D.C. restaurants lose COVID-19 insurance coverage suit
Although the judge found that there was no 'direct physical loss' for COVID-19 closures, the decision comes with some limitations.
The Superior Court of D.C. recently ruled in favor of an insurance company, finding that a typical property insurance policy does not provide business interruption coverage for losses sustained by restaurants during COVID-19 shutdowns.
Rose’s 1, LLC, (Rose’s), which owns and operates several prominent D.C. restaurants, was forced to close their doors and suffered serious revenue losses after Washington D.C. Mayor Muriel Bowser ordered the closure of all non-essential businesses amidst the pandemic.
In order to gain some coverage for these losses, Rose’s filed insurance claims with is insurer Erie Insurance. Erie issued commercial property policies for each of Rose’s restaurants. The policies included coverage for “loss of ‘income’ and/or ‘rental income’” sustained due to partial or total “interruption of business resulting directly from loss or damage” to the insured property. The policies further state that the “policy insures against direct physical ‘loss’” with the exception of several exclusions.
Erie denied the insurance claims, and the Rose’s subsequently filed a lawsuit to secure a declaratory judgment that their claims were covered by the express policy language. Both sides moved for summary judgment.
‘Direct’ and ‘physical’ loss
Rose’s first argued that the loss of use of the restaurant properties qualified as “direct” because the closures were the result of Mayor Bowser’s orders without any intervening actions. To this, the court noted that the “orders were governmental edicts that commanded individuals an businesses to take certain actions. Standing alone and absent intervening actions by individuals and businesses, the orders did not effect any direct changes to the properties.”
Rose’s next argument was that their losses were “physical” losses because the virus is “material” and “tangible,” and because the harm that the restaurants suffered was caused by the Mayor’s edicts rather than “some abstract mental phenomenon such as irrational fear causing diners to refrain from eating out.” The court found that Rose’s failed to offer evidence that the COVID-19 virus was truly present on their insured properties when the properties were forced to close, and the Mayor’s orders had no effect on the tangible or material structure of the insured properties.
Lastly, the plaintiffs argued that since the policy defined “loss” as encompassing either “loss” or “damage,” so Erie was required to treat the term “loss” as distinct from “damage,” which implies physical damage to the property and assumes that “loss” incorporates the loss of use of covered property, which requires only that Rose’s be deprived of the use of the property, not the presence of “physical damage.” In response to this argument, the court stated that the terms “physical” and “direct” modify the word “loss,” so any “loss of use” must be caused by a direct physical intrusion on the insured property. The stay-at-home orders were not a direct physical intrusion onto the property.
The case is Rose’s 1, LLC, et al. v. Erie Insurance Exchange, No. 2020 CA 002424 B, D.C. Super.
Editor’s Note: This finding shows us that under the narrow facts and definitions of this case, that municipal orders that closed restaurants in anticipation of a COVID-19 outbreak did not constitute a “direct physical loss” on its own in the policies in this case.
So while this decision, like the decision in the Gavrilides Management Company, LLC v. Michigan Insurance Co. case, seems to favor insurers and will likely be used to exemplify a victory on behalf of the insurance industry. The decision only takes into account the very specific language and facts of the case at hand and does not address many other issues that have been raised by the hundreds of cases filed that seek business interruption coverage due to COVID-19 losses.
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