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In the most recent development in one of the first business interruption cases to be filed in the wake of the COVID-19 pandemic, the Louisiana Court of Appeals has reversed the decision of the lower court, finding that there was business interruption coverage for losses due to government shutdown orders related to the pandemic. The case is Cajun Conti LLC v. Certain Underwriters at Lloyd's, 2022 La. App. LEXIS 939 (La. Ct. App. June 15, 2022).
The insured owned a restaurant, called Oceana Grill, in the French Quarter of New Orleans. Prior to the pandemic, the insured employed 200 people and could accommodate up to 500 guests at a time. Beginning in March 2020, the Louisiana government shutdown orders limited restaurant operations to take-out and delivery services. Oceana Grill reopened on May 16, 2020, but only in a limited capacity to comply with updated mayoral guidelines.
On March 16, 2020, the insured filed suit for a declaratory judgment that the Lloyd's policy the insured had in place covered losses due to the pandemic. The policy covered losses due to "direct physical loss of or damage to" the insured property. Lost business income and extra expenses were covered for losses sustained due to necessary suspensions of the property's operations during the "period of restoration." Lloyd's filed a motion for summary judgment arguing that the claims were not covered because there was no "direct physical loss of or damage to" property. The motion was denied, and a bench trial proceeded. The trial court rendered judgment denying the insured relief and an appeal was filed.
The court of appeals noted that the "all-risk" policy covered loss of business income sustained due to necessary "suspension" of operations during the "period of restoration." The "suspension" of business had to be caused by "direct physical loss of or damage to the property." The policy did not define "direct physical loss" or "damage," but "suspension" was defined in the policy as the "slowdown or cessation of our business activities." Therefore, the complete cessation of operations and an uninhabitable property were not required. By definition, suspension included the slowdown of business activities, which occurred here, as well as the complete cessation of business operations.
Lloyds referenced several recently decided cases in other jurisdictions where "physical" was interpreted in relationship to COVID-19 claims as requiring a tangible or corporeal loss of property or damage. These cases were not binding on this court.
The court found the policy ambiguous. Under one reasonable interpretation, the suspension of business operations due to "direct physical loss of or damage to the property" meant the full loss of use of the property, as Lloyd's argued. The insured's expert stated that the contagion-causing viral particles persisted in the air on the premises, and the presence of the COVID-19 virus substantially diminished the usable space of the property.
Another reasonable interpretation of the policy was that the suspension of business operations due to "direct physical loss of or damage to the property" required the full loss of the property's use, which is a distinctly different situation from the loss of the property's full use. In this example, an insured would have had to shut the restaurant down completely for an unusual period of time in order to qualify for coverage.
Because of this ambiguity and the existence of two equally reasonable interpretations of what constituted a "direct physical loss of or damage to" the insured property meant that the policy had to be construed in favor of coverage. Also due to the ambiguity, the court was allowed to consider parole evidence. The court noted that Lloyd's could have included a viral exclusion in the policy. The insured testified that it would not have purchased the policy if it had included such an exclusion, providing insight regarding how the insured reasonably construed the policy at the time of the purchase.
The judgment of the trial court was reversed. The court held that coverage existed for loss or damage caused by "direct physical loss of or damage to" the insured premises as a result of COVID-19 contamination.
Editor's Note: Although the majority of courts seem to be siding with insurers in these COVID-19 business interruption suits if the facts align a policyholder may have a chance at victory in the courts. Here, because the court found the language to be ambiguous they had to interpret the ambiguity in favor of the policyholders, as the insurer is the party who is responsible for drafting the policy.