Court Holds Implied Warranty Not Assumed in Asset Purchase

• Pages: 25-26
• Date: 01 January 2023
• Author: William H. Newman
• Subject Matter: Civil Law

to reduce their exposure. For example,

online marketplaces “shouldcon-

sider imposing stricter controls on

the productsthey sell on their web-

site andmight consider declining

altogether to sellconsumableprod-

uctsand otheringestiblesthat are

not regulated by the Food and Drug

Administration,” advises Michelle

Molinaro Burke, Morristown, NJ,

cochair of the Section’s Products

Liability Litigation Committee. Another

strategy is to include a “conspicuous

disclaimer that disclaims liability and

clearly informs consumers who they

are buying from,” adds Newman.

COVID-19 Business

Interruption Claims

Survive Dismissal

By Mark A. Flo res, Litigation News

Associate Editor

A federal court has held that whether

an insurance policy covers business

interruption losses from COVID-19

depends on a factual determination

of whether the virus can stick to sur-

faces. ABA Litigation Section leaders

advise that the answer to this question

will require signif‌icant discovery and

potentially a battle of the experts.

In Studio 417, Inc. v. Cincinnati

Insurance Company, the plainti busi-

ness owners brought a class action

against an insurance company seek-

ing property damage coverage based

on the presence of COVID-19 at their

places of business and government

orders requiring their businesses

to close due to the virus. The plain-

tis claimed the virus rendered their

physical property unsafe and unstable,

forcing them to suspend or reduce

business on their premises. The insur-

ance company sought dismissal of the

claim, arguing that its policies covered

physical losses only.

The U.S. District Court for the

Western District of Missouri denied the

insurance company’s motion based on

the language in the insurance policies

and the complaint. The court noted

that the insurance policies covered for

“physical loss” but did not def‌ine the

term “physical loss.” The complaint

alleged that COVID-19 “is a physical

substance” that lives on physical sur-

faces and travels through the air.

The district court held the plain

meaning of the phrase “physical loss”

could include COVID-19 on physical sur-

faces and did not require “a tangible,

physical alteration.” Thus, the court rec-

ognized a property that becomes unin-

habitable or unusable for the purpose

intended by its owner could constitute

“physical loss” under an insurance pol-

icy. The court concluded that the com-

plaint stated claims under the direct

physical loss, civil authority, ingress

and egress, and dependent property

coverage provisions of the policies due

to the COVID-19 virus and the gov-

ernment’s resulting orders restricting

access to the businesses' premises.

In so holding, the district court

observed that the central issue of the

case was whether “COVID-19 particles

attached to and damaged [the plain-

tis’] property, which made the prem-

ises unsafe and unusable,” thereby

constituting a physical loss. It noted

that “[d]iscovery will shed light on the

merits of Plaintis' allegations, includ-

ing the nature and extent of COVID-19

on their premises,” and reserved the

right to reconsider the insurance com-

pany’s same arguments after discovery.

Litigation Section leaders explain

how microscopic particles could result

in property damage. “There are analo-

gies that could be drawn in the envi-

ronmental context, such as to vapors

from contamination in the soil and

ground water where vapors emanate

up into the sub slab, basements, and

sometimes indoor air,” explains Brent

W. Huber, Indianapolis, IN, cochair

of the Section’s Property Coverage

Subcommittee of the Insurance

Coverage Litigation Committee. “It’s a

loss or damage caused by the presence

of particles in the air which are going

to create an inhalation risk, land on the

surfaces of the building, and create a

loss of use, which is ‘property damage,’

and a risk of bodily injury.”

Regardless, the court’s denial of

the motion to dismiss had signif‌icant

consequences for the insurance com-

pany. “You now have a reported case

that policyholders can use against the

insurance company,” notes Huber. “That

said, I can understand why they would

want to seek a motion to dismiss for

failure to state a claim.”

The decision will assist the parties

in proceeding in this litigation. “You

can cater your discovery related to

the position set forth by the plainti

and the question on which the judge

appears focused,” comments Tracy A.

DiFillippo, Las Vegas, NV, member of

the Section’s Content Management

Committee. “Instead of doing your nor-

mal questions and answers, you have

an idea of the arguments and you can

focus on those issues.”

Court Holds Implied

Warranty Not

Assumed in Asset

Purchase

By William H. N ewman, Litigation

News Associate Editor

A company that purchased assets from

a manufacturer did not assume liability

for the manufacturer’s breach of the

implied warranty of merchantability. In

Northland Industries, Inc. v. Kouba, the

court held that an asset purchaser only

assumed the liabilities expressly set

forth in its asset purchase agreement,

which did not include implied warran-

ties. ABA Litigation Section leaders

have diering opinions concerning the

eect of this doctrine on asset purchas-

ers and injured plaintis.

The Northland case concerned a

treadmill manufactured by a company

that sold its assets to another company.

In the asset purchase agreement, the

buyer assumed a list of “specif‌ically

identif‌ied” liabilities, including claims

arising from “written warranties.” After

the sale, a woman died while using one

of the manufacturer’s treadmills.

The woman’s family sued the manu-

facturer in Texas state court, alleging

negligence, strict liability, and breach of

the implied warranty of merchantability.

The plaintis also sued the company

that bought the manufacturer’s assets,

alleging that the purchaser was also

liable for their breach of warranty claim.

The purchaser moved for summary

judgment, arguing that the only liabil-

ity it assumed was for the treadmill’s

written warranty, which stated that the

manufacturer would “repair or replace”

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