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Insurers Prevail in Alleged Business Interruption Coverage Matters, Perhaps Paving the Way for Future Rulings

November 17, 2021
July 22, 2020

Gavrilides Management Company et al. vs. Michigan Insurance Co. presented an issue of first impression for Michigan courts whereby a restaurant owner made a business interruption claim under his insurance policy due to the stay-at-home order of Michigan Governor Whitmer, which prohibited restaurants from serving food to patrons at the restaurant property.  At the outset of the case, Michigan Insurance moved for summary disposition and Judge Joyce Draganchuk of Michigan’s 30th Circuit Court heard oral argument on July 1, 2020, which is available to view at the following link

Michigan Insurance argued that the policies that insure the Gavrilides property against direct physical loss to the property and business income require that there must be a direct physical loss of or damage to the insured property.  The allegations of the complaint do not set forth any direct physical loss of any kind, altering the ability of the restaurant to conduct operations or effecting any potential sale of the property.  Instead, per the complaint and a subsequent affidavit from plaintiff in response to the defendant’s motion, the business interruption claim was based upon the stay-at-home orders of Michigan Governor Whitmer.  The carrier maintained that the restaurant was in the same exact physical condition at the time of the oral argument on the motion as it was when Governor Whitmer’s order went into effect.  

Michigan Insurance relied on Universal Insurance Productions vs. Chubb from the Eastern District of Michigan which involved alleged damage to an insured property from a pervasive odor stemming from mold.  The court found that the odor did not cause damage to the property sufficient to trigger the policy language requiring direct physical loss.  The carrier reasoned that the plain language in the Gavrilides policy—direct physical loss—means that extraneous inquiries raised by plaintiff about physical contaminants (i.e., COVID-19) that do not alter the property, or loss of use unrelated to a physical condition, were not sufficient to trigger coverage.  

The carrier also contended that a virus exclusion applied to bar coverage.  The exclusion provided that there was no coverage for loss or damages caused by or resulting from any virus, bacterium, or other microorganisms that induces or is capable of inducing physical distress, illness, or disease.

On the other hand, Gavrilides claimed that the effect of Governor Whitmer’s stay-at-home order disallowed use of the interior of the property as a restaurant which constituted a loss under the policy.  Plaintiff also argued that the loss of access to the property constituted direct physical loss.  Gavrilides analogized the inability to use the covered property to a computer virus which similarly disallows use of the insured property without physical damage to the property itself.  

The court, in ruling in favor of Michigan Insurance, found that the language of the policy was clear and unequivocal, and a plain reading of the policy did not trigger coverage.  The court ultimately focused upon the lack of any physical loss to the restaurant property.  Because no direct physical loss or damage to the property existed--meaning a material tangible existence that altered the physical condition of the property--then no coverage was triggered under the policy.  Suspension of business activities would only be covered under the policy if the suspension took place because of physical loss to the property; the restaurant was continuing to operate for take-out orders.  Moreover, the court noted that the pleadings did not allege that COVID-19 was ever present at the restaurant.  

Setting aside the direct physical loss requirement of the policy language, the court also found that plaintiff had not demonstrated that the virus exclusion was inapplicable.  The terms of the virus exclusion were not vague, and the court rejected plaintiff’s arguments in that regard.  The court also commented that viruses cannot harm property and instead harms people.  

The court also found that according to the policy, action by the government through Governor Whitmer’s stay-at-home order would fall under the policy language in the causes of loss special form B exclusion, stating that acts of government are covered only when they result in a covered cause of loss—which brought the court back to the direct physical loss language of the policy which plaintiff could not satisfy.  

The court also rejected plaintiff’s request for leave to amend the pleadings.  The court noted that the pleadings and plaintiff’s affidavit already indicated that there was no physical damage, and plaintiff could not overcome these sworn statements and create coverage.

Judge Draganchuk’s decision is in line with other court decisions around the country from insureds seeking coverage for business interruption as a result of COVID-19 shutdowns.  In May of this year, the Southern District of New York heard an emergency petition in Social Life Magazine, Inc. v. Sentinel Insurance Co. Ltd., No. 20-cv-3311.  After argument, plaintiff withdrew the petition before the court could issue a formal ruling, perhaps to avoid an adverse ruling.  The court was not unsympathetic to the circumstances faced by the insured but adhered to the long-standing case law on interpreting insurance policies stating: “I feel bad for your client.  I feel bad for every small business that is having difficulties during this period of time.  But New York law is clear that this kind of business interruption needs some damage to the property to prohibit you from going.  You get an A for effort, you get a gold star for creativity, but this is not what’s covered under these insurance policies.”

As these cases show, the “physical loss of or damage to” requirement remains a necessary predicate to trigger business interruption coverage. The issue of whether an intangible, such as the COVID-19 virus, meets this requirement will vary by jurisdiction and is dependent on the specific language in the policy.  However, these two early decisions may have broad reach, and provide insight and persuasive authority for hundreds of pending cases in state and federal courts throughout the country.