Court Invites Insured to Amend Business Interruption Complaint

Business Insurance
October 20, 2020

By Judy Greenwald

A federal district court in Minneapolis has rejected a hair salon and barbershop’s effort to collect business interruption coverage from its insurer and granted a motion to dismiss the case, but invited the plaintiff to amend its complaint.

“It is possible” a policyholder would be “entitled to coverage for lost business income” if his claim were “properly alleged,” said Friday’s ruling by the U.S. District Court in Minneapolis in Kenneth Seifert d/b/a The Hair Place and HarMar Barbers inc. v. IMT Insurance Co. The ruling was by the court’s chief judge, John R. Tunheim.

Defense and policyholder attorneys disagree about the case’s significance.

West Des Moines, Iowa-based IMT Insurance Co. had filed a motion to dismiss the business interruption litigation filed by Mr. Seifert in connection with his Albert Lea, Minnesota, salon and St. Paul barbershop.

In granting the motion to dismiss, Judge Tunheim said, “The insurance policies cover the loss of business income when business operations are suspected because of ‘direct physical loss of damage to property at the described premises’…Minnesota caselaw does not require a showing of structural damage to qualify for coverage. ‘Direct physical loss’ can also be found when business premises are contaminated by asbestos…or smoke.”

The ruling states, however, that “Seifert has not pleaded any facts demonstrating his businesses were similarly contaminated by the novel coronavirus.

“That is, he only asserts he suffered an economic loss unrelated to an actual filtration and contamination of the properties.”

The ruling states also he does not plead any facts demonstrating a civil authority “prohibited him from entering his insured properties because of any such contamination.”

In stating Mr. Seifert can file an amended complaint, the ruling has a footnote citing the Sept. 8 ruling in Suite 417 Inc. v. The Cincinnati Insurance Co., in which the U.S. District Court in Kansas City, Missouri, held the plaintiffs had “adequately stated a claim of direct physical loss.”

The footnote also cites the Sept. 14 decision by the U.S. District Court in San Francisco, which ruled in the insurer’s favor in Mudpie Inc. v. Travelers Casualty Insurance Co. of America.

The footnote cites a sentence in the decision that states the court recognizes “that the law concerning business interruption coverage linked to the COVID-19 pandemic is very much in development,” and grants the plaintiffs leave to amend its complaint.

The plaintiff did not do so, and the case was dismissed with prejudice on Sept. 23.

Mr. Seifert’s attorney said he does not comment on pending litigation, while the insurer’s attorney did not respond to a request for comment.

Policyholder attorney Richard Shore, a partner with Gilbert LLP in Washington, who is not a party in the case, said policyholders who in particular do not have virus exclusions in their coverage – which the plaintiff in this case did – may be able to successfully argue in favor of business interruption coverage on the basis the virus contaminated their properties.

Courts have done so in other cases involving smoke and groundwater contamination, neither of which changes a building’s structure, he said.

“The problem in a lot of these cases is the policyholders are not making the proper argument,” he said. “This case, in my view, is a win for the policyholder world.”

However, insurer attorney Scott Seaman, a partner with Hinshaw & Culbertson LLP in Chicago, who is not involved in the case, said pleading the virus’ presence on property is insufficient to overcome a motion to dismiss in many jurisdictions.

The virus’ presence does not automatically translate into property damage. “The property is not altered or damaged by the virus,” Mr. Seaman said.

In addition, pleading whether and when the virus was present “is difficult under good faith pleading standards.” He said, even if the virus was present, it will not live longer than 48 or 72 hours if not washed or cleaned earlier, and most business interruption coverage does not kick in until more than 72 hours has passed.

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Gilbert LLP is a Washington-based law firm specializing in litigation and strategic risk management, insurance recovery and complex dispute resolution.