A Win for Small Businesses Amidst The COVID-19 Insurance War

In recent months - as the COVID-19 pandemic forced innumerous small businesses to close in Maryland and across the country - many such small business find themselves embroiled in another struggle: a war with their insurance companies. Specifically, many small businesses have had to take their insurers to court to enforce coverage for business interruption losses - the amounts a business would have otherwise received had they not been forced to close.

Last month, though, one small business won an early battle in this war. The case is Studio 417 Inc., et al. v. Cincinnati Insurance Company, and remains pending in federal court in Missouri.

Although this decision did not resolve the entire case, rather merely allowed Studio 417 to survive a motion to dismiss and proceed to discovery, its discussion provides an important prism through which to consider the scope and importance of this issue.

Business interruption coverage allows a business to recoup certain losses in the event it cannot normally function no fault of its own. For example, let's say you run a small print shop in downtown Baltimore. You finish for the day, lock up the store, and go home for the evening. But that night, a massive storm suddenly rips through downtown. When you arrive back at your store in the morning, you find that the storm caused massive damage to your shop and, as a result, all of your print machines are destroyed. To add insult to injury, a notice has been posed on your front door that reads: "PUBLIC NOTICE. THIS PROPERTY IS CONDEMNED. DO NOT ENTER UNTIL RESTRICTION LIFTED. BALTIMORE CITY BUILDING OFFICIAL."

Now what? Well, assuming you have business interruption coverage, you call your insurance agent and file a claim against that coverage to cover your financial losses and your anticipated lost income.

Now, let's change the facts slightly. What happens if you find out on March 23, 2020 that the Governor proclaimed that your business was deemed "non-essential" and must shut down operations at 5pm? Nothing about your business operations had changed from the prior day - the building remained intact and your equipment ran as well as ever. The only difference is that due to the public health emergency, you can't operate or even open your shop to the public. Shouldn't this shutdown in operations also qualify for coverage under your business interruption policy?

Since March, many insurance companies said "no," asserting that such coverage only applies when a business owner claims a "physical injury or damage" to the premises where the business operates. In other words, losses stemming from the storm damages would be covered, but losses caused by the COVID-19 shutdowns are not. Insurance companies have alternatively pointed to exclusions in their policies for losses caused by "viruses" to deny coverage.

Back to the plight of Studio 417, which was one of a group of hair salons shut down by proclamation of Missouri's Governor due to COVID-19. After its insurer, Cincinnati Insurance, denied its claim business interruption coverage, Studio 417 sued. Cincinnati Insurance moved to have the case dismissed.

In reviewing Cincinnati Insurance's motion to dismiss, the Court noted that Studio 417's policy did not have an exclusion for viruses. Furthermore, it determined that Studio 417 adequately alleged that they sustained a "direct physical loss" as required by the policy because it alleges that its premises had become "uninhabitable or unusable." Moreover, because the policy did not define what is meant by a "direct physical loss," the Court found that Studio 417 adequately alleged that such a "loss" resulted from the fact that COVID-19 is a "physical substance" that was "emitted into the air" and "infected the premises." Finally, the Court found that Studio 417 sufficiently alleged that the Governor's proclamation closing their operations fell within the provisions of the business interruption policy allowing coverage when access to the business is denied by civil authority or that there is no ingress or egress from the premises.

This decision thus provides small businesses with a ray of light as they emerge from months of economic turmoil. If anything, the decision provides yet another example why you should never take your insurance company's denial of your claim as the "final word." It may be possible, given the specific coverage provided under your business interruption policy, and the specific facts of your loss, that relief is possible. Should you have any doubt, the attorneys at SILVERMAN THOMPSON collectively have years of experience navigating clients through these disputes. Please call us at (410) 385-2225 and ask to speak with Ned Parent.