A second court has now found that a typical property insurance policy does not provide business interruption coverage for COVID-19 losses. In Rose’s 1, LLC, et al. v. Erie Insurance Exchange (Case No. 2020 CA 002424 B), Washington D.C. Superior Court Judge Kelly A. Higashi found for Erie Insurance, holding that, as a matter of law, COVID-19 does not cause direct physical damage to property, which is a prerequisite to coverage. Also, importantly, Judge Higashi concluded that despite the absence of the widely discussed virus exclusion, “even in the absence of such an exclusion, Plaintiffs would still be required to show a ‘direct physical loss.’”
Erie issued a commercial property policy to Rose’s 1, one of many restaurants around the country severely impacted by the pandemic. Judge Higashi distilled the coverage battel to its essence, writing that “the parties dispute whether the closure of the restaurants due to Mayor Bowser’s orders constituted a ‘direct physical loss’ under the policy.”
The court dismantled the policyholder’s arguments. Plaintiffs first argued that “the loss of use of their restaurant properties was ‘direct’ because the closures were the direct result of the Mayor’s orders without intervening action.” However, 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 (sic) any direct changes to the properties.”
Next, the plaintiffs argued that “their losses were ‘physical’ because the COVID-19 virus is ‘material’ and ‘tangible,’ and because the harm they experienced was caused by the mayor’s orders rather than ‘some abstract mental phenomenon such as irrational fear causing diners to refrain from eating out.’” However, the court found that the plaintiffs “offer[ed] no evidence that COVID-19 was actually present on their insured properties at the time they were forced to close. And the mayor’s orders did not have any effect on the material or tangible structure of the insured properties.”
Finally, the plaintiffs argued that “by defining ‘loss’ in the policy as encompassing either ‘loss’ or ‘damage,’” Erie was required to “treat the term ‘loss’ as distinct from ‘damage,’ which connotes physical damage to the property,” and positing that “‘loss’ incorporates ‘loss of use,’ which only requires that Plaintiffs be deprived of the use of their properties, not that the properties suffer physical damage.” Unpersuaded, the court determined that the words ‘direct’ and ‘physical’ modify the word ‘loss.’ Any ‘loss of use’ must be caused, without the intervention of other persons or conditions, by something pertaining to matter—in other words, a direct physical intrusion on to the insured property. The stay-at home orders were not a direct physical intrusion.
The court noted that the plaintiffs’ papers were devoid of caselaw standing “for the proposition that a governmental edict, standing alone, constitutes a direct physical loss under an insurance policy.” Agreeing with Erie, the court cited New York caselaw such as Roundabout Theatre Co. v. Continental Casualty Co., 302 A.D.2d 1, 2-3 (N.Y. App. Div. 2002), in which “courts have rejected coverage when a business’s closure was not due to direct physical harm to the insured premises,” but rather government closure orders like the D.C. closure order at issue in this case.
This decision follows first the denial of a preliminary injunction by the Southern District of New York in Social Life Magazine and, second, the granting of summary disposition of no coverage by a Michigan state court in Gavrilides Management Co. Now, with Rose’s 1, the courts continue to agree with insurers that the pandemic does not represent a ‘direct physical loss’ of property.