Seyferth Blumenthal & Harris LLC (SBH) partner Bruce Moothart and associate Nick Daugherty recently obtained a judgment in favor of a firm client in a Tenth Circuit federal district court. The United States District Court for the District of Kansas ruled that a Liberty Mutual Insurance affiliate company has no coverage obligations to the operator of two Hampton Inn hotels in Colorado seeking to recoup pandemic-related business interruption losses.

The ruling joins a bevy of pro-insurer rulings so far in federal court regarding COVID-19..

The hotel operator, MNR LLC, initially sued Ohio Security Insurance Company in September 2020 in a Kansas state court, seeking coverage for losses the operator said were caused by state and local orders designed to mitigate the spread of COVID-19. The hotel asserted claims for breach of contract against the insurer, and sought a declaration from the court that it was entitled to recover its losses under three separate coverages provided in the policy: business income coverage, civil authority coverage, and extra expense coverage.  The case was later removed to Kansas federal court in February 2021.

Citing Goodwill Industries of Central Oklahoma Inc. v. Philadelphia Indemnity Insurance Co., a recent Tenth Circuit decision involving the same type of insurance dispute and nearly identical relevant facts, the court held that the hotel operator was required to show that its covered premises sustained tangible loss or perceptible destruction of property.

In Goodwill, the Tenth Circuit applied Oklahoma law and found that while the policy in question did not define “direct physical loss,” dictionary definitions entailed that the phrase required “an immediate and perceptible destruction or deprivation of property.” The appellate court also found that a period of restoration provision in Goodwill’s policy, which U.S. District Judge John W. Broomes noted was “materially identical” to that in MNR’s policy, further reinforced that requirement, since the condition implied that the damage must be able to be physically repaired or rebuilt.

“Based on Goodwill, the court concludes that the absence of any allegations that Plaintiff suffered a ‘physical alteration or tangible dispossession of property,’ or ‘an immediate and perceptible destruction or deprivation of property,’ is fatal to Plaintiff’s claims for Business Income Coverage under the Policy,” Judge Broomes wrote, adding that there cannot be extra expense coverage if a period of restoration did not commence, given the lack of tangible loss or perceptible physical destruction. As for the civil authority coverage, Judge Broomes said the overarching reasoning in Goodwill still applies, but the “materially identical” virus exclusion to that in Goodwill’s policy further barred coverage nonetheless. Because COVID-19 caused the government restrictions prompting suspensions of operations, the virus exclusion applied to preclude coverage.

Moothart is a partner at SBH with a practice focused on representing businesses and professionals in complex litigation with an emphasis on insurance-related issues. An accomplished trial lawyer, he has represented clients in lawsuits in more than 20 states. Daugherty is focused on commercial litigation and counseling in all stages of litigation, emphasizing insurance-related issues. He has represented insurers in various coverage-related cases.