Policyholders obtain rare wins in COVID-19 coverage cases against insurers


By: Edward Solensky Jr.

In what is believed to be the first jury trial in the nation on the issue of whether a commercial property insurance policy covers business interruption losses due to COVID-19, Baylor College of Medicine won a Texas state court jury verdict that one of its insurers, units of Lloyd’s of London, must pay $12 million to cover pandemic-related losses, or roughly a quarter of the $48.5 million damage claimed.

In Baylor College of Medicine vs. XL Insurance America, Inc., the medical school alleged, “People infected with SARS-CoV-2 – i.e., people who had COVID-19 – began physically infecting the surfaces of real property, as well as medical and research equipment, and the airspace in and around Baylor’s multiple properties (collectively the Insured Properties) in or before March 2020.” The school said it incurred additional losses through pandemic lockdown orders that forced it to pause non-emergency patient visits, invest in sanitation and protective measures, and set up a telehealth medical program. Baylor claimed the damages and losses it incurred from both coronavirus and the lockdown orders are covered under its $100 million property policies.

The Houston-based school said in its lawsuit that it suffered more than $69 million in Covid business interruption damages. It has a primary property insurance limit of $100 million with policies issued by three insurers: XL Insurance America, a unit of AXA; ACE American Insurance Co., a unit of Chubb; and Lloyd’s. The judgment would apply to all three insurers.

The August 31 verdict in the District Court of Harris County in Texas is the first jury verdict ruling in favor of policyholders in COVID-19 insurance litigation. Courts nationwide have generally held that such claimed damage and losses are not covered under property insurance policies, because there is no property damage.

Meanwhile, a month after the Baylor College of Medicine verdict, Hawaii’s First Circuit Court in Honolulu declined to dismiss a COVID-19 business interruption claim filed by a nonprofit Honolulu theater in Hawaii Theater Center v. American Insurance Co. The plaintiff operates a historic Honolulu theater that it claims suffered direct physical damage and financial losses as a result of the COVID-19 pandemic and related governmental shutdown orders. Among other things, the venue says the coronavirus was spread on its property, furniture, and fixtures by members of a Chinese opera group who were ill around the time of a performance in February 2020. The plaintiff sought coverage for its losses from American Insurance under a commercial general liability policy. The insurer denied the claim in July 2020, prompting the plaintiff to sue it in Hawaii’s 1st Circuit Court. The lawsuit seeks a declaration that American Insurance is on the hook for the theater’s losses.

HTC specifically alleges that the losses and expenses incurred by its business operations are covered under the following Policy provisions: (1) a blanket limit of insurance totaling $902,500 under its Historic Property Business Income and Extra Expense Form; (2) the Business Income/Extra Expense Form which provides $250,000 in Additional Coverage for Income Support Properties; (3) the Business Income/Extra Expense Form which provides $25,000 in Additional Coverage for Extraordinary Advertising and Promotion; (4) the Historic Property Plus Endorsement Form which provides $100,000 in coverage for Communicable Disease Extra Expense; (5) a Crisis Management Coverage Extension Endorsement, which provides $100,000 in coverage for Crisis Event Business Income and $100,000 for Crisis Event Extra Expense.

In rejecting The American Insurance Co.’s motion to dismiss the theater’s case, Judge Jeffrey P. Crabtree held that there were “adequate allegations in the complaint that state a possible viable claim and give reasonable notice to (defendant) on what the case is about.” Judge Crabtree said the ruling doesn’t decide any of the case’s coverage issues, but simply denies the motion because the theater’s complaint makes a potentially viable claim. The Judge pointed out that the theater made explicit claims that the virus attached to and structurally altered surfaces, damaging its property and the air within it. The theater claimed the virus’s presence on its property changed it to an “unsatisfactory physical state” and led directly to loss of its proper function, according to the order. The complaint expressly, specifically, and factually alleges that COVID causes physical loss or damage to property,” Judge Crabtree wrote. “It is undisputed that the policy at issue is an ‘all-risk’ policy and does not expressly exclude viruses as a cause of loss.”

American argued that the virus doesn’t cause physical damage because cleaning surfaces could eliminate any potential hazard created by it, but the court can’t make any “plausibility determination on causation” on a motion to dismiss for failure to state a claim, Judge Crabtree held. The insurer’s argument that the theater needed to claim physical loss that required it to “repair,” “replace” or “re-build” its property also falls flat, he said. “The court respectfully disagrees,” Judge Crabtree wrote. “We are a notice-pleading jurisdiction, and [plaintiff] is generally not required to plead precise words.”

In an article in Law360, Riley Murdock writes that David Weiss, a policyholder attorney with Reed Smith not involved in the case, said the ruling supports what policyholder advocates have long argued in COVID-19 insurance cases: that courts shouldn’t use motions to dismiss to decide complicated factual issues such as whether the virus can cause physical loss or damage. “Rather, courts must accept as true well-pled factual allegations and allow cases to proceed to fact discovery, expert witness discovery, dispositive motion practice and trial, just like any other case,” Weiss said. “When cases are allowed to proceed, policyholders will be able to establish their right to coverage, just as they did in the recent Baylor Medical case in Texas.”

According to Law360’s COVID-19 Insurance Case Tracker. Federal district courts around the country have permanently tossed about 49% of the 1,425 suits from policyholders against their insurance companies seeking pandemic loss-related coverage. Another 17% of the pandemic insurance suits filed in federal courts have been voluntarily dismissed, the tracker shows, though about 31% have yet to be fully decided.

Click here to read the full original article: Hawaii Theater Survives Bid To Dismiss Virus Coverage Suit

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