Roundup: Top Developments in COVID-19 Litigation
Jason A. Levine, Gillian H. Clow, and Giles Judd, Alston & Bird LLP
This week, we focus on a constitutional challenge to California’s recent shutdown orders and the dismissal of three distinct business interruption insurance coverage cases in Florida, Pennsylvania, and Texas. These cases reflect the surge of business interruption lawsuits filed in 2020, which are now being decided – largely in favor of insurers – and that represent different ways of analyzing the claims, leaving open the possibility for success under certain factual circumstances.
1. San Diego Salon Challenges Constitutionality of Governor Newsom’s Shutdown Orders
Overview: Plaintiff Tatoma, Inc., which operates Atelier Aucoin Salon in San Diego, filed a putative class action on behalf of California barbers and cosmetologists who were forced to cease operations due to Governor Newsom’s shutdown orders. The complaint alleges due process, equal protection, and takings claims under the U.S. and California Constitutions.
Background: Tatoma asserts that the shutdowns amount to an unlawful taking by the government, since plaintiff businesses “have been denied all economically beneficial use of their property.” The complaint notes that, when the government seizes property for the public benefit while placing the burden on only a select few, those who are burdened are entitled to just compensation. Tatoma argues that the failure to compensate members of the proposed class for the deprivation of their real and personal property violates the Takings Clause of the Fifth Amendment, and also infringes on federal and state due process and equal protection rights. Further, the complaint asserts that the Governor’s designation of cosmetology businesses as “non-essential” is arbitrary and capricious, considering that “espresso bars, recreational cannabis dispensaries, pet grooming, chiropractors, and other professions” have been permitted to resume their business activities despite the shutdown orders.
Our take: If the court agrees that indefinite forced business closures amount to an unlawful taking, California – and potentially other state governments – will be placed in the difficult position of balancing the drive to protect public health against additional publicly-funded economic burdens in an already challenged economy. Prior decisions on similar claims over the course of the pandemic suggest that plaintiffs face an uphill battle.
2. Florida District Court Dismisses Caterer’s Business Interruption Claim
Overview: The U.S. District Court for the Southern District of Florida granted Scottsdale Insurance Company’s motion to dismiss claims for business interruption brought against it by Mena Catering.
Background: The catering company filed suit alleging it experienced a covered loss under the policy’s business interruption provision. Mena claimed that the coronavirus was likely present on the premises, rendering them “unsafe and unfit for [their] intended use” and thus triggering policy coverage for “direct physical loss of or damage to Covered Property.”
Decision: The court found that there is no “‘direct physical loss’ where the alleged harm consists of the mere presence of the virus on the physical structure of the premises,” and thus Mena could not state a viable claim. Even if it could, however, the court also found that the policy’s virus exclusion clause would bar coverage in any event.
Our take: This ruling is consistent with those of courts across the country, which by and large have dismissed cases against insurers under policies that limit coverage to “direct physical loss.” In her order, Judge Beth Bloom noted that courts nationwide had held that such coverage does not exist where policyholders fail to allege physical property damage.
3. Pennsylvania District Court Dismisses Restaurant’s Insurance Coverage Claim
Overview: The Western District of Pennsylvania dismissed a putative class action brought by Plaintiff 1 S.A.N.T., Inc., which operates a restaurant and tavern, against insurer National Fire & Marine Insurance Company (“National Fire”), for its purported failure to cover lost business income arising from the suspension and/or reduction of its business operations due to the COVID-19 pandemic.
Background: Plaintiff argued that, under the terms of the policy, coverage for “physical loss” and “damage” does not require an actual “physical alteration” to the property, but instead, coverage is triggered when the property cannot be used “for its intended purpose.” Further, plaintiff contended that the Governor’s shutdown orders were the proximate cause of 1 S.A.N.T.’s loss, and that its claims therefore are not barred by the policy’s virus exclusion. Finally, plaintiff claimed that the “ubiquitous” presence of the coronavirus is sufficient to “constitute a covered cause of loss” under the policy.
Decision: The court first determined whether, under the terms of the policy, 1 S.A.N.T. could establish an insurable loss. Although “direct physical loss” and “direct physical damage” are not defined terms under the policy, the court interpreted them by reference to their “plain and generally accepted meaning.” This led the court to conclude that coverage applies only to “events that physically impact the covered property.” The court also rejected the contention that the ubiquitous nature of the virus should trigger coverage, noting that 1 S.A.N.T. had not alleged that anyone at the restaurant had contracted the virus. Finally, the court also rejected the claim that the Governor’s shutdown orders were the proximate cause of 1 S.A.N.T.’s loss, because the restaurant remained open for takeout and delivery, and employees were not denied access.
Our take: This decision adds to the growing number of federal jurisdictions holding that a “direct physical loss” or “direct physical damage” requires tangible damage to the property in order to trigger coverage. However, the court’s reasoning was fact-bound, leaving open the possibility that such coverage claims might succeed if, for example, restaurant patrons had become ill while dining, or if the restaurant were prevented from operating at all.
4. Texas District Court Dismisses Dental Office’s Business Interruption Claim
Overview: The Northern District of Texas granted Aspen Insurance Company’s motion to dismiss claims for business interruption coverage brought by a dental office.
Background: Plaintiff alleged losses to her business as a result of state-wide orders prohibiting full use of her dental practice, including diminished use of the physical space of her office by installing sneeze-guard plexiglass, and requiring patients to wait in their cars before their appointments. In response, Aspen argued that coverage is only triggered by direct physical damage or loss to the dental practice, which did not occur here.
Decision: The court granted Aspen’s motion to dismiss, but with leave to amend. Although the court found that the “physical loss” required to trigger the policy need not be structural damage, plaintiff would still need to allege the virus was actually present in the office. Alleging loss of use or function was held insufficient to state a claim under the policy.
Our take: The court’s order presents a possible avenue for plaintiffs to succeed in stating a claim for business interruption – where they can allege loss to the business stemming from the presence of COVID-19 within their facility, rather than a loss of use as a result of the pandemic. As demonstrated by the Mena Catering case discussed above, however, some courts have rejected that theory where plaintiffs fail to allege physical property damage.