Federal judge favors Erie Insurance in slew of COVID-19 lawsuits nationwide

Cobb's Second Time Around Thrift Shop on Parade Street and St. Arnold's Mussel Bar in Washington, D.C. are different types of businesses separated by hundreds of miles.

Both, however, were among thousands of businesses nationwide that were forced to close temporarily due to state and local rules in the early days of COVID-19.

Those two companies had something else in common. Both filed insurance claims for lost income under commercial business policies purchased from Erie Insurance, which does business in 12 states and Washington, D.C.

And like most of those other companies that sought compensation, their claims were denied.

A group of 32 initial plaintiffs, including Second Time Around Thrift Shop and St. Arnold's Mussell Bar, filed lawsuits against Erie Insurance in what became a consolidated case in January 2021. More than 2,000 such claims were filed nationally against a long list of insurance companies.

A 75-page filing, assembled by lawyers from Pennsylvania and Florida, laid out the case for why the Erie-based company should have compensated the plaintiffs for lost business.

Among other claims, the lawsuit argues: "An all-risk insurance contract is a contract that provides its insureds, the plaintiffs and the class here, with coverage for all risks of direct physical loss or damages unless the risk is explicitly excluded or limited."

A federal judge saw things differently.

In a ruling likely to have an effect on other similar cases pending around the country, Chief U.S. District Judge Mark Hornak entered an order in October to dismiss four key counts of the plaintiff's complaint.

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How the plaintiffs saw it

Plaintiffs in the case, who were from Washington, D.C., Illinois, Maryland, New York, Ohio, Pennsylvania, Tennessee, Virginia and West Virginia, all had purchased one of two types of so-called "all-risk" commercial property insurance policies sold by Erie Insurance.

The lawsuit claims that both policies included an agreement stating, "Erie will pay for direct physical loss of or damage to covered property at the premises."

While the insurance policies define loss as "direct and accidental loss of or damage to covered property," plaintiffs made the case that their losses fit that definition.

According to the complaint, "When the mandated shutdown rules made it unlawful for plaintiffs to fully access, use and operate their businesses at the covered property, (it) constitutes a loss to the covered property under the policy."

The lawsuit asserts that the policy "constitutes a valid and binding agreement obligating the defendants to indemnify plaintiffs for covered losses."

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Plaintiffs in the case — a group that included a Honey Baked Ham store in Pennsylvania, Rose Glam Hair Studio in Virginia and Highland Park Ford Lincoln in Chicago, — argued that "Erie Insurance Group made a uniform decision to deny all claims arising from COVID-19."

Plaintiffs also said that the company "misrepresented to its policyholders that coverage decisions would be made on a case-by-case basis."

And in a pointed statement, lawyers for the plaintiffs wrote: "Erie Insurance Group's failure to reasonably investigate the losses...has been at the least reckless and/or grossly negligent in disregard of their obligations."

The judge's ruling

In his opinion, Judge Hornak explains why claims made by the plaintiff were invalid, writing that the primary dispute is whether COVID-related events caused "direct physical loss or damage to covered property."

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Hornak answered that question by recapping an argument made by the defendant, Erie Insurance, that "direct physical loss of or damage to property unambiguously requires a tangible, concrete physical harm to the property, which cannot be plausibly alleged here."

Hornak continued: "Erie (Insurance) argues that the mandated shutdown rules did not cause direct physical loss of or damage to property because they did not physically alter plaintiff's properties nor did they render those properties useless or uninhabitable."

In other words, damaged buildings and equipment cannot be blamed for the losses suffered by the plaintiffs.

The judge also addressed the plaintiff's claim that the Erie Insurance policies did not include a virus exclusion.

"We conclude that is of no import here," the judge wrote. "Unless the policy already granted coverage, which it does not do, a virus exclusion was not necessary."

Hornak said there is no minimizing the economic losses caused by the pandemic.

"It is self-evident that the COVID-19 pandemic has had detrimental consequences to people all over the world," the judge wrote. "However, it can also be accurate that the Erie policies...do not provide coverage for the additional consequences that plaintiffs assert."

Matt Cummings, a spokesman for Erie Insurance, acknowledged in a statement that the outcome was favorable for the company.

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He wrote: "We appreciate Chief Judge Hornak's thorough consideration of this multidistrict litigation and we're pleased with the outcome of this case. The conclusions reached in this COVID-19 MDL further affirm the definition of 'direct physical loss or damage' and the importance of direct physical loss to property in triggering business interruption coverage. Since 1925, Erie Insurance has been committed to providing the coverage and protection that our personal and commercial insurance customers have purchased and fulfilling the promises made in our policies."

A nationwide issue

In the early paragraphs of his 68-page opinion, the judge acknowledged that this particular claim was not unique.

He wrote: "The court is not short of guidance from the parties and from the decisions of other courts as to how it should resolve the issues of law that these cases raise."

More than 2,340 COVID-related business interruption cases have been filed nationally, according to the University of Pennsylvania Carey Law School's COVID Litigation tracker.

But successful lawsuits seem to be the exception, not the rule, according to a report by Property Casualty 360, an insurance industry publication.

The publication notes, for instance, that the U.S. Supreme Court refused to consider a business interruption case filed by Goodwill Industries in Oklahoma.

The insurance publication concludes: "In the few rare cases where a policyholder has netted a win, the facts were very specific and involved exclusions and additional coverages, ambiguous policy provisions, and the actual presence of the COVID-19 virus on business property."

Contact Jim Martin at [email protected].