From the Insurance Coverage/Defense Practice.
Do Commercial Property Insurance Policies Cover Business Interruption Losses Sustained due to COVID-19?
July, 2022 | By David F. Risk
Note: This is an update to a previously published post.
A Maryland Court of Special Appeals opinion that set Maryland precedent on business interruption losses due to COVID-19 is part of a national trend. Several courts have ruled in favor of insurers on the issue of whether losses incurred from government COVID-19 restrictions are covered by commercial property insurance policies.
In May, the Maryland Court of Special Appeals affirmed a trial court’s ruling out of Frederick County regarding a restaurant operator’s claims of business interruption losses due to state government restrictions that were enacted because of the COVID-19 pandemic. In that opinion, GPL Enterprise, LLC v. Certain Underwriters at Lloyd’s, 2022 WL 1638787 (May 24, 2022), the court held that a commercial property insurance policy did not provide coverage for business interruption losses caused by the state of Maryland’s emergency shutdown order that indefinitely suspended indoor dining at restaurants and bars during the pandemic. Semmes issued a summary of that opinion in June. Read the case summary here.
The specific language of the restaurant operator’s policy provided that the policy insured “against the loss of business income and the incurrence of expenses due to the suspension of business operations, provided that the suspension is ‘caused by direct physical loss of or damage to property at ’the restaurant.’” The Maryland Court of Special Appeals emphasized that physical damage “clearly indicates that the damage must affect the good itself, rather than the [insured’s] use of that good”, and referenced other court decisions that involved identical policy language to the property insurance policy at issue. A “physical” loss or damage requirement “is widely held to exclude alleged losses that are intangible and incorporeal”.
The restaurant operator argued that due to COVID-19 and the state’s emergency order, the restaurant “suffered direct physical harm, loss or damage to its premises.” The Court rejected this argument, explaining that “[u]nlike a fire or an earthquake, the [Maryland Governor’s COVID-19 shutdown order] had no tangible, physical impact on [the restaurant] or on the property inside the restaurant … The physical condition of the insured property was exactly the same the day after the Governor issued the order as it was the day before.” The opinion noted that the restaurant operator failed to “allege facts sufficient to establish that the COVID-19 virus somehow physically altered the structure of the restaurant so as to trigger coverage under the policy.”
The Court of Special Appeals ultimately affirmed the trial court’s dismissal of the restaurant operator’s complaint because “the policy at issue afford[ed] no coverage for the purely economic losses that [the restaurant] suffered”. The Court highlighted that the main purpose of a commercial property insurance policy “is to insure the property that the insured uses in its business against direct physical loss or damage as a result … of a fire, an earthquake, a tornado, an ice storm, a hail storm, a meteor strike, theft, vandalism, etc.” For example, these covered causes of business interruption losses may apply and provide coverage if the restaurant operator was “unable to operate its restaurant because of fire damage, as well as the additional expenses … incurred in renting new space and buying new equipment and inventory.”
Rulings in Other States
The GPL v. Certain Underwriters at Lloyd’s opinion serves as a significant Maryland precedent on the issue of whether business interruption losses sustained from government COVID-19 restrictions are covered under a commercial property insurance policy. Interestingly, based upon appellate court opinions issued by several states outside of Maryland, including numerous opinions that have been issued within the last two months, the Maryland Court of Special Appeals’ ruling is part of a national trend of court decisions that have ruled in favor of insurers on the question of whether the “loss of use” of property resulting from COVID-19 shutdown orders would allow a business owner or operator to receive insurance coverage for policies that cover direct physical loss or damage to property. Many other state and federal court decisions have issued rulings on this issue that are consistent with the Maryland Court of Special Appeals’ decision, that “loss of use” of property alone is not sufficient to establish direct physical loss or damage in order to receive coverage under commercial property policies.
In Wisconsin, several bars and restaurants filed a class action against their property insurance policy insurer to cover losses the businesses sustained as a result of the state’s in-person dining restrictions during the pandemic. Colectivo Coffee Roasters, Inc. v. Society Insurance, 2022 WL 1758674; 974 N.W.2d 442, 444 (Wis. Sup. Ct., June 1, 2022). Wisconsin’s Supreme Court examined whether a bar or restaurant’s inability to utilize in-person dining space constituted a “direct physical loss of or damage to its property” which would allow the businesses to recover under the policy. The opinion concluded that the business losses caused by the state’s COVID-19 restrictions to in-person dining were not covered under the policy since there was no allegation of “a tangible harm to … physical property necessary to trigger coverage.” Id. at 447. This Wisconsin Supreme Court opinion, which was decided one week following the GPL v. Certain Underwriters at Lloyd’s decision, noted that “[a]s the overwhelming majority of the other courts that have addressed the same issue have concluded, the presence of COVID-19 does not constitute a physical loss of or damage to property because it does not alter the appearance, shape, color, structure, or other material dimension of the property.” Colectivo Coffee Roasters, 974 N.W.2d at 447–48.
In Iowa, an operator of a private golf and country club filed a claim under its commercial property insurance policy for lost income during the time the club closed its facilities in response to the Governor of Iowa’s COVID-19 restrictions to in-person services at bars and restaurants. Wakonda Club v. Selective Insurance Company of America, 973 N.W.2d 545, 546–47 (Sup. Ct. Iowa, Apr. 22, 2022). The insurance claim was denied and the country club operator filed a lawsuit against the country club’s insurer for breach of contract and for bad-faith denial of coverage. Id. at 548. The trial court granted summary judgment in favor of the insurer, and the appellate court examined whether “the mere loss of use of business property constitutes ‘direct physical loss of or damage to property’ to trigger coverage” for business interruption losses. Wakonda Club, 973 N.W.2d at 547. The opinion concluded that the policy language “direct physical loss of” property “requires a physical aspect to the loss of the property before coverage is triggered”, and the court expressly rejected “that loss of use, without something more, is enough.”
In Florida, a restaurant and bar operator also filed a claim for income losses caused by COVID-19 restrictions mandated by the City of Miami which limited in-person dining. Commodore, Inc. v. Certain Underwriters at Lloyd’s, 2022 WL 1481776, at *1–2 (Fla. Dist. Ct. App., May 11, 2022). The Florida appellate court highlighted that “loss of intended use alone, without tangible alteration to the property, is not sufficient to trigger coverage under the plain language of the Policy.” Id. at *6. The court contrasted COVID-19 business losses in which there were no changes to the property itself, to a covered loss that includes actual and tangible alteration of property such as business losses from a hurricane. Commodore, 2022 WL 1481776, at *6.
A Michigan appellate court ruled that restaurant operators’ commercial insurance policies, which provided business interruption coverage, did not cover losses that the businesses sustained due to the Governor of Michigan’s executive orders that restricted indoor dining. Three Won Three, Corp v. Property-Owners Insurance Company, 2022 WL 1594828, at *1 (Mich. Ct. App., May 19, 2022). The restaurant operators argued that the indoor dining restrictions “prevented customers from entering their restaurants for dine-in services, and thus caused adverse physical and tangible changes to their restaurants”, and further alleged that COVID-19 was likely present in their restaurants, causing loss or damage. Id. at *3. The restaurant operators filed a complaint seeking a declaratory judgment mandating that their COVID-19 losses were covered, which was dismissed by the trial court because “the policy provided coverage for loss of business income caused by direct physical loss of, or damage to, property, and [the restaurant operators] failed to allege such loss or damage.” Id. at *2. The appellate court affirmed the trial court’s dismissal of the complaint, and also noted that the restaurant operators’ policy included a virus exclusion that expressly barred coverage for damage or loss caused by viruses. Id. at *3.
In Massachusetts, the owners of three restaurants sued their property insurer for breach of contract for failing to cover business losses caused by the Commonwealth’s restrictions on public gatherings during the COVID-19 pandemic, and also sued their insurance broker for negligence in “failing to procure policies that would have covered damages resulting from the COVID-19 virus.” Verveine Corp. v. Strathmore Insurance Company, 184 N.E.3d 1266, 1269–70 (Sup. Ct. Mass., Suffolk, Apr. 21, 2022). The Massachusetts appellate court ruled in favor of the insurer, holding that the restaurant owners’ “losses were not ‘direct physical loss of or damage to’ their property within the meaning of the insurance policies.” Id. at 1270. In support of this ruling, the court emphasized that “direct physical loss of or damage to” property mandates “distinct, demonstrable, physical alteration of the property.” Id. at 1275. The opinion added that “[e]very appellate court that has been asked to review COVID-19 insurance claims has agreed with this definition for this language or its equivalent.”
In Illinois state court, an operator of more than 50 restaurants in 19 different states sued Zurich, the operator’s commercial property insurer, for losses the restaurants incurred from government orders that prohibited indoor dining. Firebirds International, LLC v. Zurich American Insurance Company, 2022 WL 1604438, at *1 (Ill. App. Ct., 1st Dist., May 20, 2022). The restaurant operator argued that “the actual presence of [COVID-19] in its restaurants caused property loss or damage.” The restaurant operator submitted claims under its two Zurich commercial property insurance policies, which were denied because COVID-19 did not constitute a “direct physical loss or damage to property.” The claims were also denied based on a contamination exclusion contained in the policies, which defined damage or loss resulting from contamination as “[a]ny condition of property due to the actual presence of … [a] virus.” Id. at *3. The restaurant operator sued for breach of contract, and an Illinois appellate court affirmed the trial court’s granting of the insurer’s motion to dismiss, finding that the application of the policy’s contamination exclusion was “free from doubt.” Id. at *5.
A New York appellate court examined “whether the actual or possible presence of COVID-19 in … restaurants caused ‘direct physical loss or damage’ to [the restaurants’] property” for purposes of a restaurant owner and operator’s insurance claim for business interruption losses caused by state COVID-19 restrictions. Consolidated Rest. Operations, Inc. v. Westport Ins. Corp., 205 A.D.3d 76, 77–78 (Sup. Ct. NY, App. Div., Apr. 7, 2022). That court also ultimately ruled that a “policyholder’s inability to fully use its premises as intended because of COVID-19, without any actual, discern[i]ble, quantifiable change constituting ‘physical’ difference to the property from what it was before exposure to the virus, fails to state a cause of action for a covered loss.” Consolidated Rest. Ops., at 78.
As recently as June 23 and June 21 of this year, a state appellate court in New Jersey issued two separate rulings siding with insurers that denied coverage for lost income resulting from state government COVID-19 restrictions. See AC Ocean Walk, LLC v. American Guarantee and Liability Insurance Company, 2022 WL 2254864 (N.J. Super. Ct., App. Div., June 23, 2022) (the appellate court ordered the dismissal of a lawsuit filed by the operator of the Ocean Casino Resort in Atlantic City regarding its claims for property and business interruption coverage, as “the COVID-19 virus’ presence in Ocean’s air and on its surfaces did not physically alter the property’s physical structure”); and Rockleigh County Club, LLC v. Hartford Insurance Group, 2022 WL 2204374 (N.J. Super. Ct., App. Div. June 21, 2022) (the appellate court affirmed the dismissal of a complaint filed by the owner and operator of a country club regarding its claim for business interruption coverage for losses and expenses caused by the state’s COVID-19 restrictions that limited the country club operator’s ability to hold social events such as weddings).
Does Commercial Property Civil Authority Coverage Protect Against Losses Due to COVID-19?
It is worth noting that many attorneys have creatively attempted to argue that business losses caused by government restrictions from the pandemic should instead be covered under a commercial property insurance policy’s civil authority coverage, which typically will provide coverage when a civil authority prohibits access to the insured property as a result of damage to another nearby property. These arguments assert that business losses from COVID-19 restrictions should be covered because a local government’s emergency orders were entered as a result of “damage” to nearby properties, and said emergency orders prohibited access to the insured business.
For example, the restaurant operator in the Maryland GPL v. Certain Underwriters at Lloyd’s case argued that it was owed COVID-19 business interruption losses under the policy’s civil authority coverage. However, the Maryland Court of Special Appeals noted that civil authority coverage might cover a loss of income incurred “if the authorities prohibited customers from accessing [an insured] restaurant because of a fire at an adjacent structure.” In contrast, the restaurant operator did not allege it sustained losses “because the civil authorities prohibited access to its restaurant in order to respond to dangerous conditions at a damaged property in the vicinity or to secure unimpeded access to the [nearby] damaged property.” Additionally, three of the opinions referenced above also expressly rejected arguments that business interruption losses from pandemic shutdown restrictions fell within the scope of a policy’s civil authority coverage. See Colectivo Coffee Roasters v. Society (because the insured businesses “identified no physical loss of or damage to … a surrounding property”, its losses are not covered by the policy’s civil-authority provisions); Verveine Corp v. Strathmore (rejecting the argument that a claim for civil authority coverage “can be based on the loss of possession or use of the surrounding buildings” to the insured restaurants); and Firebirds International v. Zurich (civil authority coverage does not cover business losses resulting from emergency COVID-19 restrictions because such coverage “requires physical loss or damage caused by a covered cause of loss”).
Author’s Recommendation: The May 2022 GPL v. Certain Underwriters at Lloyd’s decision is consistent with how other states have ruled on whether commercial property insurance policies cover business interruption losses incurred from government emergency shutdown orders during the pandemic. However, this case note is not meant to suggest that no business can obtain coverage for losses from COVID-19 restrictions, and not all 50 states have issued court opinions addressing this topic.
Notably, on June 15 an appellate court in Louisiana sided with the owner and operator of the Oceana Grill in New Orleans that argued the policy language “direct physical loss of or damage to the property” was ambiguous as applied to an insurance claim for business losses sustained from COVID-19 shutdown restrictions. Cajun Conti LLC v. Certain Underwriters At Lloyd’s, London, 2022 WL 2154863 (La. Ct. App., 4th Cir., June 15, 2022). The specific policy language covered “loss of business income sustained due to necessary ‘suspension’ of operations during the ‘period of restoration.’ The ‘suspension’ must be caused by ‘direct physical loss of or damage to the property.’” Id. at *4. After a bench trial, the trial court issued a judgment in favor of the insurer. Id. at *2. The appellate court reversed that judgment, as the appellate court concluded that “the insurance policy is ambiguous and capable of more than one reasonable interpretation in regards to the coverage of lost business income. Due to the existing ambiguity in the relevant policy language, the contract should be interpreted in favor of [the owner and operator of restaurant].” Id. at *1.
Regardless, a significant majority of courts nationwide have clearly resisted awarding claims for business interruption losses caused by COVID-19 restrictions when such claims were raised under the umbrella of general business interruption coverage provided by a commercial property insurance policy.