445 S. Figueroa Street, Suite 2350, Los Angeles, California 90071

Coronavirus/Force Majeure Litigation Update

Since our last COVID-19 update in May, thousands of additional coronavirus-related lawsuits have been filed throughout the United States. They continue to run the gamut, ranging from insurance coverage claims to contract disputes centered on force majeure provisions. There has, however, been a marked increase in the proportion of employment-related COVID-19 claims, although no cases appear to have been filed against businesses, other than cruise lines, for a customer being exposed to and contracting the virus.

Despite the scope and numerosity of these cases, most are still making their way through the court system, with few published opinions offering guidance as to how courts will apply established contract and tort principals to the unprecedented business disruptions caused by the pandemic. There are, however, two notable exceptions which could provide insight on how courts will trend.

Stay-at-home orders a permissible basis for non-performance. In In re Hitz Restaurant Group (2020 Bankr. LEXIS 1470 (N.D. Ill. June 2, 2020)), the United States Bankruptcy Court for the Northern District of Illinois (Eastern Division) held that a force majeure clause in a lease excused a restaurant tenant from its obligation to pay a portion of post-petition rent. The force majeure at issue read as follows:

Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in this Lease, in the event, but only so long as the performance of any obligations are prevented or delayed, retarded or hindered by . . . laws, governmental action or inaction, orders of government . . . . Lack of money shall not be grounds for force majeure.

The executive order in that case prohibited on-premises consumption and dining at restaurants but permitted delivery and curbside pick-up. The court held that the executive order “unquestionably constitutes both ‘governmental action’ and the issuance of an ‘order,’ thus triggering the force majeure clause.” As for causation and damages, the court adopted a practical approach, finding that because the order prohibited the tenant’s use of 75 percent of the restaurant square footage, it was only obligated to pay 25 percent of the rental payments that became due during the order’s pendency.

The federal bankruptcy court’s decision, while not binding on other courts, could influence subsequent court decisions regarding the applicability of force majeure clauses to COVID-19 executive orders, and the possible ways courts may try to apportion causation and damages in such circumstances. As always, whether or not a force majeure clause relieves a party from a contractual obligation will largely depend on the specific wording of the clause.

Insurance coverage for COVID-19 business interruption. In Studio 417, Inc., et al. v. The Cincinnati Ins. Comp., No. 20-cv-03127-SRB, Order Denying Mot. to Dism., issued Aug. 12, 2020 (W.D. Mo.), the United States District Court for the Western District of Missouri issued a landmark ruling that essentially rejected the now ubiquitous argument by insurers that the virus causing COVID-19 cannot satisfy the requirement that “direct physical loss or damage” caused a loss. In that case, a group of hair salons and restaurants brought claims under their insurance policies to recover business interruption losses due to COVID-19. Defendant insurer filed a Motion to Dismiss on the basis that there must be tangible or structural damage to property, such as storm damage, to satisfy the “physical loss or damage” found in most business interruption policies. The court rejected that argument, ruling instead that the term “physical loss” should be broadly construed:

Upon review of the record, the Court finds that Plaintiffs have adequately stated a claim for direct physical loss. First, because the Policies do not define a direct “physical loss” the Court must “rely on the plain and ordinary meaning of the phrase.” The Merriam-Webster dictionary defines “direct” in part as “characterized by close logical, causal, or consequential relationship.” “Physical” is defined as “having material existence: perceptible especially through the senses and subject to the laws of nature.” “Loss” is “the act of losing possession” and “deprivation.”

Applying these definitions, Plaintiffs have adequately alleged a direct physical loss. Plaintiffs allege a causal relationship between COVID-19 and their alleged losses. Plaintiffs further allege that COVID-19 “is a physical substance,” that it “live[s] on” and is “active on inert physical surfaces,” and is also “emitted into the air.” COVID-19 allegedly attached to and deprived Plaintiffs of their property, making it “unsafe and unusable, resulting in direct physical loss to the premises and property.” Based on these allegations, the Amended Complaint plausibly alleges a “direct physical loss” based on “the plain and ordinary meaning of the phrase.”  (Internal citations omitted).

Although the court did not reach a final decision on the merits of the lawsuit, its order is significant. It is the first reported decision in which a court has rejected the insurer’s position that the coronavirus cannot cause direct physical loss, providing policyholders with powerful authority in support of business interruption coverage claims stemming from the COVID-19 pandemic.