DC Court Throws Out COVID-19 Business Interruption Claim

We have been closely monitoring business interruption insurance coverage lawsuits that have been arising around the country in response to the COVID-19 coronavirus pandemic. Insureds and insurance providers have been battling over difficult questions such as whether a mandated closure due to the threat of coronavirus constitutes a “direct physical loss,” and whether such a physical loss is even mandatory under a typical business interruption policy. A court in the District of Columbia recently granted summary judgment in favor of the insurance provider who denied coverage, potentially signaling how future courts around the country will deal with these claims. Read on for details about the case and the court’s decision, and reach out to a seasoned New York insurance coverage defense attorney for help defending against overbroad insurance coverage claims.

“Direct Physical Loss” Means What it Says

The case entitled Rose’s 1, LLC et. al v. Erie Ins. Exchange concerned the owners and operators of a series of prominent restaurants around the District of Columbia. The plaintiff restaurateurs had purchased commercial property coverage from the defendant, which 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 property insured. The policy explicitly noted that it insured “against direct physical ‘loss.’”

Like many other cities and states, D.C. was subjected to a state of emergency declaration and public health emergency declaration in response to the coronavirus pandemic. D.C.’s mayor ordered the closure of all non-essential businesses and banned restaurants and bars from serving both seated and standing patrons. Plaintiffs were forced to shut down their restaurants as a result, losing substantial income. They claimed coverage under the business interruption portion of their commercial property coverage provided by the defendant. The defendant insurance carrier denied their claims.

The case principally turned on the definition of “direct physical loss” under the policies’ terms. Plaintiffs argued the following : (1) that the loss was “directly” caused by the mayor’s shutdown orders; (2) the loss was “physical” because the COVID-19 virus is a “material” and “tangible” thing, as well as directly resulting from the mayor’s orders rather than some intangible, abstract mental phenomenon such as existential fear; and (3) “loss” is distinguished from “damage” in the policies, so no “physical damage” to the property is actually required.

The court rejected each argument in turn. The mayor’s orders did not cause direct loss by changing the properties (unlike, for example, an earthquake), and the loss was caused by the intervening actions of individuals and businesses. The loss was not physical, because plaintiffs provided no evidence that their businesses were contaminated with the physical COVID-19 virus. Finally, through principles of grammar and common sense, the phrase “direct physical loss” does require some physical damage to the property, not just deprivation of use. The court cited precedent from New York cases holding that business closures unrelated to actual physical harm to the property were not covered by similar policies.

Based on the plain meaning of the words “direct physical loss” and analogous cases, the court found that the defendant’s policy did not cover business interruption caused by government-mandated shutdowns connected to the coronavirus pandemic. The court’s persuasive reasoning could be employed by New York and other jurisdictions in future coronavirus-related claims.

For knowledgeable and considered legal guidance on a New York insurance defense or toxic tort claim, contact the Islip offices of Richard A. Fogel at 516-721-7161.