(Article from Insurance Law Alert, September 2020)
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In a decision that reaffirms the reasoning and holdings in the aforementioned COVID-19 coverage cases, the Eleventh Circuit ruled that a restaurant was not entitled to coverage for cleaning expenses or lost revenue related to nearby construction because it failed to allege “direct physical loss” as required by the policy. Mama Jo’s Inc. v. Sparta Ins. Co., 2020 WL 4782369 (11th Cir. Aug. 18, 2020).
Mama Jo’s restaurant sought coverage under an all-risk policy issued by Sparta for losses arising from nearby road construction. The restaurant claimed that dust and debris generated by the construction migrated into the restaurant, which necessitated daily cleaning. Although the restaurant did not cease operations during construction, it asserted that customer traffic decreased during the period of construction. Sparta denied the claim, citing a lack of requisite “direct physical loss.” In ensuing litigation, the restaurant identified additional categories of damage, including its roof systems, awning, audio and lighting systems and HVAC repairs. It relied on three experts to establish causation between the newly-claimed damages and the construction.
A Florida district court granted Sparta’s motion to preclude the expert testimony, finding that their methodologies were “unreliable or nonexistent, and that their testimony was speculative.” Absent that testimony, the court concluded that Mama Jo’s could not establish causation between the construction and the newly-claimed damages. The district court also ruled that the claim for cleaning was properly denied, stating that “property that must be cleaned, but is not damaged, has not sustained a ‘direct physical loss.’” Additionally, the court ruled that the loss stemming from lower-than-expected sales was not covered because the restaurant did not suffer a “necessary ‘suspension’” of its operations as a result of a “direct physical loss,” as required by the business income loss provision. The Eleventh Circuit affirmed.
The Eleventh Circuit rejected the restaurant’s assertion that direct physical loss encompasses property that is uninhabitable or unusable, noting that under Florida law, physical loss contemplates an “actual change in insured property.” With respect to the business loss claim, the Eleventh Circuit held that even assuming the restaurant had established a “suspension” of its operations because it closed down sections of the premises for cleaning, the claim nonetheless failed due to a lack of requisite direct physical loss.