Seifert v. IMT Insurance Company

Background

Kenneth Seifert and Harmar Barbers, Inc. alleged that two Minnesota executive orders required The Hair Place and Harmar Barbers to close because of rising COVID-19 cases. Seifert sought lost business income under four insurance policies issued by IMT Insurance Company. IMT denied that the losses were covered.

The policies’ business-income provision covered actual lost income caused by a suspension of business operations resulting from a “direct physical loss of or damage to property.” The policies also included a civil-authority provision and a virus exclusion covering loss or damage caused directly or indirectly by a virus capable of causing illness or disease.

Seifert initially sued for breach of contract and declaratory and monetary relief. The court dismissed the original complaint under Rule 12(b)(6), which allows dismissal when a complaint does not plausibly state a claim, but allowed Seifert to amend. Seifert filed an amended complaint asserting three counts: breach of contract, declaration of rights, and regulatory estoppel. The court also granted Seifert’s motion to extend the filing deadline.

Analysis

The court interpreted the insurance policies under Minnesota law. It concluded that “direct physical loss of” property differs from “direct physical loss to” property. In the court’s view, “direct physical loss of” can mean an immediate and materially perceptible deprivation of the ability to occupy and control property as intended, even without structural damage or tangible injury.

The court predicted that Minnesota courts would find a plausible direct physical loss when government orders deem property dangerous to use and prevent the owner from lawfully occupying and controlling it to provide services. Because Seifert alleged that the executive orders forced the businesses to close and impaired their function and value, the court held that he plausibly alleged coverage under the business-income provision. The court therefore denied IMT’s motion as to Counts I and II insofar as they concerned business-income coverage.

The court reached a different conclusion about the civil-authority provision. That provision required damage to property other than the insured property and prohibited access to the surrounding area because of that damage. Seifert did not allege damage to nearby properties, so the court granted IMT’s motion as to Counts I and II insofar as they concerned civil-authority coverage.

The court also held that the virus exclusion did not bar the alleged business-income losses. It interpreted the exclusion as applying when the covered premises had been directly or indirectly contaminated, not whenever a virus circulated in the community and led to generally applicable government orders. Seifert alleged that the executive orders, rather than contamination of his premises, caused the losses, and he did not allege that the businesses were contaminated or that staff or customers contracted or spread the coronavirus there. The court therefore denied IMT’s motion on this issue.

Finally, the court held that regulatory estoppel did not apply. Regulatory estoppel is a theory that can prevent an insurer from relying on policy language based on alleged representations made to regulators. The court stated that the Minnesota Supreme Court had rejected the doctrine when an exclusion is clear and unambiguous, and it found the virus exclusion clear and unambiguous. The court granted IMT’s motion as to Count III.

Disposition

The court ordered that Seifert’s motion for an extension of time was granted. It ordered that IMT’s motion to dismiss was denied in part and granted in part: denied for Counts I and II as they related to business-income coverage; granted for Counts I and II as they related to civil-authority coverage; and granted for Count III, the regulatory-estoppel claim.