Cobb’s Second Time Around Thrift Shop on Parade Street and St. Arnold’s Mussel Bar in Washington, DC are different types of businesses hundreds of miles apart.
The two, however, were among thousands of businesses across the country that were forced to temporarily close due to state and local rules at the start of COVID-19.
These two companies had something else in common. The two filed insurance claims for loss of income under commercial policies purchased from Erie Insurance, which does business in 12 states and Washington, D.C.
And like most other companies that have sought compensation, their claims have been denied.
A group of 32 original plaintiffs, including Second Time Around Thrift Shop and St. Arnold’s Mussell Bar, filed lawsuits against Erie Insurance in what became a consolidated case in January 2021. More than 2,000 such claims have been filed nationwide against a long list of insurance companies. .
A 75-page filing, compiled by attorneys in Pennsylvania and Florida, explained why the Erie-based company should have compensated plaintiffs for lost business.
Among other claims, the lawsuit argues: “An all-risks insurance contract is a contract which provides its insureds, the plaintiffs and the class here, with coverage for all risks of direct physical loss or damage unless the risk is explicitly excluded or limited.”
A federal judge saw things differently.
In a ruling likely to affect other similar cases pending around the country, U.S. District Chief Judge Mark Hornak issued an order in October to dismiss four key counts of the plaintiff’s complaint.
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How the plaintiffs saw it
The plaintiffs in the case, from Washington, D.C., Illinois, Maryland, New York, Ohio, Pennsylvania, Tennessee, Virginia and West Virginia, had all subscribed one of two types of all-risk commercial property insurance policies. sold by Erie Insurance.
The lawsuit claims that both policies included an agreement stating: “Erie will pay for direct physical loss or damage to covered property on the premises.”
While insurance policies define loss as “the direct and accidental loss or damage to covered property”, the plaintiffs argued that their losses fit that definition.
According to the complaint, “where mandatory closure rules have made it illegal for plaintiffs to fully access, use and operate their businesses on the covered property, (this) constitutes a loss to the property covered by the policy” .
The lawsuit says the policy “constitutes a valid and binding agreement obligating defendants to indemnify plaintiffs for covered losses.”
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The plaintiffs in the case – a group that included a Honey Baked Ham store in Pennsylvania, Rose Glam Hair Studio in Virginia and Highland Park Ford Lincoln in Chicago, – argued that “Erie Insurance Group made a uniform decision to deny all claims arising from COVID-19.”
The plaintiffs also said the company “falsely told its policyholders that coverage decisions would be made on a case-by-case basis.”
And in a pointed statement, plaintiffs’ attorneys wrote, “Erie Insurance Group’s failure to reasonably investigate the losses…was reckless to say the least and/or grossly negligent in disregard of their obligations.”
The judge’s decision
In his view, Judge Hornak explains why plaintiff’s claims were invalid, writing that the primary dispute is whether the COVID-related events caused “direct physical loss or damage to covered property.”
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Hornak answered this question by recapping an argument made by the defendant, Erie Insurance, that “direct physical loss or damage to property unambiguously requires tangible and concrete physical damage to property, which cannot be alleged plausibly here”.
Hornak continued: “Erie (Insurance) argues that the mandatory stop rules caused no direct physical loss or damage to property because they did not physically alter the plaintiff’s properties and did not rendered these properties useless or uninhabitable.”
In other words, damaged buildings and equipment cannot be held responsible for losses suffered by claimants.
The judge also addressed the plaintiff’s claim that the Erie Insurance policies did not include a virus exclusion.
“We conclude that it is of no importance here,” the judge wrote. “Unless the police already grant coverage, which they do not, a virus exclusion was not necessary.”
Hornak said it was impossible to minimize the economic losses caused by the pandemic.
“It stands to reason that the COVID-19 pandemic has had a detrimental impact on people around the world,” Judge wrote. “However, it may also be correct that the Erie policies … do not cover the additional consequences that plaintiffs claim.”
Matt Cummings, spokesman for Erie Insurance, acknowledged in a statement that the result was favorable for the company.
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He wrote: “We appreciate Chief Justice Hornak’s thorough review of this multidistrict litigation and are satisfied with the outcome of this case. The findings in this COVID-19 MDL further support the definition of ‘loss or direct physical damage” and the importance of direct physical loss to property in triggering business interruption coverage. Since 1925, Erie Insurance has been committed to providing the coverage and protection that our insurance customers personal and commercial property purchased and to fulfill the promises made in our policies.
A national problem
In the opening paragraphs of his 68-page opinion, the judge acknowledged that this particular claim was not unique.
He wrote: “The court has no shortage of guidance from the parties and from the decisions of other courts as to how it should resolve the legal issues that these cases raise.”
More than 2,340 COVID-related business interruption cases have been filed nationwide, according to the University of Pennsylvania Carey Law School’s COVID Litigation tracker.
But successful lawsuits appear to be the exception, not the rule, according to a report by Property Casualty 360, an insurance industry publication.
The publication notes, for example, that the United States Supreme Court declined to review a business interruption case filed by Goodwill Industries in Oklahoma.
The insurance publication concludes: “In the rare cases where an insured won, the facts were very specific and involved exclusions and additional covers, ambiguous policy provisions and the actual presence of the COVID-19 virus on the company property.”
Contact Jim Martin at email@example.com.
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