In one of the first coronavirus-related court rulings, last week, Michigan Circuit Court Judge, Joyce Draganchuk, ruled in favor of the insurer in a case where the issue was whether or not coverage was owed for restaurants that were closed, or substantially closed, due to COVID-19-related government orders. The case is Gavrilides Management Company v. Michigan Insurance Company. 

Gavrilides Management Company owns two central Michigan restaurants, the Soup Spoon Café and The Bistro, and is insured by Michigan Insurance. The insurer filed a motion to dismiss after Gavrilides sued for insurance coverage based on lost revenue during the coronavirus lockdown. The policy in place provided coverage for business interruption.

Appropriately, this landmark ruling was handed down from the bench following a Zoom hearing. The hearing was later posted on YouTube. The court explained that coverage under the policy is provided for actual loss of business income sustained while operations are suspended, and the suspension must be caused by direct physical loss of or damage to property. Further, the Judge noted that direct physical loss of or damage to the property must be "something with material existence. . . that alters the physical integrity of the property." Judge Draganchuk also noted that the complaint did not allege any physical loss of or damage to the restaurants, instead it alleged loss of business due to executive orders shutting down dining in the restaurant due to the global COVID-19 pandemic. She explained that the complaint stated specifically that at no time did COVID-19 enter the restaurants.

Gavrilides argued that the Virus Exclusion was "vague," but the court rejected that argument, holding that the exclusion would apply even if direct physical loss or damage had been established. The court then observed that while government acts are covered, there once again must be direct physical loss or damage.

Finally, the court determined that no factual development could change the complaint's allegation that loss of access to the premises and not physical damage to the property was the cause of the damages.

Editors Note: This decision supports what the insurance industry has been saying from the very beginning of the COVID-19 pandemic, that there is no property damage caused when state and local governments prevent businesses from opening due to an increased risk of the transmission of the disease. As always, though, the Judge in this case carefully considered the facts of the case in making her decision. For example, the insureds admitted in the complaint that COVID-19 at no time entered the restaurants. Representation for the insureds will surely take this into consideration when contemplating filing in the future.

Hundreds of other businesses have sued their insurers for business interruption coverage citing similar arguments. Due to the pandemic, and the halted state of courts around the country, most of those cases are still pending. In one similar ruling in May, out of New York, a judge also ruled in favor of the insurer of a magazine publisher. You can read more about that case here.

At the time of this writing, there was no written transcript of the decision.

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