On August 6, 2020, Associate Judge Kelly A. Higashi of the District of Columbia Circuit rejected efforts by Plaintiffs, owners and operators of prominent restaurants in the D.C. area, to recover business income losses from their insurance carrier Erie Insurance Exchange after the mayor declared a state of emergency and a public health emergency. In various orders, the mayor prohibited table seating at restaurants and bars, then prohibited standing customers at restaurants, bars and ultimately closed all non-essential businesses. Erie denied their claims, prompting Plaintiffs to file a declaratory judgment action requesting the D.C. Court to hold that their losses were covered by the policies issued by Erie.
Like the recent ruling by the Michigan Circuit Court who ruled in favor of the insurer in a lawsuit arising out of an insured’s claim for business interruption coverage as a result of a governor’s shelter-in-place order, the D.C. Court focused on whether the mayor’s orders constituted a “direct physical loss” to the Plaintiffs’ property. The D.C. Court rejected the three arguments advanced by the Plaintiffs, as follows:
- Plaintiffs’ Argument: The loss of use of the restaurants was the direct result of the Mayor’s orders.
Court’s Ruling: “Standing alone and absent intervening actions by individuals and businesses, the orders did not effect any direct changes to the properties.”
- Plaintiffs’ Argument: The losses were “physical” because the virus is “material” and “tangible” and the harm was caused by the mayor’s orders.
Court’s Ruling: There was no evidence that the virus was “actually present on their insured properties at the time they were forced to close. And the mayor’s orders did not have any effect on the material or tangible structure of the insured properties.”
- Plaintiffs’ Argument: The term “loss” incorporates “loss of use,” which only requires that they be deprived of the use of their properties, not that the properties suffer physical damage.
Court’s Ruling: “under a natural reading of the term ‘direct physical loss,” the words ‘direct’ and ‘physical’ modify the word ‘loss.’ As such … any ‘loss of use’ must be caused, without the intervention of other persons or conditions, by something pertaining to matter … a direct physical intrusion on the insured property.” According to the Court, the mayor’s orders were not such a “direct physical intrusion.”
The policy issued by Erie to the Plaintiffs did not contain an exclusion for pandemic-related losses. The lack of such an exclusion did not change Judge Higashi’s opinion. The judge wrote that “even in the absence of such an exclusion, Plaintiffs would still be required to show a “direct physical loss”, which they failed to do.
Judge Higashi’s order contains an excellent discussion of how the cases cited by the Plaintiffs do not support Plaintiffs’ argument that “a governmental edict, standing alone, constitutes a direct physical loss under an insurance policy.” The judge also discusses prior cases in which courts have rejected coverage claims when a business’s closure is not due to direct physical harm to the insured location.
Of interest is a 1970 District of Columbia Court of Appeals case cited by Judge Higashi in which the appellate court addressed a loss of business insurance claim following a curfew issued in D.C as a result of riots after Dr. Martin Luther King, Jr. was assassinated in 1968. See Bros., Inc. v. Liberty Mutual Fire Insurance Co., 268 A.2d 611 (D.C. 1970). The Court of Appeals held that the term “direct loss” meant “a loss proximately resulting from physical damage to the property or contents caused by a riot or civil commotion.” Id. at 613 (emphasis supplied). Based on that definition, the Court of Appeals held that the insured did not suffer any physical damage to the property; the loss of income due to the curfew “was an indirect, if not remote, loss resulting from riots.” Id.
Drew Eckl & Farnham will continue to keep you appraised of any developments on COVID-19 first party property claims and lawsuits.
 See Gavrilides Management Company v. Michigan Insurance Company.