In August 2020, the Western District of Missouri gave hope to many businesses claiming business interruption coverage for loss from COVID-19, when it denied The Cincinnati Insurance Company’s motion to dismiss in Studio 417, Inc., et al. v. The Cincinnati Ins. Comp., No. 20-cv-03127-SRB, 2020 WL 4692385 (W.D. Mo. Aug. 12, 2020). Recent decisions, though, are proving that case to be an aberration. Northern District of Georgia Judge Thomas Thrash was one of the latest to dash those affected businesses’ hopes in Henry’s Louisiana Grill v. Allied Insurance Company of America, 2020 WL 5938755 (N.D. Ga. Oct. 6, 2020).
As most policyholders are now aware, almost all business interruption coverage requires “direct physical loss or damage” at the covered premises. Insurance carriers argue that this type of provision requires damage to the structure of the premises at which a business operates to invoke coverage, and policyholders counter that income loss based on virus exposure can fall within the physical loss requirement. In Studio 417, the Missouri district court looked at the pivotal phrase—“physical loss or damage”—and determined that “loss” must be something different than “damage.” Otherwise, the court reasoned, the word “loss” would be rendered meaningless. This provided a narrow opening for policyholders to argue that COVID-19 exposure falls within business interruption coverage as physical loss. Recently, a North Carolina state court used this reasoning to grant summary judgment in favor of restaurant policyholders in North State Deli LLC et al. v. The Cincinnati Insurance Co., No. 20-CVS-02569, in the Superior Court of Durham County, N.C. (Oct. 9, 2020). These two decisions offered promise for policyholders.
In Henry’s, however, the Georgia district court issued a well-reasoned opinion specifically rejecting this argument, falling within the much larger trend of cases denying business income coverage for COVID-related losses. In Henry’s, the plaintiffs are a restaurant and event space insured by Allied Insurance Company of America (“Allied”) “against direct physical loss unless” the loss was excluded or limited by other provisions in the insurance contract. As part of its coverage, the plaintiffs’ policy included business income coverage, as follows:
(a) We will pay for the actual loss of ‘business income’ you sustain due to the necessary suspension of your ‘operations’ during the ‘period of restoration.’ The suspension must be caused by direct physical loss of or damage to property at the described premises....
(Emphasis added.) On March 14, 2020, in response to the growing threat of COVID-19 in the State of Georgia, Governor Brian Kemp issued an Executive Order declaring a “Public Health State of Emergency.” As a “direct response” to the Governor’s Executive Order, Henry’s closed its dining rooms. Allied denied coverage for this closure, pointing to the language of the business income provision and the virus or bacteria exclusion. It was undisputed that at no time has there been “any virus located at, on, or in Henry’s premises.” The court seized on this fact and did the best job yet of any trial court at crystallizing the high hurdle insureds such as Henry’s face in making business interruption claims due to COVID closures.
Plaintiffs made the argument from Studio 417 that physical loss must be different from physical damage, and that the loss of use of their dining spaces constituted a direct physical loss, even if there was no physical damage. The court in Henry’s looked at the phrase differently, though, using dictionary definitions in finding that loss and damage had “different and complimentary meanings.”
As the court explained,
loss is the ‘disappearance of value’ or ‘the act of losing possession’ by complete destruction, while damage is any other injury requiring repair. As an illustrative example, a tornado that destroys the entirety of the restaurant results in a ‘loss of’ the restaurant, while a tree falling on part of the kitchen would represent ‘damage to’ the restaurant.
The court then granted Allied’s Motion to Dismiss, holding that the contract language is not ambiguous, and because the Governor’s Executive Order did not create a “direct physical loss of” the Plaintiffs’ dining rooms, the Business Income provision does not apply to the Plaintiffs’ claims. Notably, the district court found this to be the only reasonable interpretation for the policy language under Georgia law, refusing the Plaintiffs’ request to send the issue to the Georgia Supreme Court.
The court noted that its empathy with Henry’s and the many businesses sharing in Henry’s plight could not alter its holding:
This Court recognizes the challenging position the Plaintiffs found themselves in. The COVID-19 pandemic has imposed massive changes and pressures on every business and every household in this country. The Plaintiffs, faced with a difficult decision, made a choice that they felt would best ensure the health of their customers and employees. This Court’s decision here is not a judgment on the Plaintiffs’ business sense or the wisdom of shuttering dining rooms in the face of a global pandemic. This decision merely reflects the plain language of the parties’ insurance contract.
The decision in Henry’s v. Allied continues a trend of courts across the country thwarting insureds’ efforts to collect business interruption coverage for COVID-19 closures.
For example, the U.S. District Court for the Middle District of Florida granted Certain Underwriters at Lloyds’ motion to dismiss the COVID-19 business interruption claim of Infinity Exhibits, Inc. Infinity Exhibits, Inc. v. Certain Underwriters at Lloyds’, Case No: 8:20-cv-1605-T-30AEP, 2020 WL 5791583 (M.D. Fl. Sept. 28, 2020). Infinity designs and creates trade show displays and, of course, suffered severe revenue losses when Florida Governor Ronald DeSantis issued similar executive orders to those cited by Henry’s in Georgia that resulted in cancelled trade shows starting in March and continuing throughout 2020. However, the Florida federal court held that Infinity failed to, and could not, allege direct physical loss or damage to its property. The court explained that, under the plain language of the plaintiff’s policies, “actual, concrete damage is necessary” and there were no facts alleged describing how property suffered any actual physical loss or damage.
The very next day The Cincinnati Insurance Company bettered its COVID-19 batting average by winning a motion to dismiss against a dental office in Iowa. The U.S. District Court for the Southern District of Iowa found that there was no “physical” or “accidental” loss when COVID led the local government to suspend non-emergency dental procedures. See Oral Surgeons, P.C. v. The Cincinnati Insurance Company, NO 4-20-CV-222-CRW-SBJ, 2020 WL 5820552 (S.D. Io., Sept. 29, 2020). Federal courts in Pennsylvania and Illinois also recently granted motions to dismiss business interruption insurance coverage claims related to COVID-19 closures and other government orders. See It’s Nice, Inc. v. State Farm Fire and Casualty Co, NO. 2020L000547 (18th Judicial Circuit, Il. Sept. 29, 2020); Wilson et al. v. Hartford Casualty Co., et al, NO. 20-3384 (E.D. PA, Sept. 30, 2020).
Each court has based its decision on the now-prevailing position that COVID-19 has not caused a physical loss at the premises, whether of a restaurant or other business. Therefore, it appears more and more likely that the hair salon and restaurants that overcame The Cincinnati Insurance Company’s motion to dismiss in Missouri, and the restaurants that won summary judgement against The Cincinnati Insurance Company in North Carolina will remain outliers in the battle over COVID-19 insurance coverage for business interruption losses. That said, the battle continues, as hundreds of businesses have filed similar claims with many waiting on final decisions and appellate rulings. Those appellate rulings will establish the prevailing law of each jurisdiction. In the end, whether policyholders have coverage may turn on the jurisdiction of the claim.
David J. Marmins is a partner in the Litigation practice group at the law firm of Arnall Golden Gregory LLP, Atlanta, Georgia. Rebecca Lunceford Kolb is a senior associate in the Litigation practice group at the law firm of Arnall Golden Gregory LLP, Atlanta, Georgia.
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