By Daphne Zhang

Law360 (December 4, 2020, 5:04 PM EST ) Cincinnati Insurance Co. does not need to pay for Promotional Headwear International's alleged sales loss during the pandemic, after a Kansas federal judge found that its policyholder did not suffer property damage as required by the policy and never lost access to its property from state closure orders.

U.S. District Judge Julie A. Robinson on Thursday tossed Promotional's proposed class action against Cincinnati seeking COVID-19 related loss coverage. The judge said that a mere allegation that the virus "likely contaminated its property" does not support the company's "conclusory assertion" that the virus physically damaged its property.

The Kansas-based clothing company has claimed that it lost almost 95% of sales after being forced to suspend business in March. Promotional said it had projected an over $100 million sales target for 2020, but pandemic and government orders have prevented it from the goal. After the company filed a loss claim, Cincinnati denied coverage.

The clothing company has argued that its losses should be covered because the policy does not have a virus or pandemic exclusion. Promotional also claimed that it lost the intended function of its property after being closed in March, incurring a physical loss of use. And since the policy's definition of "loss" is ambiguous, the court should rule in favor of coverage, it said.

"There is no such physical force rendering the property unusable," Judge Robinson said Thursday. The government orders are not "a physical intrusion onto the property. And while the threat of COVID-19 transmission may prohibit gathering at the property, there is no allegation that the virus has physically intruded onto the property like the asbestos, gasoline, or toxic gas described in the case law."

In the order, Judge Robinson did not buy into the headwear retailer's reference to a dictionary definition that "loss" means "the act of losing possession," and "damage" can mean a reduction in the property's "value or usefulness."

"Physical damage in an insurance policy is widely accepted to mean 'physical alteration,'" the judge said. "Plaintiff wholly ignores the modifiers 'direct' and 'physical' that precede both 'loss' and 'damage' in the policy definition." The modifiers clearly require a loss of structural change to the property, she added.

The pandemic and state closure orders temporarily barred the company's employees and customers from its property, but Promotional was not able to show "a material change or intrusion onto the property itself that rendered it unusable. And there are no allegations demonstrating permanent dispossession," the judge said.

Additionally, the company's claim that the virus was present in the U.S. sooner than first suspected does not demonstrate that COVID-19 physically attached to its covered property, Judge Robinson said. Promotional also alleged in April that there were 403 known infections in Johnson County where its facility is based, so the virus "likely contaminated" its property.

"There is no allegation that any of these infected individuals were ever-present on plaintiff's property, or that employees or customers came into contact with someone who was infected before entering the property," the judge said.

Even if COVID-19 physically existed on the company's property, there is no physical loss or damage because the virus can be cleaned, Judge Robinson added, saying that the company is seeking purely economic damages not covered by the policy.

A Cincinnati spokesperson said in an email statement that Cincinnati agrees with "the court's decision that the coronavirus does not constitute a direct physical loss to property — a prerequisite for coverage — and that the clear terms of the policy do not provide coverage for solely economic losses unaccompanied by physical property damage."

Counsel for the parties could not be immediately reached for comment Friday. 

Cincinnati is represented by Daniel G. Litchfield and Ericka C. Hammett of Litchfield Cavo and Kelvin J. Fisher and Michael L. Brown of Wallace Saunders Austin Brown & Enochs Chartered.

Promotional is represented by Abby McClellan, Bradley Wilders and Christopher Curtis Shank of Stueve Siegel Hanson LLP. 

The case is Promotional Headwear Int'l v. Cincinnati Insurance Company Inc., case number 2:20-cv-02211, in the U.S. District Court for the District of Kansas. 

--Editing by Alyssa Miller.

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