Courts are weighing in on COVID-19 business interruption claims

COVID-19-related business interruption cases are winding their way through the court system, and one state court, in a matter of first impression, recently issued a decision. A Michigan court dismissed a restaurant owner’s suit against the insurance company that had denied coverage after he argued the state government’s mandated shutdown had caused him to lose the use of his property and by extension profits. 

Michigan court’s dismissal. A business interruption claim is a contract dispute that hinges on the language in the individual contract, i.e., insurance policy. Generally speaking, to qualify for business interruption damages, a business owner must show physical damage to the property. This was the crux in the Michigan case. The restaurant owner’s policy expressly required “direct physical loss of or damage to the property.” The insured owner could not meet the physical loss requirement but tried to circumvent it by arguing the governor’s stay-at-home order interfered with his use of the property. The court rejected this argument. Adopting the owner’s position would mean reading words into the insurance policy that are not there, the court noted. Under the traditional rules of contract interpretation, courts do not rewrite a contract when the language in the contract is unambiguous. The insurance company prevailed because the plaintiff failed to show that COVID-19 actually damaged the physical integrity of the property, the court found. 

The case is Gavrilides Management Company v. Michigan Ins. Co.

Request for consolidation. Meanwhile, similar suits are proliferating, and plaintiffs filed motions to consolidate their actions. The Judicial Panel on Multidistrict Litigation (JPML Panel) recently heard the motions but rejected proposals for industrywide centralization or state or regional MDLs. However, the panel said arguments for insurer-specific MDL were more persuasive, particularly with respect to four insurers. The court asked the clerk of the panel to direct the parties to show cause why actions involving these specific insurers should not be centralized. The next hearing on this matter is on September 24.

Various stages of adjudication. Our research shows that cases are in various stages of adjudication. For example, a plaintiff owning a dentistry practice in Seattle that was shut down under government-ordered mandates filed a claim with his insurer for recovery of business interruption losses and was denied coverage. On April 30, the plaintiff filed a class action seeking a declaratory judgment and damages for breach of contract against the insurer. In granting the plaintiff’s motion for a stay in the case until the JPML had ruled on consolidation and transfer of cases, the court noted that there were over 140 similar cases nationwide, with more than 20 in the Western District of Washington. See Germack v. Dentists Ins. Co., 2020 U.S. Dist. LEXIS 119099 (July 7, 2020).

Also, a day care center in Kentucky filed for business interruption damages after the state government ordered licensed child care centers closed on March 18. The insurer, West Bend Mutual Insurance Co., a Wisconsin company, denied the claim. In a letter, the insurer, citing language in the policy addressing communicable disease-related forced shutdowns, said there were “two essential elements” the insurance holder had to satisfy: (1) "there must be a shutdown or suspension of business ordered by a local, state, or federal board of health or similar governmental board that has jurisdiction over your operations"; and (2) "the shutdown or suspension must be due to an outbreak of a communicable disease at the insured premises." (emphasis in original) The insurer said the day care center had failed to satisfy the second element; at the same time, the insurer said, “[O]ne or both elements required for coverage to be afforded have not been triggered.”

The day care center challenged the denial of business interruption damages in state court, but the defendant succeeded in removing the case to federal district court. In a recent ruling on venue, the federal court found for the plaintiff and remanded the case back to state court. See ABC Daycare & Learning Cir. v. W. Bend. Mut. Ins. Co., 2020 U.S. LEXIS 114191 (June 29, 2020).