May 19, 2021

An Update on Business Interruption Coverage for Claimed Losses Related to Covid-19 Closures

Written by Bryce Addison

To date, no state or federal appellate circuit in Louisiana have issued an opinion on business interruption coverage for claimed losses related to or arising out of the Covid-19 pandemic. This void will undoubtedly be filled within months, if not weeks, as claims make their way through the district courts and into appellate decisions. In the meantime, the overwhelming majority of federal and state district courts have determined that business interruption coverage generally does not apply to losses related to or arising out of Covid-19 closures.

Locally, in the case of Cajun Conti LLC, et al. v. Certain Underwriters at Lloyd’s, London, the Business Income Coverage Form at issue required the insurer to 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 [your] premises… The loss or damage must be caused by or result from a Covered Cause of Loss.” The term “Covered Cause of Loss” was defined as “risks of direct physical loss” unless excluded or limited under the Policy. Importantly, the insurance policy at issue in Cajun Conti did not contain a virus exclusion.

The insurer in Cajun Conti argued that the Covid-19 related closures were not a “Covered Cause of Loss” because the policy excluded from coverage (1) loss or damage resulting from delay, loss of use or loss of market and (2) loss of damage caused by or resulting from acts or decisions of governmental bodies. Additionally, the insurer argued that the Covid-19 related closures did not constitute a “direct physical loss of or damage to property,” and that the insurer never intended for the risk of virus to be a covered cause of loss under the policy.

The insured, a French Quarter restaurant, relied upon scientific evidence and regulatory filings with the Department of Insurance in support of its argument that the policy language was intended, or could at least be reasonably interpreted, to include viral contamination as a “Covered Cause of Loss.” The insured argued that it was continuously contaminated by the SARS-CoV-2 virus, a “Covered Cause of Loss,” which resulted in the loss of use of the property, necessitating coverage.

The trial court ultimately sided with the insurer, denying the insured’s request for a declaratory judgment finding coverage. However, the trial court did not provide written reasons for its judgment, so it remains unclear what the trial court’s conclusions were as to whether SARS-CoV-2 contamination was a “Covered Cause of Loss” and whether the related closures were “caused by direct physical loss of or damage to property.” The insured has since appealed the trial court’s decision to the Louisiana Fourth Circuit, where it is now pending.

A review of similar decisions emanating from Louisiana state and federal courts suggests the trial court’s decision in Cajun Conti may likely be affirmed on appeal. For example, in a recent decision out of the Eastern District of Louisiana, the federal court concluded that “Louisiana jurisprudence indicates that lost profits from government-mandated business closures are not covered without evidence of physical property damage.”[1] In that case, the court declined to construe “direct physical loss” broadly, reasoning that “COVID damages people not property” and observing that the insured was still able to operate using “effective health measures,” such as social distancing, capacity limitations, curbside pickup alternatives, and mask wearing.  Multiple federal courts have characterized this trend in excluding business interruption coverage related to Covid-19 closures as representing the “the overwhelming majority of courts” and “the prevailing consensus.”[2]

That said, federal courts have on occasion refused to dismiss business interruption claims for Covid-19 closures when insureds expressly allege both the physical nature of the SARS-CoV-2 virus and the likelihood of physical contamination at their particular premises.[3] These courts have analogized the physical nature of the SARS-CoV-2 virus to asbestos fibers and jurisprudence finding that asbestos fibers constitute physical contamination. It is nonetheless important to note that the majority of the decisions rendered in favor of insureds on this issue were merely denials of motions to dismiss brought by the insureds, and were not positive findings of coverage.

One exception is a case out of the Northern District of Ohio, Henderson Rd. Rest. Sys. V. Zurich Am. Ins. Co., in which the federal court granted the insured’s motion for summary judgment finding that the insurer owed coverage for the insured’s business interruption claims related to Covid-19 closures.[4] Not only was the operative policy language in Henderson Rd. identical to the coverage language in Cajun Conti, but unlike Cajun Conti, the Henderson Rd. insured had a Microorganism exclusion which broadly excluded coverage for loss “directly or indirectly caused by, contributed to, or aggravated by the presence, growth, proliferation, spread or any activity of ‘microorganisms.’”

The Ohio court observed that the policy language provided coverage for “direct physical loss of or damage to property,” and reasoned that the disjunctive conjunction “or” required that the terms held distinct meaning and effect. Specifically, the court reasoned that “physical loss of” property must have a distinct meaning from “damage to property,” and concluded that the insured was not required to demonstrate physical damage to property if the insured could alternatively prove a physical loss of the property. The court determined that the insured demonstrated that a “physical loss of” the property occurred when the government orders prohibited the insured from using the property for their intended purpose as dine-in restaurants. Additionally, the court found that the Microorganism exclusion did not apply to exclude coverage because the loss was caused by the government orders, not by any finding that the insured was contaminated.

It should be noted that it does not appear that any other courts have followed the reasoning in Henderson Rd. to find coverage under similar policy language and circumstances. Specifically, Louisiana’s federal district courts have issued at least five (5) opinions to date regarding business interruption coverage for Covid-19 closures.

As coverage litigators, we continue to monitor the growing number of cases making their way through the various state and federal appellate courts in conjunction with serving our clients’ coverage objectives. While these disputes have been litigated for as long as the SARS-CoV-2 virus has been detected in the United States, it would seem that we are only a few months, if not weeks, from having a robust jurisprudential framework governing the various strains of business interruption claims.

[1] Q Clothier New Orleans LLC v. Twin City Fire Ins. Co., No. 20-1470 (E.D. La. 04/23/21), 2021 U.S. Dist. LEXIS 78244, 2021 WL 1600247.

[2] See, e.g., Selery Fulfillment, Inc. v. Colony Ins. Co., No. 4:20-cv-843 (E.D. Tex. 03/15/21), 2021 U.S. Dist. LEXIS 47483, 2021 WL 963742 at n. 2 (citing federal court observations regarding the majority opinion that business interruption coverage is typically not afford for Covid-19 related closures); Barbecue v. State Auto. Mut. Ins. Co., No. 1:20-cv-665 (W.D. Tex. 12/14/20), 2020 U.S. Dist. LEXIS 234939, 2020 WL 7351246 at n. 8 (providing survey of “great majority of courts outside the Fifth Circuit” which have held that Covid-19 and related civil authority shutdown orders do not constitute a direct physical loss of property).

[3] See, Studio 417 v. Cincinnati Ins. Co., 478 F.Supp. 3d 794 (W.D. Mo. 08/12/20); Humans & Res., LLC v. Firstline Nat’l Ins. Co., No. 20-2152 (E.D. Pa. 01/08/21), 2021 U.S. Dist. LEXIS 3998, 2021 WL 75775.

[4] Henderson Rd. Rest. Sys. V. Zurich Am. Ins. Co., No. 1:20-cv-1239 (N.D. Ohio 01/19/21), 2021 U.S. Dist. LEXIS 9521, 2021 WL 168422.