Covid-related business losses are not ‘physical loss’

Where a West Virginia business closed two of its art studio locations because of the governor’s Covid-19 executive order, its claim for lost business income and other expenses was denied because there was no material destruction or harm to its covered premises.

In March 2020, Uncork and Create LLC operated a “creative events” business at two art studio locations in Barboursville, West Virginia and in Charleston, West Virginia. On March 23, 2020, the West Virginia governor issued an executive order requiring that non-essential businesses in West Virginia “temporarily cease operations.”

In compliance with the closure order, Uncork closed its two art studios. These closures caused Uncork to suffer “a substantial loss of business income” and other unspecified financial losses. When permitted to do so, Uncork re-opened its Charleston studio on June 11, 2020. However, Uncork permanently closed its Barboursville studio on April 24, 2020.

Uncork sought coverage for lost business income and other expenses from The Cincinnati Insurance Company. In response, Cincinnati issued a letter denying Uncork’s claim, stating that there was no evidence showing a “direct physical loss or damage” at Uncork’s covered property.

Following this denial of coverage, Uncork filed a class action complaint against Cincinnati on behalf of itself and similarly situated plaintiffs. The district court granted Cincinnati’s motion to dismiss, reasoning that neither the closure order nor the Covid-19 virus caused a “physical loss or physical damage” to the covered property under the terms of the policy. The court concluded that although the pandemic and the closure order adversely affected businesses, “the unambiguous terms of the [p]olicy do not provide coverage for solely economic losses unaccompanied by physical property damage.”

Uncork appealed. But an appellate court sided with the insurance company.

The court found that neither the closure order nor the Covid-19 virus caused present or impending material destruction or material harm that physically altered the covered property. As a result, the policy’s coverage for business income loss and other expenses did not apply to Uncork’s claim for financial losses because of the absence of any material destruction or material harm to its covered premises.

The court noted that this holding was consistent with the decisions in other jurisdictions, which have applied various states’ laws to similar insurance claims and policy provisions.