definition because
the policy in Mastellone did not cover “direct physical loss of or damage to” the premises; it expressly specified that it would cover loss “only if that loss [was] physical loss to property.” Here, Zurich's policy does not expressly limit coverage to physical loss to property; it extends coverage to direct physical loss of property as well.7
The Henderson court also rejected the insurer’s argument that the insureds were not precluded from using their properties since they could still use them for takeout orders. Because there was no dispute that the properties were used almost exclusively for in-person dining prior to the state orders and the insurer did not assert any facts showing the insureds would have been able to realistically transition their entire business to takeout, the insurers’ argument was unfounded.8 And the court rejected the insurer’s argument that the policy required a permanent loss of the property noting that the policy contained no such requirement and adding such a “requirement would only be interpreting an ambiguous term in favor of the insurer – something Ohio law does not permit.”9 As such, court found the business income provision provided coverage.10
In Santo’s, the insurer argued that insured failed to plead harm that met the required threshold of “direct physical loss of or damage to property,” because Ohio law construed the phrase “physical loss” to mean “distinct, demonstrable, physical alteration” of insured property.11 The Santo’s court agreed with the insurer’s interpretation relying heavily on the reasoning and decision in Mastellone.12 And because the government orders at issue exerted “no such physical force that rendered Santo’s property unusable or inaccessible,” the orders were not a physical intrusion onto Santo’s property giving rise to coverage.13
While the Henderson and Santo’s decisions demonstrate the differing interpretations of the phrase “direct physical loss of or damage to” property, the question in Neuro-Communication Services, Inc. v. The Cincinnati Insurance Company, et al., even if certified and decided by the Ohio Supreme Court, will likely not entirely resolve these differing interpretations. Why not? Because the specific Cincinnati Insurance policy language in the Neuro-Communication Services case is different. For one, it provides coverage for “direct loss to Covered Property”. As a result, the Neuro-Communication Services case will not resolve the issues plaguing the courts as to what constitutes “physical loss”; what is the significance of the conjunctive “or” in the phrase; what impact does the term “of” vs “to” have, etc.? And, then there is the question as to how to interpret the various, differing exclusions raised by the insurers – and the significance as to the absence of those exclusions in some policies. What is clear, however, is that policyholders should look closely at their specific policy language, as it may be the difference between coverage or significant losses and potential bankruptcy.
1 1:20-CV-1239, 2021 WL 168422, at *1 (N.D. Ohio Jan. 19, 2021).
2 1:20-CV-01192, 2020 WL 7490095, at *7 (N.D. Ohio Dec. 21, 2020).
3 4:20-CV-1275 (N.D. Ohio Jan. 19, 2021).
4 1:20-CV-1239, 2021 WL 168422, at *10 (N.D. Ohio Jan. 19, 2021).
5 Id. at *10.
8 Id. at *11.
9 Id. at *12.
10 Id. at *16.
11 1:20-CV-01192, 2020 WL 7490095, at *7 (N.D. Ohio Dec. 21, 2020)
12 Id. at *8.
13 Id. at *9.
This blog is intended to provide information generally and to identify general legal requirements. It is not intended as a form of, or as a substitute for legal advice. Such advice should always come from in-house or retained counsel. Moreover, if this Blog in any way seems to contradict advice of counsel, counsel's opinion should control over anything written herein. No attorney client relationship is created or implied by this Blog. © 2023 Brouse McDowell. All rights reserved.