As we anticipated back in May, there has been a significant increase in litigation relating to business interruption insurance coverage for losses attributable to COVID-19 restrictions. Restaurant policyholders, in particular, have been at the forefront of raising these disputes.

These cases have mainly centered on the applicability of two common provisions in insurance policies: (i) Business Income Coverage provisions and (ii) Virus or Micro-organism Coverage exclusions. Most business income coverage provisions provide that coverage is available for loss of income sustained during necessary suspensions of operations caused by “direct physical loss of or damage to property.” [1] However, most policies also contain coverage exclusions “for loss or damage caused by or resulting from any virus, bacterium, or other micro-organism.”[2]

These provisions are becoming particularly relevant in the context of the COVID-19 pandemic, where insureds are looking to the courts to resolve the question of (i) whether losses attributable to COVID-19 restrictions satisfy the “direct physical loss of or damage to property” threshold requirement; and (ii) assuming they do, whether the virus exclusion applies where losses are caused by the government shutdown orders issued in response to the virus, rather than the virus itself.

The consensus among courts that have interpreted the “direct physical loss of or damage to property” requirement is that there must be some tangible or structural damage that somehow alters the physical integrity of the property to trigger coverage. [3] Because physical loss/property damage is a threshold requirement oftentimes left unmet, the majority of courts have not reached the issue of whether the virus exception applies.[4] And, the few courts that have considered the issue determined that the virus exception applies because the COVID-19 virus was the cause of the government shutdown orders and the insureds’ ensuing losses. [5]

But, not all hope is lost for policyholders. Judge Polster in the Northern District of Ohio issued an opinion in Henderson Road Rest. Sys., Inc. v. Zurich Am. Ins. Co. [6] granting a policyholder’s motion for summary judgment on the issue of whether an insurer breached its contract with the policyholder when it denied them coverage related to COVID-19 business losses. [7] The court held that the business income coverage provision applied because the “direct physical loss of or damage to property” requirement extends to instances where the policyholder loses its ability to use its insured properties for their intended purposes, which in this case was in-person dining, as opposed to takeout, curbside pickup, or delivery.[8] The court reasoned that the use of the disjunctive conjunction “or” should be given meaning so that the phrases “loss of” and “damage to” have separate and distinct meanings. [9]

The court also held that the virus exception did not apply to bar coverage because the COVID-19 virus itself did not cause the losses at issue, but rather the government shutdown orders did. [10] It rejected the insurer’s argument that the COVID-19 virus indirectly caused the losses at issue. [11] The court reasoned that the purpose of the virus exclusion was to exclude coverage for damage caused by the virus itself at the policyholder’s premises. [12] And because the parties stipulated that at no point in time was COVID-19 detected at the policyholder’s premises, the court concluded that the exclusion did not apply. [13]

While many courts have found policyholder complaints sufficient to withstand a motion to dismiss, Henderson represents one of few cases in which a court has granted summary judgment in a policyholder’s favor. [14] It, therefore, provides strong precedent for restaurants seeking business interruption insurance coverage to help mitigate the losses sustained as a result of COVID-19.