COVID-19 Business Interruption Decisions for Policyholders: State Appellate Courts (Begin to) Recognize Deviations from a Pre-Pandemic Norm

Lexis Nexus - Practical Guidance

PUBLISHED ON: February 1, 2023

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This article discusses how the momentum in COVID-19 business interruption litigation may be shifting toward policyholders as a state high court as well as a growing number of state appellate courts begin to recognizefinally-that many prior COVID-19 business interruption rulings deviate from the norm. Not all claims are alike and 17% of policies were sold without broad virus exclusions; policyholders with broad policy wordings and strong claims are pursuing coverage at a time when the right to coverage for such claims is pending before several other state supreme courts. The article further outlines how to best navigate an evolving landscape in which state appellate court decisions are acknowledging pre-pandemic precedent holding that losses from fumes, bacteria, and other causes of nonstructural damage are covered, and allowing COVID-related business interruption claims to proceed toward trial.

Policyholder advocates reached a critical milestone at the end of September 2022 when the Vermont Supreme Court became the first state high court to adhere to pre-pandemic precedent and hold that well-pled allegations of “direct physical loss or damage” to property from COVID-19 may be sufficient to trigger coverage for business interruption losses. This state supreme court decision comes on the heels of a growing number of state appellate court decisions, including cases from California, Louisiana, and most recently Alaska, favoring policyholders on this critical issue.

The shift comes not a minute too soon for policyholders. Those who purchased first-party property insurance and business interruption policies without broad virus exclusions, and who have pursued coverage on grounds that COVID-19 caused direct physical loss or damage to property, are gathering steam just when the right to coverage for such claims is pending before several other state supreme courts.

For additional information about COVID-19 business interruption litigation, see Business Interruption Insurance: Filing a Claim, COVID-19 Business Interruption Claims PreLitigation, COVID-19 Business Interruption Claims PreLitigation Checklist, COVID-19 Business Interruption Claims Litigation, COVID-19 Business Interruption Claims Litigation Checklist, Business Interruption Insurance: Post-Pandemic Litigation Developments, COVID-19 Business Interruption Claims State Law Survey, and COVID-19 Insurance Litigation Resource Kit.

The State of Play before the Pandemic Arose

“Back to the Future” is a good way to describe this shift in favor of coverage. Policyholder advocates take the position that the norm—as established by decades of decisions from both federal and state courts—is that damage is tangible and subject to coverage under such policies even when the property is not structurally altered, the principal consequence is a loss of functionality, and neither the cause of the damage nor the damage itself is visible to the naked eye. The deviation was the landslide of federal courts at the start of the pandemic that disregarded this well-established precedent and rejected coverage for COVID-19 losses.


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