Since the COVID-19 pandemic initially shocked the world, there has been an influx of lawsuits filed by restaurants, stores, and other businesses against their insurers alleging coverage for lost “business income”, “extra expenses” and coverage for actions taken by a “civil authority” under their policies’ “business interruption coverage”. In fact, there is currently a case pending in the Southern District of Indiana, Café Patachou at Clay Terrace, LLC, et. al. v. Citizens Insurance Company of America, Case No. 20-cv-01462, which was filed by several Indianapolis and Carmel restaurants against their insured, Citizens Insurance Company of America (“Citizens”) alleging coverage for such damages in light of Governor Holcomb’s March 16, 2020 Executive Order and subsequent Executive Orders restricting indoor dining for all restaurants, bars and nightclubs and allowing delivery or carry out options only.
Citizens issued a commercial property policy to the Plaintiffs which provides coverage for “Business Income” and “Extra Expense”. Specifically, the policy’s Business Income and Extra Expenses Coverage form provides, in pertinent part, the following:
We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration”. The “suspension” must be caused by direct physical loss of or damage to property at “premises” which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss.
Citizens denied coverage under the policy and the Plaintiffs ultimately filed suit seeking declaratory judgment establishing that the losses suffered by the Plaintiffs were covered under the policy. The case is currently pending, and no judgment has been made.
Several federal district courts throughout the nation, including Kansas, Illinois, Mississippi, Alabama, California, Minnesota, Florida, and Texas, just to name a few, have heard lawsuits stemming from similar policy language for failure to adequately allege a “direct physical loss of or damage to property” as required by the applicable policy due to the COVID-19 pandemic. See PROMOTIONAL HEADWEAR INTERNATIONAL, individually & on behalf of all others similarly situated, Plaintiff, v. THE CINCINNATI INSURANCE COMPANY, Defendant., No. 20-CV-2211-JAR-GEB, 2020 WL 7078735, at *7 (D. Kan. Dec. 3, 2020) (“’[D]irect loss to Covered Property’ under the Policy unambiguously requires more than mere diminution in value or impairment of use of the property.”); T & E Chicago LLC v. Cincinnati Ins. Co., No. 20 C 4001, 2020 WL 6801845, at *5 (N.D. Ill. Nov. 19, 2020); Real Hosp., LLC v. Travelers Cas. Ins. Co. of Am., No. 2:20-CV-00087-KS-MTP, 2020 WL 6503405, at *8 (S.D. Miss. Nov. 4, 2020); Hillcrest Optical, Inc. v. Continental Cas. Co., No. 20-CV-275, 2020 WL 6163142, at *9 (S.D. Ala. Oct. 21, 2020) (dismissing plaintiff’s complaint with prejudice because plaintiff failed to allege a “direct physical loss of property”); Travelers Cas. Ins. Co. of Am. v. Geragos & Geragos, No. CV 20-3619, 2020 WL 6156584, at *4 (C.D. Cal. Oct. 19, 2020) (holding that a physical loss or damage to property means a “distinct, demonstrable, physical alteration” and excludes losses from the inability to use the property); Seifert v. IMT Ins. Co., No. 20-1102, 2020 WL 6120002, at *3 (D. Minn. Oct. 16, 2020) (holding that plaintiff failed to allege facts demonstrating a direct physical loss to his property caused by the coronavirus); Infinity Exhibits, Inc. v. Certain Underwriters at Lloyd’s London, No. 20-CV-1605, 2020 WL 5791583, at *3 (M.D. Fla. Sept. 28, 2020) (denying business income and civil authority coverage because plaintiffs could not demonstrate an actual physical loss or actual damage); Diesel Barbershop, LLC v. State Farm Lloyds, No. 5:20-CV-461-DAE, 2020 WL 4724305 (W.D. Tex. Aug. 13, 2020).
The most recent holding was issued by the Southern District of Florida in the matter of El Novillo Restaurant et al. v. Certain Underwriters at Lloyd’s London et al., Case No. 1:20-cv-21525. In that case, the Court dismissed with prejudice a class action lawsuit brought by various restaurant owners against its insurance company claiming business interruption insurance coverage related to the COVID-19 pandemic under the “Business Income”, “Extra Expense” and coverage for loses due to “Civil Authority”. The commercial property insurance policy in El Novillo contained similar policy language as the Indiana matter. “Physical loss” and “property damage” were not defined within the policy.
Additionally, the Extra Expense Coverage provided coverage for “necessary expenses you incur during the ‘period of restoration’ that you would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss”. The Civil Authority Additional Coverage section provided, the following:
When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises, provided that both of the following apply:
(1) Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property; and
(2) The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action taken to enable a civil authority to have unimpeded access to that damaged property.
The El Novillo plaintiffs alleged that due to the COVID-19 pandemic and governmental orders which restricted its operations, it could not use its property as intended. Plaintiffs referenced two specific Emergency Orders issued by their county which restricted restaurant operations within the county to 6 a.m. – 11 p.m. other than for delivery and effectively closed all restaurants in the county other than for delivery or takeout. Plaintiffs alleged that their losses consisted of both direct physical loss and damage to the properties due to diminished value, lost business income, reduction in right of full ownership and forced physical alterations during a period of restoration.
Lloyds filed a motion to dismiss plaintiffs’ claims asserting that plaintiffs only made conclusory allegations that they suffered direct physical damage but did not provide information regarding what the physical damage was or how and when it occurred. Plaintiffs rebutted by arguing that the phase “direct physical loss of or damage to property” is not defined by the policies and it must include intangible losses, such as the loss of functionality or intended use as opposed to only structural damage as alleged by Lloyds.
The Florida district court looked to previous decisions made by the Southern District of Florida as well as by the Eleventh Circuit, in which those courts determined that the meaning of “direct physical loss” requires the loss to be tangible, actual, or physical and excludes intangible losses, such as an economic impact unrelated to a physical alteration of the premises. Mama Jo’s Inc. v. Sparta Ins. Co., 823 F. App’x 868, 880 (11th Cir. 2020); Raymond H. Nahman DDS PA v. Hartford Cas. Ins. Co., No. 20-CV-22833, 2020 WL 6392841 (S.D. Fla. Nov. 2, 2020); Malaube, LLC v. Greenwich Ins. Co., No. 20-22615, 2020 WL 5051581, at *1 (S.D. Fla. Aug. 26, 2020).
Ultimately, the El Novillo court followed suit and dismissed the plaintiffs’ claims for coverage under the Business Income or Extra Expense Coverage sections with prejudice for their failure to allege any physical damage to their properties caused by the pandemic.
Likewise, the court also dismissed the plaintiffs’ claims for coverage under the Civil Authority Additional Coverage section as the plaintiffs failed to show that the county’s Emergency Orders “prohibited access to the described premises” as required by the policies; rather, the Emergency Orders restricted access to indoor dining, but the restaurants were able to maintain operations for delivery and takeout.
Alternatively, some courts have held that if the plaintiff alleges that COVID-19 entered its premises either through an employee or a customer, that allegation is sufficient to establish a direct physical loss or damage. See Studio 417, Inc. v. Cincinnati Ins. Co., No. 20-CV-03127-SRB, 2020 WL 4692385, at *5 (W.D. Mo. Aug. 12, 2020); Blue Springs Dental Care, LLC v. Owners Ins. Co., No. 20-CV-00383-SRB, 2020 WL 5637963, at *4 (W.D. Mo. Sept. 21, 2020); Mudpie, Inc. v. Travelers Cas. Ins. Co., –F. Supp. 3d–, 2020 WL 5525171, at *5 n.7 (N.D. Cal. Sept. 14, 2020) (noting that if the plaintiff had adequately alleged the presence of COVID-19 in the premises, it would have reached a different conclusion about whether it constituted an “intervening physical force”).
It remains to be seen how the Indiana courts will rule on these issues, and insureds considering filing business interruption claims should carefully consider the outcome of Café Patachou.
If you have questions regarding insurance coverage or claims, contact your DSV attorney or Melanie Kalmbach at firstname.lastname@example.org.
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