The COVID-19 pandemic has certainly caused substantial interruption to business these last 18 months. The legal question from nearly the beginning has been whether the business losses arising from the viral spread constitute covered “business interruption” losses resulting from a covered cause under those insurance policies that cover losses stemming from “physical property damage”. According to the Merrimack County Superior Court in New Hampshire, that answer is “yes” depending on what the insurance contract actually says.
Many companies have struggled to stay afloat since the first pandemic shut down orders came in March, 2020. Owners have had to find new sources of revenue and have sought federal and local funding offered under emergency relief programs to pay the bills. Bankruptcies and closures have gashed through communities as harshly as the virus itself. Looking for a lifeline beyond often unreliable government relief, many businesses have turned to insurance policies in an effort to recover some of their pandemic losses. Commercial insurance policies that include “business interruption” coverage have caught the eye of those businesses seeking at least some reimbursement for their lost revenues resulting from COVID-19. Many insurance companies have fought such claims successfully, arguing that these types of policies did not cover economic losses caused by a virus like COVID-19. But a recent case suggests that insureds now have a fair chance to obtain the coverage and reimbursement they seek, at least under New Hampshire law.
Earlier this summer, several New Hampshire hotel operators won a suit against their insurers who had taken the position that the hotels’ revenue losses from COVID-19 were not covered by their “business interruption” insurance policies. The Superior Court in Merrimack County rejected the insurers’ argument and ruled that these policies did in fact provide coverage for losses resulting from the COVID-19 pandemic. The case is called Schleicher & Stebbins Hotels, LLC, et al. v. Starr Surplus Lines Insurance Companies, et al., and it is important because it is one of a very few favorable Court decisions for COVID-related business interruption coverage lawsuits filed across the country. This is what happened, and it is a story all too familiar:
Plaintiffs owned and operated 23 hotels in multiple states, including 4 in New Hampshire. As with many businesses, these hotels were forced to dramatically alter operations during the pandemic. When scientists identified the virus responsible for COVID-19 and determined that it was transmitted by close contact and possibly contaminated surfaces as well, the governors of many states, including New Hampshire, imposed measures to slow the spread. As explained in the Court’s order, on April 6, 2020, Governor Sununu ordered lodging providers to “restrict ‘lodging [to] vulnerable populations and essential workers only.” On June 5, 2020, the restrictions changed so that New Hampshire lodging facilities were allowed to accept overnight reservations from in-state residents, but other limitations remained in place. New Hampshire hotels were not allowed to take out-of-state visitors unless they had completed a 14-day quarantine. Surrounding states also issued stay-at-home orders preventing people from traveling, further limiting the need for lodging at hotels in New Hampshire.
The plaintiff-hotels in the case had previously purchased $600 million in commercial insurance for the covered period November 1, 2019-November 1, 2020. These policies all had identical language with regard to business interruption coverage. Specifically, the policies stated that the Plaintiffs were covered for “direct physical loss or damage to all real and personal property owned, used, leased, or intended for use” by the Plaintiffs.
Seeking coverage under this provision for their losses caused by the response to the pandemic, the hotels filed an insurance claim in April, 2020. The insurance companies denied the claims or sought additional information from the insured hotels. In response, the hotels filed suit and won a declaratory judgment that COVID-19 had caused “physical loss or damage” and that therefore the hotels were entitled to coverage.
The decision was based largely on a unique rule applied in New Hampshire for interpreting the term “physical loss.” In New Hampshire, the term “physical loss” does not require actual structural damage or some other tangible change to real property. Rather, the New Hampshire Supreme Court has established that in order to win coverage for a “physical loss”, an insured simply needs to show a “distinct and demonstrable alteration of the insured property”. Nothing else. This standard was established in a 2015 case, Mellin v. Northern Security Insurance Company, where the property loss caused by toxic odors originating from cat urine outside the property was found to constitute such “direct physical loss” and the insureds were found to have insurance coverage.
Applying this standard in Schleicher & Stebbins Hotels, LLC, et al. v. Starr Surplus Lines Insurance Companies, et al., the Merrimack County Superior Court said that losses caused by COVID-19 were much like the property loss from the odors from cat urine and that, therefore, COVID-19 losses met the “direct physical loss” standard under New Hampshire law. Just like the odors from the cat urine in the 2015 case, the Court concluded that a “distinct” alteration of the property occurred even though the COVID-19 virus did not originate in the Plaintiffs’ properties, as the virus had been consistently found to survive on surfaces of the kind that exist in and around hotels, and as coming into contact with the property exposed to such virus resulted in a risk of contracting a potentially deadly disease. It did not matter to the court that the virus could be removed from surfaces through cleaning and disinfecting or could not be seen or touched. As for the requirement that there be a “demonstrable” alteration of the property, the court reasoned that this element had been met because the virus was found by various government authorities to be widespread in the regions in which the hotels were located and because it was detectable through laboratory testing that could determine whether the hotels’ property had been infected with COVID-19.
Importantly, the Court also rejected the insurers argument that a “microorganism exclusion” in the policies prevented coverage. This exclusion stated that the policies did “not insure any loss, damage, claim, cost, expense…directly or indirectly arising out of or relating to…[a] microorganism of any type…regardless whether there is…any physical loss or damage to insured’s property.” But the court ruled that there was ambiguity whether the COVID-19 virus was a “microorganism” and such ambiguity in the context of assessing insurance coverage must be decided in favor of the insured hotels. The court did agree with the insurance companies on one issue, specifically that hotels with a “pollution exclusion” that explicitly excluded coverage for “any…[l]oss or damage caused by resulting from, contributed to, or made worse by…[the] release, discharge, escape or dispersal of a ‘virus’” did not provide coverage for business interruption losses caused by the viral pandemic.
Exactly how much the hotels will actually be awarded remains to be determined; they claim to have sustained over $100 million in losses. There is of course a chance that the decision gets appealed. But in the meantime, this is an important ruling for companies with business interruption coverage.
So, what does all of this mean for businesses seeking to recover for the losses sustained during the COVID-19 pandemic? The availability of coverage for lost revenue depends on the specific language in a business’s insurance policy. But, this recent New Hampshire decision suggests that for some businesses, those operating in New Hampshire in particular, there might well be insurance coverage for lost revenue caused by COVID-19. Businesses should check their insurance policies for both coverage language and exclusions. If they contain “physical damage and loss” provisions the same or similar as the ones found to provide coverage in the Schleicher & Stebbins Hotels, LLC case (and no exclusions apply) businesses should seriously consider making a claim with their insurance company for lost revenues caused by COVID-19. It just might provide the lifeline needed.