Many of you remember or were involved in the disagreements between restaurant owners and their insurance companies when the restaurant lockdowns began due to the pandemic. Many believed that insurance companies were liable because of a business interruption clause contained in many policies.
Some of these policies had exceptions in the case of pandemics, viruses, or bacteria. Some did not.
As restaurants shut their doors around the country and turned to their insurance companies, believing the pandemic fell under the loss of income following a disaster umbrella, they were surprised to find that their insurance companies disagreed. Even for those without an exception in the policy, insurers denied claims stating that the virus did not constitute physical damage to the property.
The Business Interruption Group, an advocacy organization, felt otherwise, stating that the virus stayed on the surfaces and, therefore, caused property damage.
Restaurants began suing their insurers.
The Beginning of Business Interruption Lawsuits
In March 2020, one of the first lawsuits came from the French Quarter’s Oceana Grill, who named their insurance company, Lloyd’s of London, in the complaint. Shortly after, The French Laundry and Bouchon Bistro, Thomas Keller’s Napa Valley restaurants, sought judgment against Hartford Fire Insurance Co.
None of these three restaurants had virus exclusions in their business interruption insurance policies, an exclusion implemented after the SARS outbreak in 2002. In fact, one had a virus “inclusion.”
In February 2021, Lloyd’s of London underwriters won a state court ruling, setting a precedent for the other 1,500-plus lawsuits filed by policyholders against their insurers.
The First Jury Trial for COVID-19-Related Business Interruption
According to the Claims Journal, over 90% of motions to dismiss in COVID-19-related business interruption federal lawsuits have been upheld. Despite this, U.S. District Court Judge Stephen Bough upheld his ruling in September, stating that K.C. Hopps restaurant provided enough evidence that COVID-19 was physically present to go to trial.
The question at hand is whether losses qualify as direct physical loss or damage. Courts across the country have ruled that COVID-19 does not cause physical loss or damage to property as required for business interruption insurance policies.
Now, over 18 months since the policyholders and insurance company disputes began, the first business interruption lawsuit to make it to a jury trial was defeated on October 28, ruling in favor of Cincinnati Insurance Co. Inc.
Court Rulings Across the Country
Federal court rulings from Arizona to Massachusetts seem to agree. Even for those policies that did not include a virus exclusion, courts are ruling similar to the U.S. District Court in Boston in Legal Sea Foods, LLC v. Strathmore Insurance Co.
“Legal does not plausibly allege that its business interruption losses resulted from the presence of COVID-19 at the Designated Properties,” the ruling said. “Instead, it indicates in the (amended complaint) that ‘the Orders caused and are continuing to cause’ the losses for which it claims entitlement to coverage,” as reported by Business Insurance.
In essence, courts are requiring that direct physical loss refers to a tangible, material loss. The plaintiff’s lawyers suggest that restaurants experience physical loss and damage caused by the presence of COVID-19, not just the government orders.
It seems that every small win for restaurants has later been denied in courts. In January, a federal court ruled that the Ohio-based restaurant group Henderson Road Restaurant Systems had a reasonable claim against its insurance company. Unlike other courts requiring structural damage, the Ohio federal court agreed that physical damage included property that the plaintiffs could not use due to the pandemic.
Then, on September 22, the 6th Circuit Court of Appeals reversed this rare win, claiming, once again, that government orders restricting the use of property do not “constitute a direct physical loss or damage.”
With insurers prevailing more than 90% of the time in federal court, it’s clear that insurance companies are taking a victory lap.