The case for insurance coverage for COVID-19 losses took its first major blow, as a Michigan court ruled that the losses a restaurant suffered from the state’s shut-down order were not covered since there was no physical damage. In Gavrilides Management Company v. Michigan Insurance Company, the court found that a state shutdown order limiting business was not enough to elicit coverage, especially as there was no evidence that COVID-19 was ever present on the premises.
Both the facts and the law in this case are similar to other cases playing out across the country. This case is based on Michigan law, so it is not controlling in Ohio as these are issues of state law. But many assume this rationale will be persuasive, and other cases will be denied for similar reasons.
Gavrilides owns restaurants and submitted a claim to its insurer for business interruption coverage. The claim was based on the stay-at-home orders forcing businesses to shut down to slow the spread of COVID-19 coronavirus. The restaurant continued take-out and recently implemented dine-in service, causing the insurer to argue that there was no “physical” harm and the restaurants were operational.
The language at issue is the same language present in nearly all of the insurance policies at issue in these cases. In order to trigger coverage, there must be “direct physical loss of or damage to” the property. Insurers have issued blanket denials and fought litigation based on the fact that COVID-19 has not caused physical damage to properties, and the language of the policy is paramount. The policy also had the ubiquitous civil authority coverage and a virus exclusion.
The judge agreed and said considering all of the relevant language of the policy, rather than trying to define damage or loss narrowly (a tactic some plaintiff’s attorneys have taken), the plaintiff had to prove a “direct physical” loss. Under Michigan law, that means there was an alteration to the property itself. A loss of business due to the executive orders shutting down dine-in service for a period is not a physical loss or damage and there was no evidence that COVID-19 had entered the premises. The judge also said the argument that there was a physical loss as patrons were physically restricted from dine-in service was “nonsense” and did not meet the requirement.
In a bit of irony, the hearing was conducted via Zoom and is available to view on Youtube given the social distancing precautions in place in Michigan.
In May, we wrote about a similar case out of New York, where the court ruled that a publisher had not suffered a physical loss as required by the policy. However, that decision came from a preliminary injunction hearing, which require a higher burden of proof to succeed. Many were still waiting to see what would happen on a lower standard that many businesses will have to face as cases are litigated in the coming months. The Gavrilides case was decided on that lower standard, aka a motion for summary disposition. (On a procedural note, Michigan has a slightly different naming convention to its motions, but in this case the insurance company brought what is known as a “motion for summary judgement” in Ohio or federal courts. However, the Court decided the case as a motion to dismiss for failure to state a claim.)
KJK will continue to monitor these cases and update on new developments. If you have any questions about coverage under your policy, contact Brett Krantz at firstname.lastname@example.org or 216.736.7238, Jim Sammon at email@example.com or 216.736.7235 or Alexis Preskar at firstname.lastname@example.org or 614.427.5748, or reach out to any of our Litigation professionals.