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Since the Celebration at Studio 417, it has been Mudpie in the Sky for COVID-19 Business Interruption Claimants

Written by: Jacob Raehn, Esq.

In the final days of summer, Federal District Courts from every corner of The United States have laid down orders both for, and mostly against, allowing plaintiffs’ COVID-19 business interruption claims to continue against their insurers. Thus, making the “unprecedented times” we are living in a thing of the recent past – at least when it comes to a roadmap for determining how courts may interpret these new coverage claims. The recent decisions, summarized further below, provide a few key takeaways:

  1. In the absence of complaint allegations that COVID-19 infiltrated, or likely infiltrated, the insured business premises, “direct physical loss” has not been properly alleged and coverage will not apply absent allegations of another applicable trigger for potential coverage;
  2. The definition of “direct physical loss,” when not defined by the policy, remains a jurisdiction-specific question, commonly relying on the plain meaning of the terms in the absence of jurisdictional precedent;
  3. Policy clauses excluding coverage for claims related to “bacteria, fungi, and viruses” are being upheld as reasonable coverage exclusions; and
  4. There will likely continue to be an important distinction between whether the policy covers the business premises versus the value of the business.

Motion to Dismiss Granted: On July 8, 2020, in Gavrilides, the first COVID-19 business interruption decision came down in the Michigan District Court in favor of the insurer, dismissing plaintiff’s complaint for business interruption losses. The decision, given directly from the bench, has been previously reported by HBS Attorneys Duane L Cochenour, and Caitlin E. Correa, and their blog post can be found here.[1]

Motion to Dismiss Denied: On August 12, 2020, in Studio 417, the Western District of Missouri denied insurer-defendant’s motion to dismiss because the hair salon and restaurant plaintiffs (Studio 417) had appropriately alleged facts in their Complaint that may prove recoverable.[2] While no decision has been made on the merits of this case, the important takeaways from the District Court’s findings are that (1) there was no virus exclusion in policy and (2) Studio 417’s allegation COVID-19 likely infiltrated their business premises plausibly alleged facts meeting the “direct physical loss” requirement for policy coverage. In his opinion, the judge found the presence of COVID-19 was not a  benign condition,” and that the Studio 417’s allegations COVID-19 particles were a  “physical substance” that attached to and damaged their property and rendered them unsafe and unstable were credible enough to allow the suit to proceed.

Motion to Dismiss Granted: On August 26, 2020, in Malaube, a Southern District of Florida issue an order recommending complaint dismissal for business losses resulting from Florida’s COVID-19 Emergency Orders. [3] The court held there was no direct physical loss due to the Emergency Orders’ requiring Malaube’s restaurant close indoor dining to mitigate the spread of COVID-19. Defendant argued (1) the policy was never triggered because it excludes any coverage for viruses, bacteria, or other microorganisms that induce physical distress, illness, or disease; (2) there was no coverage because Malaube failed to allege that it suffered any direct physical loss or damage to property; and (3) the two Florida Emergency Orders never prohibited plaintiff from accessing the insured property, arguing lack of access as a prerequisite that must be satisfied before insurance coverage can apply. The court found defendant’s strongest argument was that Malaube’s amended complaint failed to state a claim because the insurance policy only provides coverage for the actual loss of business income if a direct physical loss or damage to the property causes a suspension to Malaube’s restaurants. Relying on Gavrilide, the Court found Malaube did not allege COVID-19 was physically present on the premises. The court relied on prior Florida case law to define “‘direct physical loss’ . . . as a diminution in value and that the modifiers ‘direct’ and ‘physical’ ‘imposed the requirement that the damage be actual.’”[4]

Motion to Dismiss Granted: On September 3, 2020, in Turek, the Eastern District of Michigan dismissed claims by plaintiff chiropractic practice for business interruption losses the sustained after plaintiff suspended all business operations in compliance with the Governor of Michigan’s COVID-19 Emergency Order. [5] Important takeaways are (1) the insurance policy at issue had specific coverage exclusions for “fungi, virus, or bacteria,”; and (2) plaintiff claimed COVID-19 had never entered the practice’s premises. The court relied on Gavrilides and distinguished Studio 417 in this regard. The Court further found Plaintiff’s claims of “direct physical loss” from damage to the chiropractic equipment, certain leased equipment, medication and supplements with expiration dates, and other depreciating assets, was the result of passive depreciation. Plaintiff did not provide any authority supporting passive depreciation as a cause of direct physical loss to the insured property.

Motion to Dismiss Granted: On September 2, 2020, in 10E, LLC, the Central District of California dismissed 10E’s complaint where the insurance policy contained an exclusion for “LOSS DUE TO VIRUS OR BACTERIA.”[6] The exclusion specifically applied to losses from “action of civil authority,” such as COVID-19 Emergency Orders. The court did not find persuasive 10E’s attempts to plead around the virus exclusion by alleging they were not attempting to recover for any losses from COVID-19, but instead due to “evidence of physical damage to property,” in the surrounding area, not the restaurant premises. The court found that “while public health restrictions kept the restaurant’s ‘large groups’ and ‘happy-hour goers’ at home instead of in the dining room or at the bar, Plaintiff remained in possession of its dining room, bar, flatware, and all of the accoutrements of its ‘elegantly sophisticated surrounding.’” The court relied on Malaube and 10E, LLC, and distinguished Studio 417.

Motion to Dismiss Granted: On September 11, 2020, in Pappy’s, several barbershops had their Complaint dismissed in the Southern District of California.[7] Pappy’s complaint did not allege any COVID-19 Emergency Orders prohibited plaintiffs from accessing their business premises. Instead, the complaint alleged plaintiffs were prohibited from operating their businesses at their premises. Pappy’s policy contained a civil authority provision allowing recovery for losses “caused by civil authority preventing access to the described premises.” The court found “[p]laintiffs fail[ed] to make any distinction between their place of business (i.e., the physical premises where they operate their business), and the business itself, but this distinction is relevant to coverage under the Policy.” (emphasis added). The policy at issue insured plaintiff’s physical property, not plaintiff’s business itself. To that end, the civil authority coverage provision only provided coverage to the extent that access to plaintiffs’ physical premises is prohibited, and not if plaintiffs are simply prohibited from operating their business. While finding any complaint amendment was likely futile, the court has allowed Plaintiff’s until September 21, 2020 to file a motion for amended complaint. The court’s order relied on Malaube and distinguished Studio 417.

Motion to Dismiss Granted: Most recently, on September 14, 2020, in Mudpie, the Northern District of California granted defendant’s motion to dismiss related to Mudpie’s claims that California’s COVID-19 Emergency Orders requiring sheltering in place caused business interruption and subsequent economic losses which should trigger coverage.[8] Mudpie is a San Francisco based retail store selling children’s clothing, toys, housewares, books, and other goods. Defendant argued Mudpie “was not entitled to Business Income and Extra Expense coverage under its policy because ‘the limitations on [Mudpie’s] business operations were the result of the Governmental Order, as opposed to ‘direct physical loss or damage to property at the described premises.’” Additionally, and no less importantly, the policy contained an exclusion clause for “‘loss or damage caused by or resulting from any virus’ – such as the COVID-19 virus.” The court relied on Gavrilides and distinguished Studio 417, finding Mudpie did not allege COVID-19 had entered, or likely entered, the business premises.

It will likely be many more days and weeks before Court guidance on COVID-19 business interruption coverage achieves any redline absolutes. In the interim, we will continue to keep you updated the developments and trends in this growing area of dispute.

The Merriam-Webster dictionary defines “direct” in part as “characterized by close logical, causal, or consequential relationship.” Merriam-Webster, www.merriam-webster.com/dictionary/direct (last visited August 12, 2020). “Physical” is defined as “having material existence: perceptible especially through the senses and subject to the laws of nature.” Merriam-Webster, www.merriam-webster.com/dictionary/physical (last visited August 12, 2020). “Loss” is “the act of losing possession” and “deprivation.” Merriam-Webster, www.merriam-webster.com/dictionary/loss (last visited August 12, 2020).


[1]    Gavrilides Management Co. LLC v. Michigan Ins. Co., No. 20-258-CB, 2020 WL 4561979, at *1 (Mich. Cir. Ct. July 21, 2020) (noting reasoning for decision was expressed from the bench on July 8, 2020.).

[2] Studio 417, Inc. v. Cincinnati Ins. Co., No. 20-CV-03127-SRB, 2020 WL 4692385, at *1 (W.D. Mo. Aug. 12, 2020). The District Court relied on The Merriam-Webster’s definitions for defining “direct,” “physical,” and “loss.”

[3] Malaube, LLC v. Greenwich Ins. Co., No. 20-22615-CIV, 2020 WL 5051581, at *1 (S.D. Fla. Aug. 26, 2020)

[4] Homeowners Choice Prop. & Cas. v. Miguel Maspons, 211 So. 3d 1067, 1069 (Fla. Dist. Ct. App. 2017); Vazquez v. Citizens Prop. Ins. Corp., No. 3D18-769, 2020 WL 1950831, at *3 (Fla. Dist. Ct. App. Mar. 18, 2020).

[5] Turek Enterprises, Inc. v. State Farm Mut. Auto. Ins. Co., No. 20-11655, 2020 WL 5258484, at *1 (E.D. Mich. Sept. 3, 2020).

[6] 10E, LLC v. Travelers Indem. Co. of Connecticut, No. 2:20-CV-04418-SVW-AS, 2020 WL 5359653, at *1 (C.D. Cal. Sept. 2, 2020).

[7] Pappy’s Barber Shops, Inc. v. Farmers Grp., Inc., No. 20-CV-907-CAB-BLM, 2020 WL 5500221, at *1 (S.D. Cal. Sept. 11, 2020).

[8] MUDPIE, Inc., Plaintiff v. Travelers Casualty Insurance Company of America, Defendant., No. 20-CV-03213-JST, 2020 WL 5525171 (N.D. Cal. Sept. 14, 2020).

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