The key question in many COVID-19-related insurance disputes is what constitutes “direct physical loss,” a federal court recently explained as it rejected a plaintiff’s breach of contract claim against the insurer. The plaintiff unsuccessfully offered two theories to meet this prerequisite for coverage, and they are similar to the arguments Caesars Entertainment recently presented in its massive lawsuit against nearly 60 insurers. The outcome here and in similar cases bodes ill for Caesars’ case.
The plaintiff owned a restaurant in South Miami whose operations were curtailed by pandemic-related measures. The plaintiff had an all-risk commercial property insurance policy with Certain Underwriters at Lloyd’s. (Caesars, too, had all-risk insurance, as its complaint emphasized.) The policy included business interruption coverage and covered the actual loss of business income due to the necessary “suspension” of the business’s “operations.” The “suspension” had to be caused by “direct physical loss of or damage to property.”
Cleaning is not direct physical loss: In its suit (subject to Florida law) against the insurer, the plaintiff proposed two explanations of how the virus and various governmental actions caused it to suffer direct physical loss. Under one theory, the plaintiff contended it lost the use of its facilities because of the high risk of transmission of physical coronavirus inside the premises.
The court rejected the “loss of use theory,” as has the “vast majority of federal courts around the country and all courts within this district.” The court said, “[C]ourts reject this theory because it is an attempt to recover for economic losses that happen to be caused by something physical (e.g., the coronavirus particles) rather than a ‘direct physical loss.’ In contrast, losses caused by a hurricane would be ‘clearly covered.’” Here, the property did not change on account of the virus, but the world around it did. “And for the property to be usable again, no repair or change can be made to the property—the world must change,” the court said.
Under the plaintiff’s physical contamination theory, the plaintiff maintained the virus was physically present inside its premises. The plaintiff acknowledged that there was no test to show so but claimed that, as the virus was omnipresent in the community, it is a “virtual certainty” that it was on the premises at some point. The court cited applicable 11th Circuit case law that has rejected this argument, finding “an item or structure that merely needs to be cleaned has not suffered a ‘loss’ which is both ‘direct’ and ‘physical.’” The court in the instant case said that, by now, “it is widely accepted that life can go on with hand sanitizer and disinfecting wipes.” The court also observed that the plaintiff had in fact continued to do take-out business “from the very premise they argue has suffered direct physical loss.”
The court dismissed the plaintiff’s complaint.
The case is Town Kitchen LLC v. Certain Underwriters at Lloyd’s, 2021 U.S. Dist. LEXIS 361919 (Feb. 26, 2021). BVLaw has been tracking many of these disputes (the list keeps expanding), and digests and the court opinions are available to BVLaw subscribers.