Lack of physical loss moves court to reject COVID BI claims
U.S. District Court for the Northern District of Georgia has rejected a bid for business income insurance coverage, joining similar rulings nationwide.
The COVID-19 pandemic ravaged businesses across the country in unprecedented ways. For the first time in modern American history, businesses shuttered their doors for months, most in direct response to state and local orders mandating their closure. Many will never reopen.
As surviving businesses begin to reopen and attempt to regain solid financial footing, many have looked to their business insurance policies to try to recover the income they lost. However, a ruling from the U.S. District Court for the Northern District of Georgia in October indicates businesses will need to look elsewhere for financial healing. Chief Judge Thomas Thrash joined courts across the country in rejecting bids for business income coverage because the insureds cannot show the “direct physical loss” the policies require.
No ’direct physical loss’
In Henry’s Louisiana Grill, Inc. v. Allied Insurance Company of America, two Georgia restaurants sued their insurer after it refused to reimburse them for business income the eateries lost when they closed their doors in response to the Georgia governor’s executive order declaring a state of emergency in response to COVID-19.
The restaurants claimed their lost income was covered under two common business insurance policy provisions — now routinely cited by insureds seeking coverage for COVID-related business losses — the Business Income provision and the Civil Authority provision.
To recover under either provision, there must be a “direct physical loss” to property.
Under the Business Income provision, the eateries argued the “direct physical loss of or damage to” requirement was met because once the governor’s executive order was issued, their dining rooms were no longer physically available to patrons. The court rejected this argument, emphasizing the dining rooms “underwent no physical change as a result of the order.” Thrash’s analysis of the meaning of the phrase “direct physical loss of or damage to” was guided by long-standing Georgia law finding that “the words ‘loss of’ and ‘damage to’ make clear that the coverage is predicated on a change to the insured property resulting from an external event.”
The restaurants fared no better under the bid for coverage under the Civil Authority provision. The court rejected coverage for multiple reasons, chief among them that the restaurants had not pointed to “any particular property” in the vicinity that was actually damaged by COVID-19.
Because the court found there had been no direct physical loss, and therefore, the policy’s coverage agreement had not been triggered, the court did not consider whether the policy’s “virus or bacteria” exclusion also prevented the restaurants from recovering.
Across the country
Although the ruling in Henry’s Louisiana is the first of its kind in Georgia, a growing list of courts around the country have similarly denied businesses’ attempts to recover COVID-related losses under business insurance policies.
The legal landscape, however, is not completely devoid of any beacon of hope for insureds. In Studio 417 v. Cincinnati Insurance, a federal judge in Missouri refused to throw out a group of cases brought by restaurants and hair salons, finding that because the businesses claimed COVID-19 was present on the premises and rendered them unsafe or unsuitable, those plaintiffs had adequately stated a claim for direct physical loss. The policies in the Missouri cases — unlike many policies — do not have a virus or bacteria exclusion. The Missouri decision is therefore unlikely to rescue most insureds whose policies have the virus or bacteria exclusion.
This article was edited for length and clarity.
Christy Maple is an attorney for Swift, Currie, McGhee & Hiers, with over a decade of experience in insurance coverage matters, including catastrophic property losses and bad faith. Kristin Tucker is an attorney at Swift, Currie, McGhee & Hiers, representing national insurance companies in a wide array of complex litigation matters.
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