A District of Columbia judge recently knocked back a lawsuit by a group of restaurants, claiming for business interruptions during the COVID-19 pandemic, ruling that government shutdown orders didn’t constitute a “direct physical loss.” The American FAIR organisation sent us an update on the case;
Superior Court Judge Kelly A. Higashi sided with Erie Insurance Exchange in a suit led by Rose’s 1 LLC, which owns and operates several restaurants, ruling that the insurer was not liable for the losses the restaurants suffered when they had to close their doors during the lockdown.
Like numerous businesses around the country, Rose’s 1’s properties shut down operations in response to government mandates — in this case, orders issued by the Washington, D.C., Mayor, prohibiting table seating and standing customers at bars and restaurants and mandating closure of non-essential businesses. That basically meant, no trading.
The restaurants claimed from Erie for compensation for their losses, under their “Ultrapack Plus Commercial Property Coverage” insurance policies – but were denied, prompting the law suit, after which both Rose’s 1 and Erie pushed for summary judgment.
Once again the issue came down to defining a “direct physical loss.”
To trigger the policy, Judge Higashi ruled, the “loss” has to directly impact the property itself. While Rose’s 1 argued that the orders were the “direct” reason for the closing, the judge wrote that the orders only directed businesses to take certain actions but did not effect any direct change to the properties in and of themselves.
Finally, while the restaurants argued that “loss” can refer to a “loss of use,” the judge wrote that the word is still modified by “direct” and “physical,” so any loss of use must be because of a “direct physical” effect on the properties, and the orders created no such effect by themselves.
Without demonstrating the shutdown orders caused direct physical change that caused Rose’s 1 to lose the use of the properties, the orders don’t trigger coverage, the judge wrote.
The question of how to interpret “physical loss” is at the centre of a number of COVID-19 business interruption coverage cases in the USA, as businesses argue that being forced to shut down either because of government orders or the virus itself constitutes such a loss, while insurers argue that neither the orders, nor the virus, actually caused any physical damage to the property.
In the UK the test case brought by the FCA may well go some way to resolving the issue of policy wordings. In many cases the exact definition is slightly different from US arguments, since cafes and retaurants here are claiming that they did have pandemic cover, and it isn’t related to physical damage of the premises, in the same way that fire or flood would cause a commercial insurance claim.
In essence they bought cover similar to SARS virus policies and believe that pandemic or viral shutdowns ordered by the government or council, should trigger a payout.
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