Alabama's First Cases Remain Pending

We reported in April  that a Tuscaloosa shoe store and a Mountain Brook restaurant had filed the first Alabama business interruption cases. Five months later, we are still awaiting a definitive ruling in both.  

In Sharecropper LLC dba Ollie Irene v. Farmers Insurance Exchange, Inc., No. 01-CV-2020-901319 (Jefferson County Cir. Court April 7, 2020), the insurer did not remove to federal court. In July, the court granted a motion to expedite proceedings. The parties negotiated potential factual stipulations but were unable to come to an agreement. The last week of August, the insurer moved for the entry of a scheduling order allowing three months for fact discovery and setting a March 2021 deadline for dispositive motions. The court has not yet ruled on that motion. 

Unlike most COVID-19 business interruption cases, Ollie Irene expressly disclaims any physical damage to its property. Instead, it argues it lost the use of its restaurant space when the government prohibited on-premises dining. It contends that, under Alabama law, this loss of use triggered coverage. While this argument avoids the virus exclusion, it may run headlong into others. In a recent filing, the defendant referenced the Consequential Damages Exclusion, which eliminates coverage for "loss of use," as well as the Acts or Decisions Exclusion, which eliminates coverage for the "acts or decisions" of a governmental entity.

In Wagner Shoes v. Auto-Owners Insurance Co., No. 7:20-cv-465 (N.D. Ala. Apr. 6, 2020), the plaintiff had to repled to address jurisdictional deficiencies. In late July, the defendant again moved to dismiss. That motion went under submission the first week of September. 

Wagner Shoes argues that its property was physically damaged by the presence of COVID-19 and that its property was "damaged" when it was rendered unsuitable for use as a retail store (whether by the virus, a civil closure order, or otherwise). It contends the policy does not define "direct physical loss" and that Alabama law is unclear on this point. The defendant counters that "direct physical loss" means what it says—i.e., physical alteration—and that numerous courts in other states have held COVID-19 is not a "direct physical loss." 

In a normal case, we might expect a decision in the next 3-4 months. But this is not a normal case so it's possible a decision could come much sooner. Alternatively, the federal district court may decide the meaning of "direct physical loss" is unclear and certify that question to the Alabama Supreme Court. 

Over the last five months, many more Alabama cases have been filed, and we could see a resolution in one of those cases before a decision in Ollie Irene or Wagner Shoes. Regardless, the meaning of "direct physical loss" under Alabama law is likely headed to the Alabama Supreme Court either through direct appeal or by certification from a federal court.  

Insurer Victories 

Currently, over 1,000 COVID-19 business interruption cases are pending nationwide. Decisions are starting to trickle in and are going overwhelmingly for the carriers. At last count, the scorecard was 9-1 in their favor. 

Most courts have not even addressed the virus exclusion, finding instead that COVID-19 does not constitute a "direct physical loss" to property. These decisions include: Turek Enterprises, Inc. v. State Farm Fire and Casualty Co., No. 20-11655 (E.D. Mich. Sept. 3, 2020); 10E, LLC v. Travelers Indem. Co. of Connecticut et al., No. 2:20-CV-04418-SVW-AS, 2020 WL 5095587 (C.D. Cal. Aug. 28, 2020); Malaube v. Greenwich Insurance Company, No. 22615-CIVWILLIAMS/TORRES, 2020 WL 5051581 (S.D. Fla. Aug. 26, 2020); Diesel Barbershop, LLC, et al. v. State Farm Lloyds, No. 5:20-CV-461-DAE, 2020 WL 4724305 (W.D. Tex. August 13, 2020); and  Rose's 1, LLC v. Erie Insurance Exchange, Civil Case No. 2020 CA 002424 (Superior Court of the District of Columbia Aug. 6, 2020). So far, these decisions appear based on existing precedents defining the meaning of "direct physical loss." We have not yet seen a decision from a jurisdiction where the meaning of "direct physical loss" is unclear. 

In addition to COVID-19 decisions, the Eleventh Circuit recently decided Mama Jo's, Inc. v. Sparta Ins. Co., No. 18-12887, 2020 WL 4782369 (11th Cir. Aug. 18, 2020). In that case, a Florida restaurant argued that road construction required it to clean and repaint its building and that this "cleaning and repainting" satisfied the "direct physical loss" requirement. The Eleventh Circuit disagreed and held that cleaning was not enough. While a non-COVID decision, Mama Jo's will feature prominently in any COVID-19 litigation in the Eleventh Circuit. 

The Lone Policyholder Victory

The lone  decision going for policyholders hails from Missouri. In Studio 417, Inc. v. Cincinnati Ins. Co., No. 6:20-cv-3127-SRB (W.D. Mo. Aug. 12, 2020), the court held the plaintiffs had plausibly alleged a "direct physical loss" based on the plain and ordinary meaning of that term. The court explained the term "loss" could mean "loss of use" because the policy covered both "direct physical loss of  or damage to" covered property. The Court concluded the word "damage" would be superfluous if the word "loss" did not include "loss of use." While the court allowed discovery to proceed, it noted it was not deciding the coverage issue and it would reconsider whether COVID-19 constitutes direct physical loss to property at the close of discovery. 

No National MDL for COVID-19 Business Interruption Suits

In late July, the Judicial Panel for Multidistrict Litigation heard arguments in favor of consolidating all business interruption suits in a single MDL. While the sheer number of suits is substantial, the arguments against consolidation are compelling. Lawyers for policyholders and carriers pointed out the policies varied from case to case and that each state's law was different. Less than two weeks later, the panel declined to create a national MDL. The court said there were too few common questions of fact and that centralization would not result in any efficiencies. The Court left open the possibility of creating insurer-specific MDLs. 

Legislative Proposals Largely Stalled 

Early in the pandemic, several states considered forcing insurers to cover COVID-19 business interruption losses. New Jersey came the closest to bringing such legislation to a floor vote but the effort ultimately stalled at the last moment. Similar legislation in other states such as Pennsylvania, Ohio, and Louisiana also appears to have fallen by the wayside. This is hardly surprising because such legislation would likely violate the Contracts Clause or other constitutional provisions. 

California, however, has taken a different tact. Assembly Bill 1552 would create "a rebuttable presumption . . . that COVID-19 was present on the insured's property and caused physical damage to that property which was the direct cause of the business interruption." This "presumption" would shift the burden of proof to the insurer to prove that COVID-19 was not present and did not physically damage the property. Because this is merely a rule of evidence rather than a rule of substantive law, it would likely pass constitutional scrutiny. It would also effectively eviscerate the "direct physical loss" requirement because, in most situations, it will be impossible to "prove" that the virus was not present on the property.  

Assembly Bill 1552 was referred to the California Senate's Committee on Insurance on July 2, 2020 and remains there. Insurance trade organizations largely oppose the bill so it will be interesting to see if the bill can advance out of committee. 

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