The Superior Court of D.C. sided with an insurance company, finding that a typical property insurance policy does not provide business interruption coverage for losses resulting from the COVID-19 pandemic and resulting public shutdowns. The case is Rose's 1, LLC, et al. v. Erie Insurance Exchange, No. 2020 CA 002424 B, D.C. Super.
Erie issued a commercial property policy to Rose's 1, LLC, (Rose's), owners and operators of several prominent D.C. restaurants. Each restaurant was insured by "Ultrapack Plus Commercial Property Coverage" from Erie Insurance Exchange. The policies 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 insured property. The policies further state that the "policy insures against direct physical 'loss'" with the exception of several exclusions that do not apply in this case.
Due to the worldwide COVID-19 pandemic, on March 11, 2020, D.C. Mayor Muriel Bowser declared a state of emergency and a public health emergency due to the "imminent hazard of or actual occurrence of widespread exposure" to the virus. Over the next thirteen days, Bowser gradually increased restrictions and eventually ordered the closure of all nonessential businesses. These restrictions continued for several months.
Due to this closure, Rose's restaurants were forced to close their doors and suffered serious revenue losses. In order to gain some coverage for these losses, they filed insurance claims with Erie, who denied the claims. Rose's filed this suit to secure declaratory judgment that their claims were covered by express policy language. Both sides moved for summary judgment.
Rose's first argued that the loss of use of the restaurant properties qualified as 'direct' because the closures were the result of Mayor Bowser's orders without any intervening actions. To this, the court noted that the "orders were governmental edicts that commanded individuals and businesses to take certain actions. Standing alone and absent intervening actions by individuals and businesses, the orders did not effect any direct changes to the properties."
Rose's next argument was that their losses were "physical" losses because the virus is "material" and "tangible," and because the harm that the restaurants suffered was caused by the Mayor's edicts rather than "some abstract mental phenomenon such as irrational fear causing diners to refrain from eating out." The court found that Rose's failed to offer evidence that the COVID-19 virus was truly president on their insured properties when the properties were forced to close, and the Mayor's orders had no effect on the tangible or material structure of the insured properties.
Lastly, the plaintiffs argued that since the policy defined "loss" as encompassing either "loss" or "damage," so Erie was required to treat the term "loss" as distinct from "damage" which implies physical damage to the property, and assumes that "loss" incorporates the loss of use of covered property, which requires only that Rose's be deprived of the use of the property, not the presence of "physical damage." In response to this argument, the court stated that the terms "physical" and "direct" modify the word "loss," so any "loss of use" must be caused by a direct physical intrusion on to the insured property. The stay-at-home orders were not a direct physical intrusion onto the property.
Editors Note: This finding shows us that under the narrow facts and definitions of this case specifically, that municipal orders that closed restaurants in anticipation of a COVID-19 outbreak did not constitute a "direct physical loss" on its own in the policies in this case.
So, while this decision, like the decision in the Gavrilides Management Company, LLC v. Michigan Insurance Co. case seems to favor insurers and will likely be used to exemplify a victory on behalf of the insurance industry the decision only takes into account the very specific language and facts of the case at hand, and does not address many other issues that have been raised by the hundreds of cases filed that seek business interruption coverage due to COVID-19 losses.
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