On July 1, 2020, Michigan Circuit Court Judge Joyce Draganchuk issued what it appears to be to be the first U.S. court decision in an insured’s first party property lawsuit against an insurance carrier seeking business interruption coverage as a result of a governor’s shelter-in-place order. See Gavrilides Management Company v. Michigan Insurance Company. The insurer filed a motion for summary disposition asking the Michigan Court to rule as a matter of law that its policy did not provide coverage for business interruption losses caused by COVID-19 shelter-in-place order. Judge Draganchuk agreed with the insurer. The hearing on the motion is posted on You Tube.
Michigan Insurance Company argued that the policy provided coverage only for direct physical loss of or damage to the insured’s properties and noted that missing from the insured’s Complaint was any allegation that the property had been damaged. Rather, the insured only focused on the governor’s shelter-in-place order that prevented physical access to the insured’s properties causing it to lose business income. In the hearing, counsel for the insurer noted that nothing in the governor’s order prevented access to the insured’s properties. In fact, the insured was able to enter the properties and operate as restaurants, albeit only for take-out after the order. The insurer’s counsel also focused on the affidavit submitted by the insured’s owner in which he admitted that there was no physical damage to its locations. As a result, counsel argued that there was no physical loss because the property existed in the same condition as it did before the shelter-in-place orders went into effect.
Judge Draganchuk ruled from the bench. She stated that the first inquiry concerned the coverage afforded under the policy, which in this case provides for actual loss of business income sustained during a suspension of operations. The judge noted that the suspension must be caused by direct physical loss of or damage to property. Further, the loss of or damage must be caused by a covered cause of loss.
“Direct physical loss of or damage to” property requires something that alters the physical integrity of the property ruled Judge Draganchuk. She also found that the term “direct physical” applied to both the “loss” and “damage” terms such that the policy provision should be read as “direct physical loss or direct physical damage” to covered property. The Court agreed with the insurance company that the insured failed to allege in the Complaint any direct physical loss of or damage. In fact, the owner had admitted in his affidavit in opposition to the carrier’s motion that at no time had the virus entered the insured locations. According to Judge Draganchuk, a restriction preventing dine-in business is not the required direct physical loss of or damage to covered property. The Court further rejected the insured’s request to amend its complaint, finding that there no facts that could be developed that could change the fact that the business loss was not caused by a direct physical loss of or damage.
Next, the Court addressed the policy’s coverage for losses caused by governmental acts. The judge held that the coverage provision required the same direct physical loss of or damage to covered property. Because there was no evidence or any allegation of such physical loss, there was no coverage under the governmental acts provisions of the policy.
Finally, the Court rejected the insured’s argument that the Virus Exclusion was vague. Even it the exclusion did not apply, the Court held that there still would be no coverage due to the lack of any alteration of the physical integrity of the property.
Of course, Judge Draganchuck’s decision is the first of many that will be issued by the courts in the United States. Drew Eckl & Farnham will continue to keep you appraised of any developments on these important issues.