By Steve Schulwolf, Schulwolf Mediation, PLLC
Does insurance cover COVID-19 losses? As our national economy slows to a crawl, many businesses are desperately searching for lifelines. While there will no doubt be COVID-19 claims under all types of coverage, there have already been numerous lawsuits seeking reimbursement for business losses under property policies. Depending on the language at issue, these policies typically cover lost business income when the insured property suffers direct physical loss or damage from a covered peril resulting in the interruption of the insured’s business.
The first COVID-19 lawsuits involve policies that allegedly lack exclusions for viral pandemics. See, e.g. Cajun Conti LLC, et. al. v. Certain Underwriters at Lloyd’s, Civil Dist. Ct. for the Parish of Orleans (March 16, 2020)(Complaint at ¶ 15). This article does not discuss those exclusions or coverage for “Civil Authority” orders but instead focuses on a threshold issue for business loss claims: whether insureds will be able to demonstrate “direct physical loss or damage.” Different jurisdictions have taken different approaches. Some require the insured to demonstrate a specific physical alteration of the insured property, while others only require the presence of something (even a gas or smell) on or around the insured property. As is true in all insurance disputes, the precise policy language at issue is key.
Cajun Conti alleges that the coronavirus can stay on the surface of objects for up to twenty-eight days (Complaint at ¶ 21), which supports the argument that shelter-in-place measures are being taken in response to the physical contamination of premises and not merely aimed at reducing the spread of person-to-person bodily injury. This will be hotly contested as insurers not only dispute the allegation factually but stress that the mere theoretical possibility of the virus surviving for extended periods of time does not relieve the policyholder of its burden to demonstrate a particularized physical loss to the insured premises.
Cajun Conti also argues that gaseous fumes can satisfy the physical loss requirement. Id. at ¶ 24. Policyholder attorneys have cited cases for the proposition that structural damage is not required to demonstrate physical loss or damage. See, e.g., Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., Civ. No. 2:12-cv-04418, 2014 U.S. Dist. LEXIS 165232, at *15 (D. N.J. Nov. 25, 2014)(ammonia release “transformed the air” within insured’s premises). One policyholder recently alleged that “coverage for Business Income does not require damage to property at premises” at all. See Proper Ventures, LLC dba Proper Twenty-One v. Seneca Ins. Co., Inc. (Superior Court of the District of Columbia, April 8, 2020)(Complaint at ¶ 58). In contrast, insurers have argued for a stricter standard that COVID-19 may not satisfy. See, e.g., Columbiaknit, Inc. v. Affiliated FM Ins. Co., U.S. Dist. LEXIS 11873, at *18 (D. Or. Aug. 4, 1999) (“mere adherence of molecules to porous surfaces, without more, does not equate [to] physical loss or damage.”).
In cases without readily applicable exclusions, policyholders will argue that insurers’ insistence on “direct physical loss” is belied by history. In 2003, AIG Europe paid the Mandarin Oriental International $16 million for business losses during the SARS epidemic; in 1999, Houston Casualty paid Universal Studios business loss claim despite no physical damage; and in 2006, the Insurance Service Office (“ISO”) noted the risk of pandemic claims if insurers did not incorporate the post-SARS Virus Exclusion into their policies. Insurers will counter that the above cherry-picks the record and that property insurers have always, with overwhelming success, insisted on a particularized damage to the insured premises.
No insurer wants to be the first carrier to voluntarily agree to pay COVID-19 claims under standard property policies. That said, all litigation tends to follow an evolutionary path. Insurers in the early 1970s took the position that they excluded pollution claims and spent decades litigating the enforceability of their exclusions. At some point, when the landscape changes, parties become more amenable to negotiated resolutions and new cutting-edge cases slowly become “normal.” And the vast majority of “normal” cases eventually settle.
COVID-19 claims may present the rare “bet the company” case for both sides. Many insurers sincerely believe that in respect to standard property coverages, they have not accepted premiums to cover these catastrophic risks and forcing them to do so would bankrupt them. Policyholders may also face the very real possibility of losing their businesses if they cannot recover their mounting losses.
I acknowledge that not many sides are thinking about mediation. However, COVID-19 cases will be expensive to litigate, involve experts concerning our evolving understanding of the virus, and attract the brightest legal minds from across the country determined to craft the most creative argument. Bringing in an effective neutral early in the process can allow the parties to explore a potential business solution before they have invested a lot in litigation. Moreover, having an early frank discussion can help ensure all involved have reasonable expectations. Even if a comprehensive resolution is not attainable, ancillary issues—such as damages or whether the claim was properly investigated—can be discussed if not resolved, and the main coverage issues can be narrowed for both the Court and, perhaps, future negotiations. Finally, if a mediator is brought into the process early, she can remind a party about prior arguments and emphasize when the legal or regulatory backdrop has shifted in a way that should cause a party to reconsider their initial position.
Online mediation has become the only option while we are subject to stay-at-home orders. Admittedly, my preference is to be in the same place as the parties, but insurance coverage cases often involve decision-makers in different locations. There are legitimate confidentiality considerations for a Zoom mediation, but a mediator knowledgeable about such issues can successfully conduct a secure meeting. As a neutral, I encourage attorneys to be flexible and engage in discussions about resolving issues early in the process. Stay healthy and safe during these unprecedented times.
 See, e.g. French Laundry v. Hartford Fire Insurance Co., Superior Court for the State of California, County of Napa (March 25, 2020); Barbara Lane Snowden DBA Hair Goals Club v. Twin City Fire Ins. Co., No. 2020-19538/Court: 113 (Texas Dist. Ct. Harris Cnty., Mar. 26, 2020); Sandy Point Dental PC v. Cincinnati Ins. Co., No. 1:20-cv-02160 (N.D. Ill); Big Onion Tavern Group, LLC, et. al. v. Society Insurance, Inc., No. 1-20-cv-02005 (N.D. Ill); Prime Time Sports Grill, Inc. v. Certain Underwriters at Lloyd’s London, No. 20-cv-0771-CEH-JSS (M.D. Fla); Mace Marine Inc. v. Tokio Marine Specialty Ins. Co., No. 105911474, Circuit Court of the 16th Judicial Circuit, Monroe, County, Florida.
 I have seen policyholder attorneys cite various cases to support that COVID-19 satisfies the “direct physical loss” requirement, including TRAVCO Ins. Co. v. Ward, 715 F. Supp. 2d 699, 708-09 (E.D. Va. 2010), aff’d, 504 F. App’x 251 (4th Cir. 2013)(gases released from otherwise intact drywall constitute “physical loss”); Mellin v. Northern Sec. Ins. Co., 167 N.H. 544 (2015)(coverage for cat urine claim); Farmers Ins. Co. of Oregon v. Trutanich, 123 Or. App. 6 (finding odors caused by a methamphetamine lab were “direct physical loss” and held that the “odor was ‘physical,’ because it damaged the house”); Essex v. BloomSouth Flooring Corp., 562 F.3d 399, 406 (1st Cir. 2009)(“permeating and pervasive” odor could constitute “physical injury”); Motorists Mut. Ins. Co. v. Hardinger, 131 F. App’x 823, 826 (finding e-coli contamination “direct physical loss” even though it was “unnoticeable to the naked eye” and finding a genuine issue of material fact concerning whether the functionality of the property was nearly eliminated or destroyed); Murray v. State Farm Fire and Casualty Co., 509 S.E.2d 1 (W.Va. 1998)(finding “direct physical loss to the insured property requires only that the property be damaged, not destroyed” and structural damage is not required).
 Insurers’ attorneys have argued that the mere existence of dangerous substances is insufficient to trigger coverage and the insured needs to demonstrate that its premises was rendered uninhabitable. See, e.g., Universal Image Prods., Inc. v. Chubb Corp., 703 F. Supp. 2d 705, 709-10 (E.D. Mich. 2010)(“odor, mold and bacterial contamination (both visual and aerosolized)” did not constitute structural or tangible damage to insured’s property and finding no physical loss and no evidence that the premises needed to be vacated); Universal Image Prod., Inc. v. Fed. Ins. Co., 475 F. App’x 569, 572-74 (6th Cir. 2012)(finding insured “failed to present a genuine issue of material fact regarding the uninhabitability or unusuitability of the building” where building was not evacuated); Great N. Ins. Co. v. Benjamin Franklin Fed. Sav. & Loan Ass’n, No. 90-35654, 1992 WL 16749, at *1 (9th Cir. 1992)(finding that “the contamination of [the insured’s] building with asbestos was an economic loss and not a physical loss”); Port Auth. of N.Y. & N.J. v. Affiliated FM Ins. Co., 311 F.3d 226, 231 (2002)(holding an insured fails to demonstrate “physical loss or damage” “unless asbestos in a building was of such a quantity and condition as to make the structure unusable”); Mastellone v. Lightning Rod Mut. Ins. Co., 175 Ohio App. 3d 23, 31, 884 N.E. 2d 1130, 1144 (Oh. Ct. App. 2008)(finding lack of “physical injury” because any damage was “only temporary and did not affect the structure of the wood”). Policyholders will likely argue that that these cases are distinguishable because during a stay at home order, restaurants, movie theaters, and other establishments have been effectively evacuated and rendered unsuitable.
 Hous. Cas. Co. v. Lexington Ins. Co., No. H-05-1804, 2006 U.S. Dist. LEXIS 45027, *2 (S.D. Tex. 2006).