Insurers Win First Battle in Fight Over Business Interruption Coverage For COVID-Related Closings — Michigan Judge Issues First Decision in this Billion Dollar Insurance Coverage Fight
Hundreds of declaratory judgment actions have been filed across the country seeking business interruption coverage for shutting down businesses due to the coronavirus. It is shaping up as one of the biggest coverage battles in years with billions of dollars of losses at stake. On July 1st, a Michigan Circuit Court issued the first ruling in any of these cases. In Gavrilides Management Company vs. Michigan Insurance Company, Case No. 20-258-CB-C30, Judge Draganchuk (Ingham County) granted the insurer’s motion for summary judgment, finding that the lack of a direct physical loss precluded coverage. A formal opinion has not yet been published or transcribed, but the Court issued its ruling in a video hearing, which can be viewed at: https://www.youtube.com/watch?v=Dsy4pA5NoPw&feature=youtu.be.
By way of brief background, the Plaintiff’s Complaint is based on the Governor of Michigan’s shelter-in-place order, which shut down the dine-in portion of the Plaintiff’s restaurant. Notably, the Plaintiff admitted that at no point in time did COVID-19 enter the business. The Complaint only alleges that there was a loss of business due to executive orders that caused certain dine-in aspects of the Plaintiff’s restaurant to be shut down. This is an important distinction which may limit the reach of this decision, as many of the businesses pursuing these lawsuits have made no such admission (and in some cases, allege the virus was or may have been present at some level).
In this case, Judge Dradanchuk found that the allegations in the Complaint did not, and could not, meet the terms of the insuring agreement since the policy ultimately requires that the loss of business income result from a direct physical loss. Thus, because the Complaint explicitly admits that COVID-19 did not enter the business at any time, there can be no possibility of direct physical loss of or damage to the property.
In addition to the question of whether there was a direct physical loss, the other big issue in these cases is the application of the virus exclusion. The Plaintiff argued that it was vague, or in the alternative, that the coverage for government acts is rendered illusory when the virus exclusion interacts with the causes of loss special form. The judge rejected both arguments. She found that the virus exclusion is clear and not ambiguous at all. Further, it would not exclude government acts that were also considered a covered cause of loss. Therefore, the coverage was not illusory. The virus exclusion would have applied to exclude coverage as the claim did not fit the exception to the exclusion due to the lack of a direct physical loss.
While this is a win for the insurer, it should not have been much of a surprise given the Plaintiff’s admission that COVID-19 was never present in the business at any time and the policy’s requirement of a direct physical loss. The question remains whether the presence of the virus constitutes a direct physical loss. The bigger take-away may be the finding that the virus exclusion was not ambiguous or illusory. The real fight will come on cases in which there is at least the possibility of the virus being present. For now, Gavrilides Management Company vs. Michigan Insurance Company can be considered a win for the insurer, but stay tuned for other cases with different factual scenarios and appellate review of trial court decisions, which will ultimately decide these issues.