Insurers Remain Undefeated In Federal And State Appellate Tribunals On COVID-19 Business Interruption Claims
By Melinda S. Kollross
The body of federal and state appellate precedent keeps growing, with these appellate tribunals unanimously holding that there is no property insurance business interruption coverage for losses arising from the COVID-19 pandemic.
Gavrildes Mgmt. Co. v. Michigan Ins. Co., No. 354418 (Mich. App. 2-1-22)
Policyholder attorneys complain that the federal courts should postpone ruling on these COVID-19 coverage cases until the state courts have their say. Well, as we have been reporting, the state courts have and continue to have their say ruling, like the federal circuits, that there is no coverage for these losses.
In Gavrildes, the Michigan Court of Appeals issued a published opinion holding that two restaurants were not entitled to lost business income coverage arising from closure orders issued to stem the spread of COVID-19 because the closure orders did not cause any physical loss or damage to the insured’s premises. According to the Court, the word “physical” necessarily required some manner of tangible and measurable effect on the premises, and the closure orders had no such effect on the insured’s premises. The Court found moreover that the “period of restoration” meant that the policy expected the loss or damage to be amenable to physical remediation—either by making tangible alterations or repairs to the premises, or by replacing the premises altogether. No alteration to, or replacement of, the insured’s premises would have permitted the restaurants to reopen because the closure orders had kept the insured’s premises closed.
Additionally, the Court ruled that an exclusion barring payment for loss or damage caused by or resulting from any virus, bacterium or other microorganism that could induce physical distress, illness or disease was clear and unambiguous and barred the entirety of the insured’s claim.
Sweet Berry Cafe, Inc. v. Society Ins., Inc., 2022 Ill. App. (2d) 2100881
The Illinois Appellate Court recently added its voice to the growing number of appellate tribunals holding that an insured’s pandemic related losses are not covered in a published opinion issued on 3-15-22. In Sweet Berry, the Court rejected the insured cafe’s contention that loss of use sufficed for it to obtain reimbursement of business income losses. According to the Court, although the policy did not define the operative policy language “physical loss of or damage to”, the plain meaning of those words requires a physical alteration or substantial dispossession, not merely loss of use to trigger coverage for lost business income. The Court cited the Illinois Supreme Court’s decision in Travelers Ins. Co. v. Eljer Mfg. Inc., 197 Ill. 2d 278 (2001), concerning what constitutes a “physical” injury to tangible property. Eljer held that tangible property does not experience physical injury if that property suffers intangible damage, such as diminution in value. The Appellate Court further rejected the insured’s claim that coverage existed because the policy did not contain a virus exclusion. The insured reasoned that since the policy did not exclude losses from a virus, then it had to cover losses from a virus. But the Court rejected this specious claim, holding that the absence of an exclusion could not create any coverage that did not exist in the first place.
Sweet Berry made two other notable points.
The Court found it significant that its decision was consistent with the overwhelming weight of decisions nationwide, noting specifically that “all published federal appellate court decisions have ruled in the insurance companies’ favor”. Finally, echoing the policy concerns raised by other appellate tribunals, the Court stated that while it was sympathetic to the plight of insureds such as Sweet Berry, it could and would not create coverage where none existed: “We are not unsympathetic to the immense challenges facing restaurants and other hospitality-service providers during the present pandemic. However, we must construe the contract into which the parties entered and hold them to their agreement.”
Lee d/b/a Evanston Grill v. State Farm Fire and Casualty Co., 2022 IL App (1st) 210105
In Lee d/b/a Evanston Grill v. State Farm Fire and Casualty Co., 2022 IL App (1st) 210105, the Illinois Appellate Court, First District added its name to the growing body of appellate precedent holding that there is no first-party property coverage for an insured’s COVID-19 pandemic related economic losses.
In reaching its conclusion, the Court found persuasive the Seventh Circuit’s decision in Sandy Point Dental, P.C. v. Cincinnati Insurance Co., 20 F.4th 327, 329 (7th Cir. 2021), which construed the identical policy language of direct physical loss to covered property. Based upon Sandy Point Dental, which looked to the Illinois Supreme Court’s decision in Travelers Ins. Co. v. Eljer Mfg. Inc., 197 Ill. 2d 278 (2001) for guidance, Lee held as a matter of Illinois law that to trigger coverage, the insured must suffer physical alteration of its property, and not just economic losses.
The Lee Court further held that even if the insured could show such a physical alteration, the virus exclusion in the policy operated to bar all coverage. The virus exclusion excluded “any coverage for any loss” from a “[v]irus, bacteria or other microorganism that induces or is capable of inducing physical distress, illness or disease”. The Court found that the insured’s claim fell directly within the virus exclusion and described as “unavailing” the insured’s contention that its losses arose from the closure orders and not the virus.
Rye Ridge Corp. v. Cincinnati Ins. Co., 2022 U.S. App. LEXIS 1009, 2022 WL 120782 (2d Cir. 2022)
Kim-Chee LLC v. Phila. Indem. Ins. Co., 2022 U.S. App. LEXIS 2655, 2022 WL 258569 (2d Cir. 2022)
Deer Mt. Inn LLC v. Union Ins. Co., 2022 U.S. App. LEXIS 5355, 2022 WL 598976 (2d Cir. 2022)
SA Hospitality Group, LLC v. Hartford Fire Ins. Co., 2022 U.S. App. LEXIS 7139 (2d Cir. 2022)
Following on the heels of its published opinion in 10012 Holdings, Inc. d/b/a Guy Hepner v. Sentinel Ins. Co., Ltd., 21 F.4th 216 (2d Cir. 2021), the Second Circuit issued four Summary Orders to start off 2022 in Rye Ridge, Kim-Chee, Deer Mt. Inn, and SA Hospitality all ruling in favor of insurers and holding that there was no first-party property coverage for any pandemic related business income losses suffered by insureds.
In Rye Ridge, the Second Circuit found its previous decision in 10012 Holdings dispositive that mere loss of use of the premises due to a closure order did not constitute physical loss or damage under the policy as those terms have been applied under New York law.
In Kim-Chee, the Second Circuit likewise found its 10012 Holdings decision controlling that the insured was not entitled to coverage for mere loss of possession or access, and also holding that any closure due to the risk of possible human infection did not qualify as a risk of direct physical loss. The Court also found unavailing the contention that the virus was everywhere on the insured’s premises, finding that the virus’s inability to physically alter or persistently contaminate property differentiated it from radiation, chemicals, dust, gas, asbestos, and other contaminants whose presence could trigger coverage. Finally, the Court rejected the contention that the absence of a virus exclusion meant that losses due to the virus were covered ruling that the absence of an exclusion cannot create coverage.
In Deer Mt. Inn, the Second Circuit once again relied upon 10012 Holdings, as well as the decisions in Rye Ridge and Kim-Chee, in holding that there was no coverage without actual physical loss or damage to the insured’s property. More importantly, the Second Circuit also warned future insureds that the Court would not lightly deviate from the controlling precedent in 10012 Holdings and its progeny, stating: “‘It is a longstanding rule of our Circuit that a three-judge panel is bound by a prior panel’s decision until it is overruled either by this Court sitting en banc or by the Supreme Court.’”
In SA Hospitality, the Second Circuit relied once more upon 10012 Holdings to summarily dispose of an insured’s claim for coverage. The insured even conceded that 10012 Holdings was dispositive but argued that 10012 Holdings was wrongly decided, and it asked the panel hearing its case to revisit the issue anew and come to a different conclusion. The Second Circuit panel in SA Hospitality ruled that even assuming arguendo 10012 Holdings was wrongly decided—which it was not—the SA Hospitality panel could not revisit the issue decided in 10012 Holdings. Echoing the admonition given in Deer Mt. Inn, the SA Hospitality Second Circuit panel stated that 10012 Holdings was binding until it is overruled by the Second Circuit sitting en banc or by the Supreme Court.
Uncork and Create LLC v. The Cincinnati Ins. Co., No. 21-1311 (4th Cir. 3-7-22)
In Uncork and Create, the Fourth Circuit added its voice to the unanimous body of federal appellate precedent, holding in a published opinion that under West Virginia law, policy language requiring a “physical loss” or “physical damage” unambiguously covered only losses caused by, or relating to, material destruction or material harm to the insured property. Because the insured did not suffer such a physical loss or damage resulting from the pandemic or the government closure order, it was not entitled to coverage. In so ruling the Fourth Circuit found it significant that its decision was consistent with the unanimous decisions by other Circuits, which have applied various states’ laws to similar insurance claims and policy provisions. And, while the Court was sympathetic to the insured’s plight, it refused to create coverage where none existed:
And although we, like the district court, recognize that Uncork and other businesses suffered severe losses during the period that the closure order was in effect, we conclude that under the unambiguous terms of the policy, coverage is not available for Uncork’s loss of business income and related expenses absent material destruction or material harm to the covered property.
Aggie Invs., L.L.C. v. Cont’l Cas. Co., 2022 U.S. App. LEXIS 2411, 2022 WL 257439 (5th Cir. 2022)
Like the Second Circuit, the Fifth Circuit issued a summary order in Aggie, giving short shrift to the insured’s arguments for coverage because its previous decision in Terry Black’s Barbecue L.L.C. v. State Automobile Mutual Ins. Co., 22 F.4th 50 (5th Cir. 2022), was dispositive of the case in favor of the insurer. According to the Court, Terry Black’s Barbecue rejected the argument that direct physical loss of property could reasonably be interpreted to cover a loss of use of property. Terry Black’s Barbecue held that direct physical loss meant only one thing: a tangible alteration or deprivation of property. Since the Aggie insured always had ownership of, access to, and the ability to use the entirety of its property throughout the pandemic, it was not entitled to coverage.
Q Clothier New Orleans, LLC v. Twin City Fire Ins. Co., 2022 U.S. App. LEXIS 7565, — F.4th — (5th Cir. 2022)
In Q Clothier New Orleans, LLC v. Twin City Fire Ins. Co., 2022 U.S. App. LEXIS 7565, — F.4th — (5th Cir. 2022), the Fifth Circuit followed its own prior precedential decision in Terry Black’s Barbecue, L.L.C. v. State Auto. Mut. Ins. Co., 22 F.4th 450 (5th Cir. 2022), in ruling for the insurer on COVID-19 pandemic related business loss claims. Q Clothier involved Louisiana law, but the Fifth Circuit found Texas law, which it had applied in Terry Black’s, similar on the operative issues to Louisiana law. Accordingly, the Fifth Circuit opined that consistent with its decision in Terry Black’s, and the decisions of the unanimous appellate tribunals nationwide, the insured’s business income losses caused by civil authority orders closing nonessential businesses in response to the COVID-19 pandemic did not fall within the meaning of direct physical loss of or damage to property so as to trigger coverage under defendant’s policy.
Estes v. Cincinnati Ins. Co., 23 F.4th 695 (6th Cir. 2022)
Applying Kentucky law to a claim made by a dental office insured, the Sixth Circuit held in a published opinion that the Kentucky Supreme Court would agree that to obtain coverage under a first-party property policy for lost business income, the insured had to show that there was a physical alteration or deprivation of the insured property.
According to the Court, the phrase physical loss would convey to the average person that a property owner has been tangibly deprived of the property or that the property has been tangibly destroyed. “If, for example, a thief stole the ‘[f]urniture’ from Estes’s dental offices, a person might say that Estes suffered a ‘physical loss’ of the furniture or if a fire completely destroyed one of Estes’s dental offices, a person might say that Estes suffered a ‘physical loss’ of the building and its contents.” But the Court held that the average person would not say that the insured suffered a physical loss because of the pandemic; COVID-19 did not destroy the insured’s dental offices, and the government shutdown orders did not dispossess the insured of them for a single day.
Brown Jug, Inc. v. Cincinnati Ins. Co., 2022 U.S. App. LEXIS 4836, 2022 WL 538221 (6th Cir. 2022)
In another published decision, the Sixth Circuit, applying Michigan law, found the Michigan Court of Appeal’s decision in Gavrildes Mgmt. Co. persuasive. Together with Gavrildes, the Court applied its previous decisions in Dakota Girls, LLC v. Phila. Indem. Ins. Co., 17 F.4th 645 (6th Cir. 2021), and Santo’s Italian Café LLC v. Acuity Ins. Co., 15 F.4th 398 (6th Cir.), in holding that several restaurant insureds were not entitled to coverage under their property policies for their pandemic related business income losses.
The Sixth Circuit’s opinion here focused on the failures of the insureds to properly allege any physical loss or damage. According to the Court, the complaints did not credibly allege that the presence of COVID-19 in any way caused direct physical loss of or damage to any insured property, or that the virus physically and directly altered property by its mere presence. Moreover, although one of the insured’s complaints specifically alleged that COVID-19 caused physical loss and damage by, among other things, destroying, distorting, corrupting, attaching to, and physically altering property, the complaint made clear that this damage only had occurred because the insured had to take remediation measures, such as cleaning and reconfiguring spaces, to reduce the threat of COVID-19. But the Court ruled that these are precisely the types of losses that are not tangible, physical losses, but economic losses not covered under the policy.
System Optics, Inc. v. Twin City Fire Ins. Co., 2022 U.S. App. LEXIS 5731 (6th Cir. 2022)
System Optics involved Ohio law, and while the Ohio Supreme Court has yet to rule on these pandemic related property policy issues, the Sixth Circuit found it could deal with this insured’s claim in summary fashion given the decision of the Ohio Court of Appeals in Sanzo Enters., LLC v. Erie Ins. Exch., — N.E.3d —, 2021 WL 5816448 (Ohio Ct. App. Dec. 7, 2021) and its own prior decision in Santo’s Italian Café LLC v. Acuity Ins. Co., 15 F.4th 398 (6th Cir. 2021). According to the Court, these decisions teach that direct physical loss of or damage to property means what it says—tangible destruction, in whole or part, or tangible or concrete deprivation—and thereby excludes mere loss of use. So here, the fact that the insured could not make full use of its medical clinic was irrelevant absent any showing that the closure orders physically destroyed the clinic or otherwise tangibly deprived the insured of its property.
Goodwood Brewing v. United Fire Group, 2022 U.S. App. LEXIS 5794 (6th Cir. 2022)
Goodwood Brewing involved Kentucky law and the Sixth Circuit here found its prior decision in Estes v. Cincinnati Ins. Co., 23 F.4th 695 (6th Cir. 2022), virtually indistinguishable, allowing it to deal with this insured’s claim in summary fashion as well. Applying Estes, the Court held that COVID-19 and Kentucky’s shutdown orders caused only intangible or economic harms that were not covered under the insured’s property policy.
Baker v. Oregon Mut. Ins. Co., 2022 U.S. App. LEXIS 6769 (9th Cir. 2022)
The Ninth Circuit summarily disposed of this insured appeal in a 3-paragraph order by holding that the appeal was controlled by California law, and the California appellate decision in Inns-by-the-Sea v. California Mutual Ins. Co., 71 Cal. App. 5th 688, 286 Cal. Rptr. 3d 576 (2021), was dispositive: “In Inns-by-the Sea, the Court of Appeals held that the commercial property insurance policy language at issue does not cover loss of business income caused by COVID-related closure orders.”
Ascent Hosp. Mgmt. Co., LLC v. Employers Ins. Co., 2022 U.S. App. LEXIS 1161, 2022 WL 130722 (11th Cir. 2022)
The Eleventh Circuit in Ascent faced a pandemic related property claim governed by New York law, and finding New York clear, the Court here too determined that it could deal with the insured’s appeal in summary fashion. According to the Court, New York courts have consistently interpreted Roundabout Theatre Co. v. Cont’l Cas. Co., 751 N.Y.S.2d 4 (N.Y. App. Div. 2002), to require the rejection of claims for pandemic-related lost profits under insurance provisions like the one at issue here. This is so, the Court found, because policy language providing coverage for direct physical loss or damage unambiguously required some form of actual, physical damage to the insured property to trigger loss of business income and extra expense coverage. In this case, the insured could not show any such physical damage or loss and thus there was no coverage.
Inns-by-the-Sea v. California Mutual Ins. Co., 2021 Cal. App. LEXIS 956 (Cal. App. 2021)
We reported on this California appellate decision favorable to the insurance industry in Vol. 4 of our 2021 CM Report. The insured subsequently sought review by the California Supreme Court, and on 3-9-22, the California Supreme Court denied the insured’s petition for review.
Although the California Supreme Court’s denial of review does not have precedential value and is not to be regarded as expressing approval of the propositions of law set forth in an opinion of the court of appeal, it does not follow that such a denial is without significance as to the views of the Supreme Court. In Di Genova v. State Board of Education, 57 Cal. 2d 167, 177 (1962), the California Supreme Court stated: “The order of this court denying a petition for a transfer . . . after . . . decision of the district court of appeal may be taken as an approval of the conclusion there reached, but not necessarily of all of the reasoning contained in that opinion.” (quoting Cole v. Rush, 45 Cal 2d 345, 351, fn. 3 (1955)). See also, 16 Cal. Jur. Courts § 318.
Learning Points: Based upon my analysis of these appellate decisions, as well as others I have reported on in past issues of the CM Report, I have these “appellate recommendations” for our friends in the insurance and defense industry for appeals going forward involving these property policy pandemic related claims:
—Stress the public policy considerations advanced in cases such as Santo’s Italian Café LLC v. Acuity Ins. Co., 15 F.4th 398 (6th Cir. 2021), and Sweet Berry against creating insurance coverage not contemplated by the parties for the economic losses suffered by some insureds during the pandemic.
—Stress the unanimous body of federal and state appellate precedent that is being developed regarding these pandemic related property insurance claims. The Fourth Circuit found this unanimous body of appellate precedent significant to its decision in Uncork and Create, as did the Illinois Appellate Court in Sweet Berry.
—Stress the admonition given by the Second Circuit in Deer Mt. Inn that once a court decision is made, future panels in that Circuit will not lightly disregard the prior decision merely because three different judges might be deciding another case. Although not all appellate tribunals might have as explicit a rule as the Second Circuit—that a three-judge panel should be bound by a prior panel’s decision until it is overruled either by the Court of Appeals en banc or by the Supreme Court—the admonition is sound and bears repeating.