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First Decisions on Application of Insuring Agreement to Business Interruption Claims During COVID-19 Pandemic

Posted on: August 28th, 2020

By: David Slocum

In the months since the COVID-19 pandemic began, thousands of claims and lawsuits have been initiated by businessowners seeking coverage for alleged property damage and business losses based on the impact to their businesses. From restaurant owners, to magazine publishers, to minor league baseball teams, a wide range of businesses argue business interruption insurance policies should cover business losses following government-ordered lockdowns and restrictions on large gatherings. Businessowners filing such lawsuits generally contend their businesses have been interrupted through no fault of their own, and that the business interruption insurance should cover their losses.  

Lawsuits filed by businessowner policyholders around the country generally argue their property has been impaired and that the loss of functionality resulting from governmental lockdown orders (as distinct from the virus itself) should qualify as “direct physical loss of or damage to” the property.

In one of the first judicial rulings on the issue, Circuit Court Judge Joyce Draganchuk of Ingham County, Michigan recently held business interruption insurance does not provide coverage for such losses. Nick Gavrilides, owner of the Soup Spoon Cafe in Lansing, Michigan had sued his insurer, Michigan Insurance Company, a subsidiary of Donegal Group Inc., which had denied Mr. Gavrilides’ $650,000.00 business interruption claim.  The policy at issue contained a provision requiring “direct physical loss of or damage to the [insured’s] property” as one of the elements necessary to establish business interruption coverage. The policy also contained an exclusion providing the insurer “will not pay for loss or damage caused by or resulting from any virus, bacterium, illness or disease.”

Michigan Insurance argued business interruption coverage under the policy requires a physically destructive event that alters the structural integrity of the policyholder’s property. Mr. Gavrilides argued that the Michigan governor’s stay-at-home order interfered with the use of his property and that the extraordinary circumstances of the pandemic call for new interpretations of what “direct physical damage” means for businessowners. 

Ruling from the bench during a virtual hearing, the judge sided with the insurer and held that the plain language of the policy requires tangible physical damage to property in order for business interruption coverage to apply. The judge explained:

[I]t is clear from the policy … that only direct physical loss is covered. Under their common meanings and under federal case law … direct physical loss of or damage to the property has to be something with material existence, something that is tangible, … something that alters the physical integrity of the property. The Complaint here does not allege any physical loss of or damage to the property.

The judge stated that because COVID-19 had not physically affected the structure of the property, there was no point allowing Mr. Gavrilides to file an amended complaint. Mr. Gavrilides has filed an appeal. Because the insuring agreement did not apply in the first instance, the court never reached the question of whether the “virus, bacterium, illness or disease” exclusion applied.

The ruling in May of this year in Social Life Magazine Inc. v Sentinel Insurance Co., Ltd. also held there is no coverage for claimed business losses without actual tangible impact to the physical property.  In Social Life Magazine a federal judge in New York denied a magazine publisher’s motion seeking a declaratory judgment that business interruption insurance should cover income lost due to a government-ordered COVID-19 lockdown. The policyholder has appealed. 

Decisions on COVID-19 claims are continuing, and the stakes are high for businessowners and insurers. The outcome in any individual case should, of course, depend on the specific language of the applicable insurance policy and the evidence presented. If, as in the Gavrilides and Social Life Magazine decisions, the courts construe the policy language as written, the mere loss of use of a businessowner’s property is not sufficient to show the insuring agreement applies. 

If you have questions or would like more information, please contact David Slocum at [email protected].

Additional Information:

FMG has formed a Coronavirus Task Force to provide up-to-the-minute information, strategic advice, and practical solutions for our clients. Our group is an interdisciplinary team of attorneys who can address the multitude of legal issues arising out of the coronavirus pandemic, including issues related to Healthcare, Product Liability, Tort Liability, Data Privacy, and Cyber and Local Governments. For more information about the Task Force, click here.

You can also contact your FMG relationship partner or email the team with any questions at [email protected].

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