(Article from Insurance Law Alert, July/August 2020)
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Trial courts in the District of Columbia and Michigan ruled that restaurant owners are not entitled to business interruption coverage stemming from government orders aimed at slowing the spread of COVID-19, finding that the insured properties did not sustain any direct physical loss or damage, as required by the policies. Rose’s 1, LLC v. Erie Ins. Exchange, No. 2020 CA 002424 (D.C. Superior Ct. Aug. 6, 2020); Gavrilides Mgmt. Co. LLC v. Michigan Ins. Co., No. 20-258-CB-C30 (Mich. Cir. Ct. Ingham Cty. July 2, 2020) (Oral Transcript).
In the Washington D.C. case, the court granted the insurer’s summary judgment motion, ruling that the policyholder is not entitled to business interruption coverage for COVID-19-related loss. According to the policyholder’s statement of material facts, the mayor of Washington D.C. declared a state of emergency, ordered the closure of non-essential businesses and issued a stay-at-home mandate that lasted several months. The policyholder argued that as a result of these orders, its restaurants were forced to close and incurred significant revenue losses. Erie Insurance denied coverage on the basis that there was no “direct physical loss” to insured property, as required by the policies.
Siding with Erie Insurance, the court rejected the policyholder’s assertion that the loss was “direct” because the restaurant closures were the direct result of the mayor’s orders, explaining that the orders “did not effect any direct changes to the properties.” The court also dismissed the contention that the loss was physical because the COVID-19 virus is “material” and “tangible.” The court emphasized that the policyholder “offer[ed] no evidence that COVID-19 was actually present on their insured properties at the time they were forced to close.” Therefore, the policyholder could not establish the requisite material or tangible change to property under its own theory. Additionally, the court rejected the policyholder’s attempt to equate “loss of use” with “direct physical loss,” explaining that the latter requires a “direct physical intrusion on to the insured property.”
The court distinguished several cases frequently cited by policyholders in this context, noting that none of them support the proposition that a government edict, standing alone, constitutes direct physical loss under a property policy. See, e.g., Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am, 2014 WL 6675934 (D.N.J. Nov. 25, 2014) (ammonia leak that rendered property unusable was a direct physical loss because it constituted “an actual change in insured property . . . causing it to become unsatisfactory for future use or requiring that repairs be made to make it so”); Western Fire Ins. Co. v. First Presbyterian Church., 437 P.2d 52 (Colo. 1968) (direct physical loss requirement satisfied by release of gasoline fumes into church because building became “infiltrated and saturated so as to be uninhabitable”).
In the Michigan case, the policyholder sought coverage for losses it allegedly sustained after the Michigan governor issued an executive order that limited the restaurants’ business to take out and delivery. The policy provided business interruption coverage for loss of income due to a suspension of operations caused by direct physical loss or damage to an insured property. In a ruling from the bench, the judge held that physical loss must be tangible and alter the “physical integrity of the property.” Noting that the underlying complaint did not allege any confirmed cases of COVID-19 at the insured locations, the court concluded there was no physical damage to the insured’s property. The ruling supports insurers’ contention that there is no coverage for losses arising from limitations on access to premises due to COVID-19-related government orders because the requisite physical loss or damage is lacking.
In addition, the court rejected the policyholder’s assertion that a virus exclusion was ambiguous and inapplicable because the losses were caused by an executive order rather than the virus itself. The court held that even assuming that the loss stemmed from government action rather than the actual virus, coverage would nonetheless be barred by an exclusion relating to acts or decisions of government entities.
Employing similar reasoning, a Texas federal district court dismissed several barbershops’ COVID-19-related coverage claims in Diesel Barbershop, LLC v. State Farm Lloyds, No. 5:20-CV-461 (W.D. Tex. Aug. 13, 2020). The court ruled that the policyholders failed to allege direct physical loss to insured property. The court acknowledged that some courts have found physical loss absent tangible destruction in other contexts, but deemed those cases distinguishable, concluding that “the line of cases requiring tangible injury to property are more persuasive here.” In addition, the court held that even if the policyholders had alleged direct physical loss, coverage would be barred by a virus exclusion. In so ruling, the court rejected the policyholders’ assertion that the exclusion did not apply because the losses were caused by government orders, rather than presence of the virus itself. The policyholders also argued that an anti-concurrent causation clause, which operated as a “lead-in” to the virus exclusion and barred coverage for excluded events “regardless of . . other causes of the loss; or . . . whether other causes acted concurrently or in any sequence with the excluded event to produce the loss,” was ambiguous. The court rejected this contention, stating that “Plaintiffs have pleaded that COVID-19 is in fact the reason for the Orders being issued and the underlying cause of Plaintiffs’ alleged losses. While the Orders technically forced the Properties to close to protect public health, the Orders only came about sequentially as a result of the COVID-19 virus.” Finally, the court ruled that a civil authority provision was inapplicable based on the lack of requisite physical damage to neighboring property.