In recent restaurant news, a rare decision by a state court sided with a restaurant owner and reversed a judgment for an insurance company in the ongoing debate on what constitutes structural damage.
The First U.S. Trial Between Restaurants and Insurers Over Pandemic Loses
In March 2020, Cajun Conti LLC, the parent company of the 500-seat Oceana Grill in New Orleans’ French Quarter, filed a business interruption insurance lawsuit against Lloyd’s of London. Oceana Grill is a well-known, busy restaurant that draws in tourists. They filed a suit on the first day the restaurant shut down due to COVID-19 restrictions. It was also the first case to head to trial, which means its ruling set precedence for about 1,500 lawsuits that restaurants filed against their insurers.
At issue, as we are all too familiar with, is whether shutdowns due to the pandemic constitute structural damage and should trigger insurance payouts for lost income and other business expenses. Cajun Conti specifically sought a ruling based on the Oceana Grill’s “all-risks” property policy.
The non-jury trial started in mid-December, and, on February 10, 2021, Judge Paulette R. Irons of the Civil District Court of the Parish of New Orleans denied Cajun Conti’s petition for declaratory relief without explanation.
The Ruling Overturned
On June 15, 2022, that decision was reversed on appeal with a 3-2 ruling that Lloyd owed coverage.
The basics of insurance companies’ claims are that the pandemic, and the corresponding restaurant shutdowns, should not qualify for business interruption assistance because that aspect of their policy was created to cover property damages and closures due to natural disasters. According to insurers, COVID-19 and the resulting government shutdowns do not constitute property damage.
Lloyd’s argued that the restaurant’s operation was not entirely interrupted because they continued to operate during the lockdown, serving take-out and delivery.
Louisiana’s Fourth Circuit Court of Appeal reversed the decision. Two of the panel’s judges found the insurance policy’s requirements of “direct physical loss or damage” ambiguous and that physical damage did not have to be obvious and observable. A third judge agreed on other grounds.
The majority further agreed that the restaurant did not need to undergo a complete shutdown to get coverage. Lloyd’s insurance policy did not have a virus exclusion.
Two other judges sided with the insurance company, stating that the presence of COVID-19 did not cause physical property damage. The court did not order a specific sum to be paid to Oceana.
Bloomberg Law reported on Chief Judge Terri Love’s statement. “The physical presence of COVID-19 substantially diminished the usable space of the property, as tables needed to be pushed farther apart, and resulted in economic losses due to the slowdown of the appellants’ business.” She also added that other federal and state court filings that favored insurance companies were not binding to the Louisiana court.
The Trickledown Effects of the Decision
According to Reuters, Oceana’s lead lawyer, John Houghtaling of Gauthier, Murphy & Houghtaling, stated that the decision will “dramatically change the way federal courts have treated these cases.” He further noted that the industry’s widespread use of a standard virus exclusion proves that insurers believe the contamination causes physical loss or damage.
Lloyd’s attorney, Virginia Dodd of Phelps Dunbar, stated the ruling was inconsistent with “ten federal circuit courts of appeal and every other state appellate court.”
This is the first appellate decision to rule in favor of restaurants and insurance coverage for COVID-19 income losses under an all-risk property insurance policy. On June 14, 2022, a state appellate court in New York affirmed a judge’s ruling, allowing the 250-acre New York Botanical Garden in the Bronx to sue its Pollution Liability Insurer for loss of business income due to COVID-19 under contingent business interruption loss.
How many COVID-19 business interruption lawsuits have insurance companies won?
According to Saxe Doernberger & Vita, P.C., in a review of over 600 trial and appellate decisions, insurance companies won about 90%. That number was reduced to 85% when the insurance policy did not have a virus exclusion. One-third of these cases were filed by the hospitality and food service industry. Policyholders won only 5% of federal and 18% of state court decisions.
Does a business policy provide business interruption coverage?
Not all business insurance policies carry this type of coverage. However, policies covering liability and property almost always provide some coverage for business interruption. Owners should read the property coverage section and any exclusions to determine the scope.
How does business interruption coverage work?
Most insurance policies insure specific named causes, such as fire. Others provide coverage for “all-risks.” Policies require that business interruption is the result of direct physical loss. Restaurants argue that contamination due to COVID-19 constitutes a direct physical loss.