D.C. Court Rules for Insurer, Dismisses COVID-19 Business Income Claim

In perhaps the highest profile COVID-19 business income lawsuit to-date, Rose’s 1 versus Erie Indemnity, the court ruled in favor of the insurer and concluded that the plaintiff (Rose’s 1) had failed to prove that they had suffered any direct physical loss as their insurance policy would have required. Countless business interruption claims and a large number of lawsuits have been filled all over America since the pandemic has crippled our global economy.

As we have outlined in earlier posts, exclusions related to virus and bacteria perils date back to the SARS virus and are today common throughout the industry. That, along with the typical need to suffer some provable direct physical loss, has led to insurer declines all over the world as well as legal rulings in favor of insurers such as the one announced by the District of Columbia’s Superior Court on August 7th.

You can read more about the ruling in an article in the Insurance Journal which can be found on-line here; https://www.insurancejournal.com/news/national/2020/08/07/578232.htm or as follows below:

The insurance industry has notched another victory in its defense of its commercial insurance policies against claims for business interruption due to the coronavirus.

In a case brought by the owner of several restaurants against its insurer over business interruption due to the coronavirus shutdown ordered by the mayor, a District of Columbia Superior Court judge has sided with the insurer, ruling that the restaurants’ insurance policy is not triggered because the shutdown did not amount to direct physical loss.

Finding that the plaintiff restaurants failed to prove there was any direct physical loss, Associate Judge Kelly Higashi on Thursday granted a summary judgment in the suit in favor of Erie Insurance Exchange.

In March, D.C. Mayor Muriel Bowser issued several orders. They included a ban on indoor dining, the closing of all non-essential businesses, and an order for residents to shelter-in-place. Rose 1 had to close its restaurants as a result.

The restaurants had purchased Erie’s Ultrapack Plus Commercial Property Coverage that 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 further states that the “policy insures against direct physical loss” with the exception of several exclusions that the judge said were not material to the case.

The restaurant company, Rose’s 1, argued that the loss of use of its restaurants was a direct physical loss because the closures were the direct result of the mayor’s orders without intervening action. But the judge noted the orders “did not effect any direct changes to the properties.”

The plaintiffs further argued that the losses were physical because the coronavirus is “material” and “tangible” rather than abstract. But the judge found the plaintiffs offered no evidence that the virus was present in their inured properties and found that the mayor’s orders did not have any material or tangible effect on the insured’s properties.

Finally the judge rejected the argument that “loss” is distinct from “damage” and that “loss” should incorporate loss of use, which should require only that they be deprived of the use of their properties, not that they suffer physical damage. But Judge Higashi noted that in the phrase “direct physical losses,” direct and physical modify the word losses and thus any loss of use must be caused by a direct physical intrusion onto the properties. The mayor’s orders were not a physical intrusion, she wrote.

She also said the plaintiffs had failed to put forth any cases supporting their contention that a mayoral order constitutes direct physical loss under an insurance policy. The judge, however, cited several cases where courts have rejected coverage where there was no direct physical harm to the properties.

The case is Rose’s 1 v Erie Indemnity. The lead plaintiff, Rose’s 1 LLC, runs several upscale restaurants including Rose’s Luxury, Elaine’s One, Pineapple and Pearl’s, and Little Pearl. The owner is chef Aaron Silverman. Other plaintiffs included Buttercream Bakeshop, Karma Modern Indian, El Cucho, Bar Charley, La Vie and Beuchert’s Saloon.

The case follows a Michigan state court ruling in July that also sided with insurers.

Judge Joyce Draganchuk of Michigan’s 30th Circuit Court ruled verbally on July 1 that some tangible alteration to a property is required to trigger coverage. What’s more, a virus exclusion in the property insurance policy would have barred coverage even if the claimants had alleged the virus did cause physical damage, the judge said.

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