On July 1, a Lansing, Michigan state court handed down the first, substantive COVID-19 business interruption coverage decision of its kind. In Gavrilides Management Co. et al. v. Michigan Ins. Co., Judge Joyce Draganchuk sided with an insurance carrier on a threshold motion to dismiss, dismissing the complaint as a matter of law.
Judge Draganchuk, in a well-reasoned decision, determined that “direct physical loss of or damage to property” requires more than mere loss of use or access. Rather the court stated that some tangible alteration or damage that impacts the physical integrity of the premises is required. While the judge was applying Michigan law, we think that this interpretation is consistent with the approach of the majority of states.
In an attempt to avoid application of the policy’s virus exclusion, the plaintiff declined to allege direct physical damage altogether. Instead, the policyholder asserted a theory of direct physical loss of use/access that it claimed was caused by government closure orders rather than the virus. No doubt artfully pled, the judge called this attempt “just nonsense.” Many policyholders have taken this pleading approach, while the majority of pending cases allege direct physical damage to property as a result of the virus. Whether the virus can cause physical damage was not addressed here.
However, even had direct physical damage byway of the virus been pled, the policy’s virus exclusion proved too high a hurdle for the policyholder to overcome. Here, not only did the court determine that there was no trigger of coverage, but also that the virus exclusion unambiguously excluded coverage caused by this viral pandemic. A one-two punch.
All in all, a big win for the insurance industry. This case will likely have the attention of the insurance world the way Social Life Magazine v. Sentinel Ins. Co. had over the past month and a half. Recall that in Social Life—a preliminary injunction application, rather than a motion to dismiss—Judge Caproni of the Southern District of New York exclaimed that the virus “damages lungs. It doesn’t damage printing presses.” Albeit early, strong language used by courts in both Gavrilides Management Co. and Social Life Magazine when interpreting “direct physical loss of or damage to property” bodes well for carriers across the country.
Argument for Gavrilides Management Co. was recorded on Zoom and posted to YouTube. The court’s decision begins at the 23:13 mark of the recording. https://www.youtube.com/watch?v=Dsy4pA5NoPw&feature=youtu.be