In a first-of-its-kind ruling, a Michigan state trial court recently handed down a decision confirming that direct physical loss is required to trigger business interruption coverage for loss allegedly arising out of the novel coronavirus (which causes the disease COVID-19) and related government stay-at-home orders.
In Gavrilides Management Co. v. Michigan Insurance Co., No. 20-258-CB-C30, the insured, an owner of two restaurants in Michigan, sought $650,000 in business interruption coverage under its commercial property policy for losses stemming from stay-at-home orders issued by Michigan’s governor that temporarily limited all restaurants’ business operations to take out and delivery service to slow the spread of the coronavirus. The policy afforded coverage for business income loss resulting from a “suspension of operations” due to “direct physical loss of or damage to” insured property. Although the insured’s complaint did not allege that the coronavirus was present at either of its restaurants, the insured asserted that the policy’s physical loss requirement was met because physical restrictions were placed on the restaurants’ use, chiefly the prohibition of dine-in services during the pendency of the executive orders.
In an oral opinion issued from the bench on what was essentially a motion to dismiss, the court rejected the insured’s argument as “simply nonsense” and ruled that under Michigan law, direct physical loss or damage must take some tangible form that alters the physical integrity of the insured property. The court placed particular emphasis on the insured’s own averments and allegations that no staff or customers had tested positive for the virus, no contact tracing had led back to the restaurants, and that the insured did not allege the virus’ presence at the restaurants, but merely the threat of its presence.
The court also rejected the insured’s arguments that the policy’s standard virus exclusion was inapplicable under the circumstances because it was vague and ambiguous with respect to its application to losses resulting from the stay-at-home orders due to the threat of the presence of the coronavirus. The court found the insured had not adequately explained why the virus was vague and the court found the definition of virus within the exclusion to be completely workable and understandable. Based on its findings, the court dismissed the complaint against the carrier.
Although a formal written opinion has yet to be issued, the ruling represents a potentially influential victory for carriers in the ongoing dispute over business interruption coverage for losses related to the coronavirus and government stay-at-home orders. Still, the extent of the ruling’s impact outside of Michigan remains to be seen, and although the ruling may provide the insurance industry with a reason to be cautiously optimistic about how courts will decide these issues going forward, it is important to recognize that states’ law interpreting what constitutes “direct physical loss of or damage to” vary. Additionally, the Gavrilides court relied on the insured’s own averments and allegations that the virus was not present and therefore the court did not address the situation where an insured alleges the presence of the virus at its covered property.