Commercial property insurance policies typically provide coverage for “all risks” of “physical loss or damage” to the insured property. Critically for policyholders, commercial property policies also cover loss of business income. However, business income provisions typically require that “physical loss or damage” must cause the loss of business income. COVID-19 coverage disputes thus often present the threshold issue of whether the virus causes “physical loss or damage” to insured property.

When the pandemic began in earnest a year ago, many businesses felt the squeeze as government closure orders cut off their revenues. When these companies (many of them restaurants, hair salons, fitness centers, and other retail businesses) filed claims, their insurers told them they had no coverage. Plaintiffs’ law firms saw this as an opportunity to sign up COVID-19 policyholders and rushed to courthouses across the country to file lawsuits, often without regard to policy language.

In the early going, many policyholders failed to adequately plead “physical loss or damage” to their properties by neglecting to allege that the virus infected or contaminated their property. In these cases, insurers typically responded by moving to dismiss policyholders’ complaints on the ground that they failed to state a claim for which relief could be granted, under Federal Rule of Civil Procedure 12 or a state-court analogue. Specifically, these motions argued that the policyholders failed to plausibly plead “physical loss or damage” to their properties because they did not allege that the virus infected or contaminated their premises.

Predictable results followed, and insurers racked up a string of early wins. In the first reported COVID-19 coverage decision, Gavrilides Management Co. et al. v. Michigan Ins. Co., a Michigan state court granted the insurer’s motion for summary judgment. However, the policyholder (a restaurant) did not allege that its insured property had suffered “physical loss or damage” due to the presence of the virus. To make matters worse, the policyholder specifically stated that “at no time” did the virus enter either of its restaurant locations. As explained above, business income coverage provisions require “physical loss or damage” to cause the suspension of the policyholder’s operations. In this high-profile case, the policyholder in Gavrilides thus pled itself out of coverage.

Many other policyholders’ early pleadings suffered from similar defects, resulting in similar outcomes. As the losses mounted, insurers began to claim victory, putting out a false narrative that courts across the country had reached a “consensus” that commercial property policies do not cover COVID-19 losses. The insurance industry also began publishing think pieces pushing a similar story. The purpose of this narrative was clear: to discourage businesses from filing claims with their insurers. After all, insurers win 100% of the coverage lawsuits that policyholders do not file. Fortunately, more experienced attorneys with better-pled complaints were waiting in the wings to mount a comeback in the second half of 2020.

In the early stages of COVID-19 coverage litigation, insurers capitalized on the pleading mistakes of unsophisticated businesses and inexperienced lawyers to score a series of easy wins and claim victory. However, as more sophisticated businesses with more experienced attorneys joined the fold and began filing better-pled complaints, the trend reversed: policyholders began defeating insurer motions to dismiss and winning summary judgment outright. Contrary to the insurers’ narrative, many courts are now correctly interpreting “physical loss or damage” in policyholders’ favor. Stay tuned as these cases progress to the appellate level in 2021. The COVID-19 coverage wars aren’t over—they’ve only just begun.