The last few weeks have seen both ups and downs for companies that are pursuing business income claims. On the upside, two Washington state courts have now held in favor of policyholders, ruling that government shutdown orders can constitute “physical loss” covered by insurance. On the downside, Oregon, Washington, and other states have imposed new “freeze” orders similar to those we saw in the spring, including banning most in-person dining and restricting other “non-essential” operations. For restaurants in particular the re-imposition of these restrictions may be catastrophic. What impact will the courthouse wins have on businesses that are again being pushed to the brink?
The Washington Court Rulings. The Washington rulings – available here – came from cases in King County (Seattle) and Spokane County (in Eastern Washington), filed by a dentist and a brewpub. Both had property policies issued by Mutual of Enumclaw (“MOE”) covering business income losses arising from “direct physical loss of or damage to” insured property. Both businesses were impacted by government orders, including Governor Inslee’s March 16th order banning in-person dining, and his March 19th order restricting dentists to emergency procedures only.
The legal issue. In both cases, the policyholders argue that the government closure orders themselves constituted “direct physical loss” of their business property. In other words, it did not matter whether or not the virus was present on their property – the government orders were enough to trigger coverage. This argument has been termed the “closure theory”. MOE contends that the government orders only caused economic and not physical loss and that some kind of physical alteration of the property is required. In the King County case, MOE moved to dismiss; in the Spokane County case, the policyholder moved for summary judgment. These motions only put the “direct physical loss” question at issue; both policies contain exclusions (including a virus exclusion and exclusion for “loss of use”) but those exclusions were not in play.
The rulings. In both cases, the courts observed that the term “loss of” must mean something different than the term “damage,” due to the “or” separating the two terms. Both courts observed that dictionaries define the term “loss” to include “deprivation,” and that the government orders could have directly deprived the businesses of physical property. As a result, both courts held in favor of the policyholder, meaning that the cases can go forward. MOE will eventually be able to argue that various policy exclusions apply. But because the courts endorsed a coverage theory that does not depend on the presence of the virus, MOE may have trouble arguing that the virus exclusion bars coverage.
Next steps? MOE may eventually appeal these rulings, but there is little chance of an appellate ruling soon. Instead, the next step may occur in federal court. There are over two dozen cases pending before Washington federal Judge Barbara Rothstein, many of which are based on the “closure theory.” Almost all of those cases already have motions pending similar to those in the MOE cases. Insurance interpretation is governed by state law, meaning that a federal judge will generally defer to state appellate courts, but insurers may argue that these two trial-court rulings are not binding. Judge Rothstein is not expected to rule before March 2021.
The Potential Impact of the Rulings. One obvious impact is that businesses who have shied away from making a claim (and are now facing existential threats from revived government restrictions) may want to re-evaluate making a claim. Regulators have estimated that 83% of small business policies have a virus exclusion. The apparent success of the “closure theory” in Washington means that the virus exclusion may not be fatal, although additional hurdles will remain. This applies to Oregon businesses as well; the principles of Washington law underpinning these new decisions are also applicable under Oregon law, and we hope to see Oregon judges applying these principles in the same way. (Nor are the Washington decisions unique – other courts across the country have ruled similarly, although insurers have prevailed in more than half of all cases). Those making new claims should be careful about additional coverage restrictions that some insurers have imposed on policies issued since the pandemic hit.
For those businesses with pending claims, the new court rulings are certainly encouraging. The recent government orders raise the stakes and highlight important questions, including whether there is a new “occurrence” or whether this is a continuation of losses since the spring. As with all aspects of insurance coverage, it will help to consider the overall strategy and counter-arguments that can be expected from insurers.
Game-Changers? Not Yet. Overall, these decisions don’t appear to be game-changers for several reasons, including that as trial-court rulings they are not binding on other judges. However, they certainly represent important developments that should cause insurers, businesses, brokers, and lawyers to revisit decisions made in the spring – particularly in light of the revived government restrictions. These decisions will hopefully also lead to rulings (including by the federal courts) with broader impacts.