A District of Columbia court has ruled that a property insurance policy does not offer business interruption insurance coverage for losses related to the COVID-19 pandemic.
In the case Rose’s 1, LLC, et al. v. Erie Insurance Exchange, Washington, D.C. Superior Court Judge Kelly A. Higashi determined that the coronavirus does not cause direct physical damage to property, which is a prerequisite for coverage. Higashi concluded that, despite the absence of a virus exclusion in Erie Insurance’s policy, “plaintiffs would still be required to show a ‘direct physical loss.’”
The plaintiffs, Rose’s 1, LLC and several other restaurants, were forced to shut down their operations following government mandates to stem the pandemic. The plaintiffs had attempted to claim on the resulting business losses under Erie Insurance’s “Ultrapack Plus Commercial Property Coverage,” but the insurer denied coverage.
National Law Review reported that Judge Higashi granted a summary judgement for the insurer, ultimately ruling that loss has to have a direct impact on the physical property. The plaintiffs had initially argued that the shutdown orders were the direct reason the restaurant closed, but the judge said that orders only directed businesses to take certain actions, but “did not affect any direct change to the properties.”
The plaintiffs also argued that the losses were “physical” since the virus is “material” and “tangible,” and because the losses they suffered were caused by the shutdown orders and not
“some abstract mental phenomenon such as irrational fear causing diners to refrain from eating out.” To this argument, Higashi said that the restaurants did not offer any evidence that the virus was present in their insured properties at the time they were ordered to close. The judge also ruled that the “mayor’s orders did not have any effect on the material or tangible structure of the insured properties.”
Plaintiffs additionally claimed that by defining “loss” in the policy as encompassing either “loss” or “damage,” the insurer must treat the term “loss” separately from “damage,” which refers to physical damage to property. The judge stated that “under a natural reading of the term ‘direct physical loss,’ the words ‘direct’ and ‘physical’ modify the word ‘loss.’” Higashi added that 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 decision comes just days after another federal judge ruled in favor of policyholders in a separate case, allowing the policyholders’ lawsuit against their insurer to continue undismissed. In that case, the judge ruled that the plaintiffs plausibly alleged that the COVID-19 particles were a “physical substance” that attached to and damaged their property.