The Eleventh Circuit has answered an important and timely question about insurance coverage for business losses due to COVID-19. Under Florida law, an “all-risk” insurance policy covering direct physical loss or damage does not insure against losses and expenses incurred by businesses as a result of COVID-19.
In SA Palm Beach, LLC v. Certain Underwriters at Lloyd’s London, 2022 U.S. App. LEXIS 12210 (11th Cir. May 5, 2022), the court considered the particular policy language at issue in four cases consolidated on appeal providing coverage for “direct physical loss of or damage to” property or “direct physical loss or damage to” property. The four insured businesses, SA Palm Beach, Emerald Coast Restaurants, Rococo Steak, and R.T.G. Furniture, all lost on motions to dismiss in the district courts. In an opinion written by Judge Jordan and joined by Chief Judge Pryor and Judge Anderson, the court addressed the particulars of each underlying insurance policy and claim of loss in the consolidated cases.
SA Palm Beach, a fine-dining restaurant, claimed it was unable to use its property for its intended purpose due to state and local closure orders. SA Palm Beach claimed that it suffered physical loss in the form of diminished value, lost business income, and forced physical alterations during a period of restoration. SA Palm Beach’s policy with Lloyd’s London defines “Covered Causes of Loss” as “direct physical loss unless the loss is excluded or limited in this policy,” but the policy does not define the terms “direct,” “physical,” “loss,” or “damage.” SA Palm Beach also claimed that its policy provided business interruption coverage in sections regarding business “suspension” during a period of “operations” caused by, again, “direct physical loss of or damage to property.”
Emerald Coast, which operated a sports bar and restaurant, was also subject to state and local closure orders due to the pandemic, and its insurance policy with Aspen Specialty Insurance contains substantively identical provisions regarding direct physical loss and damage. Emerald Coast alleged that the presence of the actual COVID-19 particles on its physical property impaired its value, usefulness, and normal function. Aspen Specialty Insurance also insured the third business, Rococo Steak, which operated a steakhouse in St. Petersburg. Rococo’s policy was substantively identical to Emerald Coast’s and SA Palm Beach’s regarding the direct physical loss and damage provisions at issue. Rococo included a claim that viruses like COVID-19 “infest property and stick to its surfaces” which can cause a kind of structural alteration to property that falls under the coverage of the term “direct physical loss of or damage to” covered premises.
The fourth business, Rooms-To-Go (“RTG”), operates under a coverage tower spreading risk across multiple insurers (one of which is Aspen Specialty Insurance), and the relevant terms in each of RTG’s policies are substantively the same as the policies at issue for SA Palm Beach, Emerald Coast, and Rococo Steak. RTG included a claim that the detectable presence of coronavirus particles on various types of surfaces caused “direct physical damage” to its properties. All but one of the policy provisions under which the four businesses sought coverage (variously called the Business Income and Extra Expense, Extended Business Income, Business Interruption, Extra Expense, Contingent Business Interruption, Civil Authority, Ingress/Egress, and Loss Adjustment Expenses provisions) required on their own or by reference to other provisions that there be “direct physical loss of or damage to” property or “direct physical loss or damage” to property.
The Eleventh Circuit held that, under Florida law, the district courts properly granted motions to dismiss the insureds’ claims because COVID-19 did not cause physical loss or damage to covered property. The court recognized Florida law that all-risk policies do not cover “every conceivable loss.” Sebo v. Am. Home Assurance Co., 208 So. 3d 694, 696–97 (Fla. 2016). Noting the absence of Florida court decisions addressing the direct physical loss or damage language at issue, the court applied a presumption that the Florida Supreme Court would adopt “the majority view on a legal issue in the absence of indications to the contrary.” Bobo v. Tenn. Valley Auth., 855 F.3d 1294, 1304 (11th Cir. 2017). The court cited the majority view as stated in the leading treatise, Couch on Insurance, that a “physical” loss requirement excludes “intangible or incorporeal” losses and precludes claims for mere economic impact without “a distinct, demonstrable, physical alteration of the property.” Steven Plitt et al., 10A Couch on Insurance § 148:46 (3d ed. & Dec. 2021 update) (footnotes omitted). In a multi-page string citation, the court surveyed courts of other jurisdictions, finding that “every federal and state appellate court that has decided the meaning of ‘physical loss of or damage to’ property (or similar language) in the context of the COVID-19 pandemic has come to the same conclusion and held that some tangible alteration of the property is required.” Applying the majority view presumption, the court concluded that the Florida Supreme Court would agree.
The court went on to hold that Florida law supports this majority position, discussing cases holding that a broken drain pipe and the destruction of a bacteria colony integral to a sewage treatment facility were covered physical loss or damage. The court also acknowledged a prior unpublished Eleventh Circuit decision in Mama Jo’s Inc. v. Sparta Insurance Co., 823 F. App’x 868 (11th Cir. 2020), as persuasive authority. In that case, the court held that migrating dust and debris from a nearby road construction project did not cause direct physical loss or damage, because property that merely needs to be cleaned has not suffered a direct physical loss. “Like the dust and debris in Mama Jo’s,” the Eleventh Circuit reasoned, “COVID-19 did not cause any material alteration of the insureds’ properties.”
As to the insurance policy provisions covering a “suspension” or “interruption” of business operations, the court held that actual material destruction or material harm to the covered premises remains a pre-condition to coverage. Addressing arguments from RTG and Rococo Steak that the particles of COVID-19 themselves caused property damage, the court held that the complaints’ allegations failed to allege the requisite direct physical loss or damage. RTG’s allegations were too specific, alleging that the “damage” was the existence of detectable coronavirus particles, which the court held simply is not physical damage. Rococo Steak’s allegation, on the other hand, that COVID-19 “caused direct physical loss of and/or damage to the covered premises,” was too conclusory to satisfy Twombly’s pleading standard. Finally, the court remanded Emerald Coast’s additional claim based on a policy provision which does not include the language “direct physical loss of or damage to” property or “direct physical loss or damage to” property, because the district court did not address that claim in its order granting dismissal below.
This decision continues a string of victories for insurers in pandemic loss disputes. Earlier this year, the court decided Ascent Hospitality Management Co. v. Employers Insurance Co. of Wausau, 2022 U.S. App. LEXIS 1161 (11th Cir. Jan. 14, 2022), holding that, under New York law, an all-risks insurance policy did not cover lost profits suffered from COVID-19 government restrictions because the policy only covered “direct physical loss or damage.” And just a few months before the Ascent case, the court decided Gilreath Family & Cosmetic Dentistry, Inc. v. Cincinnati Insurance Co., 2021 U.S. App. LEXIS 26196 (11th Cir. Aug. 31, 2021), holding that there is no coverage under all-risk insurance policies for physical loss or damage under Georgia law.