Stephanie Berman Schneider, Esq.
Business interruption insurance coverage is one of the most contested issues to arise in the wake of COVID-19. Restaurants, hotels, sports stadiums, stores, and other similarly impacted businesses have wasted no time filing suit across the country, seeking to recoup their lost profits. There has been heated debate on the topic, primarily centered on the fact that businesses have timely paid insurance premiums for years, and are not getting a desperately needed return on their investment. To date, there have been two significant court rulings, both in favor of insurers.
In the initial case, believed to be the country’s first final ruling on the issue, a state court judge in Michigan ruled in early July that two restaurants could not recover lost income under a business interruption policy, because the properties did not sustain a direct physical loss. In Gavrilides Management Co. et al. vs. Michigan Insurance Co., the insurer filed a motion to dismiss in response to the lawsuit filed on behalf of two restaurants. The court granted summary judgment for the insurance company, holding that the restaurants would have to suffer “direct physical loss or damage” resulting from the coronavirus for there to be coverage. According to the ruling, direct physical loss must be something “with material existence, something that is tangible, something…that alters the physical integrity of the property.” The judge noted that the complaint contained allegations of business losses based on government orders restricting business operations, but did not allege any compensable physical damage due to the virus. While the plaintiff tried to argue that the policy’s physical requirement was met because customers could not dine-in at the restaurants, the judge was unmoved, stating: “[T]hat argument is just simply nonsense and it comes nowhere close to meeting the requirement that there has to be physical alteration to the integrity of the property.”
In the more recent ruling, a District of Columbia state court judge again ruled in favor of the insurer. In early August, the D.C. court granted summary judgment in favor of Erie Insurance Exchange. Like the judge in Michigan, the judge in Rose’s 1 v. Erie Indemnity ruled that the plaintiff restaurants failed to show any direct physical loss. By way of background, the D.C. mayor issued orders banning indoor dining, closing all non-essential businesses, and ordering residents to shelter-in-place. As a result, plaintiffs had to close their restaurants. While the plaintiffs argued that the loss of use of their restaurants was a direct physical loss because the closures were the direct result of the mayor’s orders, the judge concluded that the orders “did not effect any direct changes to the properties.” In addition, plaintiffs argued that the losses were physical because the coronavirus is “material” and “tangible,” rather than abstract. In response, the judge found that plaintiffs offered no evidence that the virus was present in their properties and that the mayor’s orders did not have any material or tangible impact on the properties. Lastly, the judge disagreed with plaintiffs’ contention that “loss” is distinct from “damage” and that “loss” should include loss of use, which would only require that the restaurants be deprived of the use of their properties, not that they suffer physical damage. The judge concluded that any loss of use must be caused by a direct physical intrusion onto the properties, and that the mayor’s orders did not constitute a physical intrusion.
On a related note, a group of policyholders attempted to consolidate business interruption coverage lawsuits into one multi-district litigation. In late July, a multi-district litigation panel heard oral argument on whether to consolidate the increasing number of lawsuits filed across the country into a single multi-district litigation. Plaintiffs’ attorneys argued that there are inherently common questions which arise from the same policy language, and “only a handful of iterations of the same key terms.” Attorneys for insurers and even some policyholders rejected this notion, pointing to the sizeable number and type of defendants, as well as the differences in the policies and policy language. On August 12, 2020, the five-judge panel declined to coordinate these cases into one proceeding, ruling that each policy was too different and that even “seemingly minor differences in policy language could have significant impact on the scope of coverage.” The panel remained open to the possibility of coordinating cases against insurance companies and requested further briefing as to why cases against the four involved insurers should not be centralized.
As this article was going to print, Ralph Lauren filed suit against its insurer for lost income from its retail stores. We expect to see a plethora of business interruption suits like these, as the pandemic continues to cause businesses across the country to suffer sizeable business losses and to seek recoupment.
The attorneys at Berman, Berman, Berman, Schneider & Lowary LLP will continue to monitor these developments and can address any questions you have regarding the above. They are uniquely qualified to provide additional insight and guidance.