In a moment that insurance coverage attorneys nationwide have anticipated since mid-March, a U.S. court has granted an insurer’s motion to dismiss a policyholder’s claim for business interruption insurance due to the ongoing COVID-19 pandemic as businesses continue to seek novel arguments for coverage.

Gavrilides Management Company et al. vs. Michigan Insurance Co.

In Gavrilides Management Company et al. vs. Michigan Insurance Co., the plaintiff, Gavrilides Management Co., owns two restaurants in Ingham County, Michigan. Gavrilides (as with most restaurants across the country) has suffered a tremendous loss of business during the COVID-19 pandemic and the concomitant government-enforced lockdowns put in place to prevent its spread. Gavrilides sought to recover these losses by filing a business interruption coverage claim under its property insurance policy.

Business interruption insurance for Gavrilides—and for most companies across America—does not offer broad coverage for any and all lost income. Rather, it only replaces lost income when the business is forced to reduce its operations while repairing a “direct and physical loss or damage.” Moreover, this particular property policy excluded coverage for damage caused by viruses.

For those reasons, the Court dismissed the case, decrying the plaintiff’s argument as “just nonsense.” The Court made it clear that loss of use is entirely distinct from physical damage to the property—and moreover, even if there had been physical damage, the virus exclusion still applied.

Companies Continue to Seek Novel Arguments for Business Interruption Coverage

Despite the plaintiff’s “nonsense” argument, companies across the world have filed lawsuits seeking business interruption coverage from their property insurers. These businesses range from small local restaurants, like New Orleans French Quarter eatery Oceana Grill, to the Chickasaw Nation and its Oklahoma casino.

One of the larger domestic companies to file a lawsuit seeking business interruption coverage is the West Coast fast food chain In-N-Out Burger. In-N-Out, a privately owned business, is the policyholder on a $250 million Zurich American Insurance Company commercial property policy that covers all of its more than 300 locations.

As In-N-Out noted in its complaint filed in the Central District of California, its Zurich policy is an “all-risks” policy—meaning that it covers property damage from any cause, including “contaminants.” The policy also does not have a virus exclusion—unlike Gavrilides’ restaurants in Michigan. Moreover, In-N-Out’s policy also covers business interruption due to a neighboring property’s physical loss, as well as any civil or military order that prohibits access to its locations, if the order is in response to physical loss or damage (such as a collapse at a neighboring building).

In-N-Out takes the position that the virus and the business shutdowns are physical losses caused by “contamination.” It argues that state and local governments issued their stay-at-home orders and ordered restaurants to close their dining rooms due to the risk of property being contaminated with COVID-19, causing the disease to spread amongst restaurant employees and patrons.

The verbiage used in various government emergency orders lends some support for In-N-Out’s arguments. Local governments including Key West, New Orleans, and Los Angeles all noted in their stay-at-home orders that the virus caused property loss or damage by virtue of the fact that it could survive on surfaces for extended periods of time. While Gavrilides could not avail itself of this argument due to the virus exclusion in its policy, In-N-Out’s policy has no such exclusion—again, its policy expressly covers damage due to “contamination” by viruses and other pathogens.

Coverage Based on Government-Mandated Stay-at-Home Orders Unlikely

In-N-Out and other members of the dining and hospitality industry likely face a steep challenge ahead of them to prove that their restaurants actually suffered the “direct and physical loss” necessary to claim business interruption coverage. However, if In-N-Out can show that any of its restaurants were forced to suspend all operations for a specific period of time due to one of its employees or guests contracting COVID-19, it is far more likely that the fast food chain could prove that it lost business due to actual contamination. Thus, such a claim may be more likely to fall within coverage.

Accordingly, these restaurants’ greatest likelihood for coverage would likely be in situations in which they were required to shut down their operations due to a known exposure. But, given the Michigan court ruling in Gavrilides, it is unlikely that any business is entitled to coverage based on government-mandated stay-at-home orders alone.