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Texas Judge won’t dismiss Theater Chain’s Covid Lawsuit

A federal judge in Sherman, Texas ruled last week against an insurer that had petitioned to dismiss a $500 million Covid-19 business-interruption lawsuit. Cinemark, the nation’s third-largest chain of movie theaters, brought the suit in January for insurance coverage the chain was denied by its carrier, FM Global.

The decision was the first in about a month for policyholders who seek coverage for lost income from Covid pandemic-related lockdowns or restrictions.

Covid Virus Present on Cinemark Properties

U.S. District Court Judge Amos L. Mazzant ruled that Cinemark Holdings had effectively pleaded the coronavirus was present on its properties and that it caused damage. The chain had noted that more than 1,700 Cinemark employees had tested positive for the virus called Covid-19.

Judge Mazzant wrote in his opinion that the facts of the case differed from another Covid-19 claim that was dismissed in March by the Eastern District of Texas. In that case, property owner Selery Fulfillment did not allege that the virus was actually present on the property.

“Cinemark’s policy is much broader than the one in Selery and expressly covers loss and damage caused by ‘communicable disease,’” wrote Judge Mazzant. “Both parties agree ‘communicable disease’ encompasses COVID-19. At this stage of the proceedings, Selery is distinguishable.”

Cinemark’s attorney wrote in an email that property owners would see more favorable rulings if more judges followed the rules of federal civil procedure. The attorney said Judge Mazzant considered Cinemark’s actual allegations and the specific policy wording.

The lawyer noted, “Too many courts are overlooking this fundamental duty at the carriers urging to simply follow decisions, which happen to be factually and materially distinguishable.”

Judge Mazzant’s ruling was the first of any state or federal judge since March 31, 2021 which rejected altogether an insurer’s motion to dismiss a Covid-19 business-interruption lawsuit. That observation comes from a litigation tracker run by the University of Pennsylvania’s Carey Law School. Since late March 2021, two judges granted partial dismissal and 48 judges fully dismissed Covid-19 lawsuits or else granted the insurer’s motion for summary judgment. That means those suits were essentially dismissed.

Based in Plano, Texas, Cinemark runs 332 theaters with 4,522 screens in 42 states. It also operates 200 other theaters in 17 other countries. The chain acquired a policy from FM Global that covered up to $500 million in damages from “all risks of physical loss or damage,” save for perils that were specifically excluded. Regarding Covid, communicable diseases were covered under Cinemark’s policy.

Cinemark’s lawyer said, “Given the number of theaters affected, you can reasonably assume the damages will exceed policy limits.”

Cinemark was forced to shut down its theaters worldwide because of the Covid virus. The theater chain notified FM Global on April 20, 2020 that it was suffering losses because of the virus shutdowns. FM Global requested more information about the scope of Cinemark’s losses, though the insurer did not acknowledge any coverage applied.

Cinemark filed its lawsuit in January 2021. In response, FM Global filed a motion on March 30 for summary judgment, meaning it wanted the suit dismissed. FM Global claims the policy expressly excludes damages caused by “contamination.”

According to the insurer’s dismissal motion, while the specific inclusion of coverage for “communicable diseases” may create an exception to the exclusion, a sublimit in the policy limits coverage to $1 million.

FM Global pointedly argued, in its attempt at getting the case dismissed, that Cinemark had failed to show any evidence of direct physical loss to its property. The carrier argued that actual structural alteration is required to constitute physical loss.

“Physical Loss”

The definition of “direct physical loss” is where the rubber hits the road. The definition of “physical loss” has been a prime sticking point in most Covid business interruption insurance cases.

Hence, FM Global wrote in its motion: “District courts in Texas have repeatedly and unanimously held that the presence of COVID-19 — whether present at a specific insured property or supposedly omnipresent in a general area — is not ‘physical loss or damage’ to property.”

However, the Carey Law School litigation tracker doesn’t categorically back that assertion. Though 16 federal judges did rule in favor of the insurance carrier, a state judge in Dallas and a federal judge for the Western District of Texas have denied insurers’ motions to dismiss.

Cinemark’s lawyer said: “Hopefully, courts will take heed of Judge Mazzant’s analysis and base future Covid-19 business interruption decisions on the actual facts alleged and the actual insurance wording before the court, as the rules and interpretive case law require.

When courts do that, the lawyer said, “The tide will shift substantially.”

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