A motion to dismiss recently filed by a Lloyd’s insurer in Florida lays the foundation for the first primary argument against coverage for business income losses related to COVID-19
The motion highlights the “direct physical loss or damage” requirement common to business interruption policies
Anticipating an argument that closure orders rendered the business premises “uninhabitable,” the defense points to executive orders encouraging restaurants to remain open to provide delivery, carry-out, or curbside service
Background: Understanding the Prime Time Coverage Suit
While the numerous complaints filed for COVID-19 losses have provided insight into policyholder arguments for coverage, a motion to dismiss recently filed by an insurer in Florida lays the foundation for the first primary argument against coverage. The motion to dismiss, filed in Prime Time Sports Grill, Inc. d/b/a/ Prime Time Sports Bar v. DTW1991 Underwriting Limited, a Certain Interested Underwriter at Lloyd’s London, provides insight into how insurers intend to respond to the claims and how insurers may ultimately litigate these cases.
In the case, the policyholder-restaurant is seeking a judicial declaration that the insurer must cover an alleged loss of business income under a commercial property insurance policy. The policyholder alleges that two orders issued by the governor of Florida caused it to suspend its restaurant/bar operations resulting in a loss of income. The policy at issue requires that the loss of business income “must be caused by direct physical loss of or damage to property” at the insured premises.
Breakdown: Assessing the Motion to Dismiss
The Lloyd’s underwriter argues that the policyholder failed to allege facts showing direct physical loss to the insured property to trigger coverage. It points out that the policyholder’s allegation that the Florida governor ordered the restaurant to close for 30 days, even if true, does not meet the direct physical loss requirement. The insurer goes on to argue that any amendment of the allegations is futile because there is no alternate basis for coverage due to the orders or the COVID-19 pandemic.
The insurer anticipates that the policyholder will argue that the COVID-19 pandemic has rendered the insured property uninhabitable and thus legally considered to have sustained a physical loss. However, the insurer counters this possible theory of recovery by arguing that the orders actually encourage restaurants, like the policyholder, to remain open to provide delivery, carry-out, or curbside service. Furthermore, it asserts that a physical loss is only found to an uninhabitable property where the uninhabitability is caused by a physical characteristic of the property—not by an external condition that merely prevents access to the building. Even if COVID-19 was found at the insured property, the insurer argues that the building would require, at most, extra caution, cleaning, or sanitation to resolve the problem.
The insurer also argues against any civil authority coverage because it, too, requires physical damage to property. Even though the policyholder does have a government order limiting access to its premises, there is no physical damage to neighboring property (within one mile) as is required for coverage.
Analysis: Applying the Direct Physical Loss Requirement
The direct physical loss requirement for business interruption coverage is ubiquitous and standard for commercial property insurance policies. While some jurisdictions make distinctions in coverage depending on different phrasing and word usage, courts historically enforce the physical loss requirement. The purpose behind the requirement is to preclude coverage for income losses that are caused by external factors, such as bad weather, economic downturn, changes in consumer trends, etc., instead of by distinct, demonstrable, physical alteration of the property.
The physical loss requirement is important for COVID-19 claims because most business income losses likely relate only to government-imposed closures, social distancing, and/or stay at home orders. We have yet to review a COVID-19 claim in which a policyholder seeking business interruption coverage can show actual physical loss to the insured property. In the Prime Time case, the insurer specifically argues that the claim involves only “the economic side-effect of reduced sales stemming from the Florida [g]overnor issuing COVID-19 ‘Safer at Home’ orders, [which] is a non-physical, purely pecuniary loss” that does not give rise to coverage.
We await the court’s ruling in the Prime Time case. We anticipate insurers will file similar motions in cases in other jurisdictions. While each new COVID-19 case will present rulings and orders that will help shape the growing body of COVID-19 legal authority, it is important to understand the law that applies in the jurisdiction for a particular claim.