Court Says Sheer Fear of Pandemic Not Grounds for Insurance Payout Under Hawaii Law

On November 9, in the Northern District of California, District Judge William H. Orrick added Hawaii to the list of growing states in the U.S. who have clarified that fear of a pandemic, even if the fear results in state-wide mandated closure of businesses, fails to operate as a valid basis for receiving insurance payouts for business interruption. The underlying case involved a corporation in Hawaii, Water Sports Kauai (WSK), suing their property insurance provider, Fireman’s Fund Ins. Co. (Fireman’s) after the defendant denied their claim on grounds that the plaintiff failed to show valid property loss. 

The insurance contract at issue covered property damage for a loss of business income due to “necessary suspension of business operations…(when) the suspension (is)…caused by direct physical loss of…property.” The policy also explicitly covers loss of business income when the direct physical loss of property is “caused by action of civil authority that prohibits access to the described premise…” 

WSK argued that the provisions outlined above clearly covered the lost business revenue that resulted from the Hawaii Governor’s decision to limit business operations for non-essential businesses, such as the plaintiff’s store, Sand People, during the COVID-19 pandemic in March of 2020. As such, the plaintiff filed a putative class action against the defendant for breach of contract. The class included “all persons or entities in Hawaii who own an interest in a business that was insured by (the defendant) in March 2020 (who) made (or attempted to make) a claim with (the defendant) arising from lost business income…at that business related to COVID-19, and did not receive coverage for that claim.”

The judge summarily disagreed with the plaintiff and granted the defendant’s motion to dismiss. The court held that the defendant correctly averred that “the mere threat of coronavirus is insufficient to show a ‘direct physical loss of or damage’ to its covered property.” The standard under existing law, Judge Orrick explained, for a valid “direct physical loss of property” based on a virus, is “sufficient evidence of the presence of the contaminant at the property plus an imminent threat from it.” The district court explained that under the aforementioned standard, the plaintiff would need to refile its case with an allegation that includes the specific evidence of actual physical exposure of its stores to coronavirus. An example, Judge Orrick professed, might be that the plaintiff says that “COVID-19 entered the property through (this) employee or customer” or “the store was closed because its employees became sick with coronavirus.” 

The court concluded by acknowledging that while it was technically the government’s fear of spreading coronavirus that resulted in an executive order resulting in the plaintiff’s lost revenue, the analysis was no different. The judge explained that one must prove the direct physical loss first before the considerations around excepted, or permissive sources of said direct physical loss are even analyzed. No evidence of coronavirus contamination, ceded the court, means no case and no consideration of the civil authority exception. 

The plaintiff is represented by Wendel, Rosen, Black & Dean.