January 27, 2021 Practice Points

Policyholders Notch a Win in the Fight for COVID-19 Insurance Coverage

The case involves an Ohio-based restaurant system that argued it was entitled to business interruption coverage caused by the pandemic.

By Rebecca Lunceford Kolb and David J. Marmins

On January 19, 2021, an Ohio Federal District Court granted summary judgment to several restaurant policyholders, determining that they were entitled to business interruption coverage for closures caused by COVID-19. See Henderson Rd. Rest. Sys., Inc. v. Zurich Am. Ins. Co., No. 1:20-CV-1239, 2021 WL 168422 (N.D. Ohio Jan. 19, 2021). Relying on contract ambiguities that it had to interpret in favor of the policyholders, the court determined that the business income policies provided coverage for the plaintiffs’ in-person dining closures resulting from state orders.

As with most of the cases addressing this type of coverage, the court had to determine whether COVID-19-related closures fell within the initial coverage grant for the policy. The key language for this determination in nearly all these cases is whether the business interruption was caused by “direct physical loss or damage” to the covered premises. Most courts have determined that closures resulting from the pandemic were not based on physical loss or damage to the covered property. In Henderson Road, however, the court noted a small but critical distinction in the relevant policy, which stated that there must be “direct physical loss of or damage to real property” (emphasis added). The court employed the rule of contract construction that all words must have meaning and, therefore, there must be a difference between “physical loss of” and “damage to” real property.

The plaintiffs argued that, even if there was no damage to the property, “physical loss of … real property” could include “when the state governments ordered that the properties could no longer be used for their intended purpose.” The court agreed that the language was susceptible to that interpretation. Because all ambiguities must be construed in favor of the insured, the court ruled, as a matter of law, the restaurant closures did result in “direct physical loss of … real property.” Therefore, the policy covered losses from state-mandated COVID-19 restaurant closures.

The policy also included a “microorganism” exclusion, but the court determined the exclusion did not apply. Notably, the parties stipulated that “none of Plaintiffs’ Insured Premises were closed as a result of the known or confirmed presence of SARS-CoV-2 or COVID-19 at any of the Insured Premises.” Normally, such a stipulation would favor insurance carriers because plaintiffs have commonly (though often unsuccessfully) relied on the presence of the virus to satisfy the requirement of physical loss or damage to the property. In Henderson Road, though, the plaintiffs argued that government orders caused their closures, rather than direct presence of the virus. Under the plaintiffs’ argument, they did not need direct presence of the virus to satisfy the coverage grant. But the stipulation did bar Zurich from using the microorganism exclusion to preclude coverage.

Plaintiffs argued that, for the microorganism exclusion to apply, the virus must have been present on the premises. The court agreed with the plaintiffs, relying in part on insurance carriers’ representations to the Ohio Department of Insurance when initially seeking approval for the microorganism exclusion in 2006. Then, the carriers “explained that, despite the broad language of the exclusion, they were seeking to avoid coverage for ‘viral and bacterial contamination’ of properties” (emphasis added). Relying on that interpretation of the exclusion and based on the parties’ stipulation that none of the plaintiffs’ closures were based on the presence of the virus at their properties, the court ruled that the microorganism exclusion did not apply.

Although the court granted summary judgment for plaintiffs on coverage, it delayed discovery on damages pending appeal based on the “substantial ground for difference of opinion” on the policy interpretation. In addition to the Sixth Circuit, Ohio appellate courts will soon have the chance to clarify the issue of COVID-19 insurance coverage. On the same day the Northern District of Ohio issued the Henderson Road opinion, a judge in the same district certified a similar question to the Ohio Supreme Court. See Order of Certification to the Sup. Ct. of Ohio, Neuro-Commc’n Serv., Inc. v. The Cincinatti Ins. Co., No. 4:20-CV-01275 (N.D. Ohio Jan. 19, 2021). In Neuro-Communications, though, the policy at issue contains the far more common language requiring “direct physical loss or damage,” omitting the critical “of” included in the policy in Henderson Road.

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Rebecca Lunceford Kolb and David J. Marmins are with Arnall Golden Gregory LLP in Atlanta, Georgia.


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