A recent suit arising in the District of Columbia Superior Court adds to the body of emerging case law holding that COVID-related closures do not qualify for business interruption coverage in the absence of “direct physical loss or damage.” In the case of Rose's 1 LLC et al. v. Erie Insurance Exchange, Rose’s 1, LLC—the owner of several restaurants in the D.C. area—filed business interruption claims with their insurer, Erie. When Erie denied Rose’s 1’s claim, Rose’s 1 instituted a lawsuit seeking coverage.
Rose’s 1’s restaurants were forced to close due to mandates from the office of D.C. Mayor Muriel Bowser, which began prohibiting indoor seating and ultimately ordered the closure of all nonessential businesses in March. Although Rose’s 1 maintained business interruption insurance, the policy at issue required proof of “direct physical loss” to trigger coverage.
When the parties filed cross motions for summary judgment, Judge Kelly A. Higashi of the D.C. Superior Court sided with Erie, holding that the restauranteur failed to prove that the mayor’s orders constituted a “direct physical loss.” Since the policy called for direct physical loss, a generalized “loss of use” due to an intangible order was insufficient to satisfy the coverage trigger.
The analysis focused on the natural reading of the term “direct physical loss.” In the eyes of the court, “the words ‘direct’ and ‘physical’ modify the word ‘loss.’” Because “the mayor’s orders did not have any effect on the material or tangible structure of the insured properties” and the orders “were not such a direct physical intrusion” as to directly cause loss of use of the property, coverage was not granted under the written terms of the insurance policy. Accordingly, summary judgment was granted in favor of Erie.
This case has followed the developing trend nationwide where courts have tended to side with insurers, holding that broad government shutdown orders are not the types of business interruptions that trigger coverage under insurance policies. Although much litigation certainly remains as the COVID crisis continues, the early decisions—including this case and similar cases in New York and Michigan—seem to favor insurers. Stay tuned for more developments.