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Mixed Messages Widespread Throughout The Nation’s Courts Regarding Restaurants And Business Interruption Insurance Claims Due To The Covid-19 Pandemic

January 29, 2021

STELIOS STOUPAKIS reports on rulings that have been creating a growing body of case law on business interruption insurance claims related to COVID-19, specifically in the restaurant industry.

A pair of rulings in early November 2020 brought bad news for several New Jersey restaurants that were shut down during the COVID-19 pandemic and were seeking reimbursement for their losses by insurance.  The owners of the Cara Mia restaurant in Millburn were seeking business interruption coverage from Cumberland Mutual Fire Insurance Company, but had their suit dismissed by Senior District Judge Robert Kugler.  In similar fashion, Presiding Civil Judge Steven Polansky of Camden County Superior Court dismissed a suit by The Cake Boutique of Mullica Hill seeking business interruption coverage from Selective Fire and Casualty Insurance Company.  Both rulings were based on policy language that excluded coverage for losses covered by viruses.

In the Cara Mia case, Judge Kugler said it was not necessary to address the issue of whether or not the insured experienced any direct physical loss or damage to the premises (which would be grounds for business interruption coverage) because the policy included a “virus” exclusion which barred coverage.  Similarly, in the Cake Boutique case, Judge Polansky found that a clause in the policy barred coverage in the event of a virus, even if another cause or event contributes to the loss.  Judge Polansky stated “it therefore does not matter whether the closure of plaintiff’s business as the result of government orders to prevent the spread of the coronavirus constitutes direct physical damage to covered property … since the reason for the exercise of that civil authority was the virus.”

However, these decisions may not be conclusive for all restaurants’ business interruption insurance claims due to the COVID-19 pandemic.  In August 2020, a Bergen County Superior Court judge denied a motion to dismiss a similar complaint after finding the policy language in that case had no virus-related exclusion clause. 

On January 15, 2021, a federal court dismissed a Pennsylvania restaurant’s suit seeking business interruption coverage.  U.S. District Court Judge William S. Stickman IV ruled that establishments limited to take-out services have not sustained the “direct, physical loss” which triggers business interruption coverage.  Judge Stickman further stated that the fact that the insurance policy does not specifically define what constitutes a “direct, physical loss” does not leave the policy term open for argument as ambiguous.  The court found that under the “dictionary definitions of those key words,” the restaurant has not suffered a “direct, physical loss,” most specifically because it was still open for take-out business. 

However, a recent Ohio federal court decision ruled differently.  On January 19, 2021, U.S. District Court Judge Dan Aaron Polster ruled that Zurich American Insurance Company must cover losses due to COVID-19 for more than a dozen restaurants.  Judge Polster’s decision found that the business income provision can be understood to extend coverage when a policyholder loses the ability to use its insured premises for the intended purposes.  Judge Polster agreed with the Plaintiff’s position that they lost their real property interest when government orders prevented them from using the property for intended purposes (dine-in restaurants).  Interestingly, Judge Polster also found that the policy’s virus exclusion did not apply because the losses were not caused specifically by COVID-19; rather they were caused by government shutdown orders.

Courts are struggling to cope with COVID-19 insurance claims involving restaurants and other businesses. Often it is a matter of specific policy language as to whether there is coverage or there is an exclusion, but decisions are also based on interpretations of the law itself or public policy.

It can be expected that COVID-19 claims will continue for many years and will no doubt result in future changes in policy language and the law itself requiring careful scrutiny by business owners and their professionals whenever there is a claim or a need for purchasing insurance.

Please contact Stelios Stoupakis if you have any questions or need assistance in connection with this subject.