A federal judge's ruling in Missouri represents one of the first victories of note for policyholders as litigation over business interruption insurance continues to pile up across the U.S.

But with only a handful of opinions issued on the matter so far, it is clear that legal battles over whether pandemic-related losses are covered are still in the very early days of winding their ways through court.

U.S. District Judge Stephen Bough of the Western District of Missouri on Aug. 12 threw out a motion to dismiss a case against Cincinnati Financial Corp., ruling that the plaintiffs "adequately alleged a direct physical loss," since coronavirus particles attached to property and damaged it by making it unsafe and unusable. The decision will allow a group of restaurants and hair salons to move forward with their case and sue the insurance carrier for losses.

Insurers largely contend that business interruption losses related to the pandemic are not covered, and say forcing them to pay out claims could ruin the industry. However, many lawyers for policyholders do not find these cases so cut and dry and believe that coverage will be found for many such claims.

Loretta Worters, a spokesperson for the Insurance Information Institute, called the Missouri ruling that allowed the lawsuit to go forward "only a first step."

"As this case continues, we believe that the court will ultimately enforce the language of the policy contract just as three judges have already done so on other cases," Worters said in an email. "Rewriting a contract like an insurance policy is unconstitutional."

Cincinnati Financial shares were pummeled in the wake of its first-quarter earnings, when it revealed that its commercial policy forms were not completely aligned with standard business insurance language that excludes interruption losses due to viruses. They remain down about a quarter from where they were in mid-February.

On Cincinnati Financial's second-quarter earnings call, CEO Steven Johnston said he feels that the company's "standard policy language is strong."

"Because the virus does not produce direct physical damage or loss of property, we believe strongly that no coverage exists for this peril," Johnston said.

Alex Roje, a partner with Lathrop GPM's Insurance Recovery Group, has been following the developing situation with business interruption litigation and called the Missouri case a "terrific" win for policyholders. However, in notable cases in Michigan and New York, judges ruled in favor of the carriers, finding that the virus does not in fact present direct physical loss or damage to property and therefore fails to trigger coverage.

Roje noted that the Michigan case was an "outright dismissal" of a complaint, which she said would be appealable.

"That's going to need to work its way through the appeal process," Roje said. "I think we're going to see a substantive decision come out of Michigan, but it's going to take a long time."

Although the decision in Missouri was good for policyholders, Roje said a pro-policyholder decision coming out of a state like California under California law would likely prompt more litigation. She noted that several significant complaints have been filed there, including for popular restaurant chains P.F. Chang's and In-N-Out Burger.

According to court documents, In-N-Out Burger maintained a business interruption policy through Zurich Insurance Group AG with a liability limit of $250 million. In-N-Out said in its complaint that the Zurich policy expressly includes coverage for many types of contamination such as virus, pathogen and disease-causing illness or agent. The complaint also accuses Zurich of denying coverage without "conducting any investigation."

In Zurich's response, the insurer said there could be no coverage for In-N-Out, under the view that the restaurant chain did not suffer "direct physical loss ... or damage caused by a covered cause of loss to covered property at an insured location."

Cases stack up

There are now more than 1,000 COVID-related legal cases filed against insurers in the U.S., with the vast majority seeking business income or business interruption coverage, according to the University of Pennsylvania Law School's COVID Coverage Litigation Tracker.

As of Aug. 24, the university's case tracker showed that 168 cases have been filed against Hartford Financial Services Group Inc., the most against any insurer. Three other insurers — Cincinnati Financial, Zurich and Travelers Cos. Inc. — have at least 50 cases filed against them.

The U.S. insurance industry has paid some business interruption claims, albeit only a small fraction of the number filed. According to information collected by the National Association of Insurance Commissioners, insurers as of July had an aggregate of $96.8 million in paid losses on 1,122 claims, for an average paid loss of almost $86,000. However, more than 133,000 cases had been closed without payment, including all but 10 of the nearly 66,000 business owners policy claims.

Ultimately, insurers believe a government backstop is likely to be key for insurance coverage of future pandemics, and several prominent insurers are working to fill the coverage gap that has left commercial policyholders unprotected and tied up in long legal battles.

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