On Monday, Oceana Grill, a restaurant in New Orleans, Louisiana, became the first to file a lawsuit over coverage for COVID-19 business interruption losses. The lawsuit, styled Cajun Conti, LLC, et al. v. Certain Underwriters at Lloyd’s of London, et al. (La. Dist. Court, Orleans Parish), seeks a declaratory judgment that an “all risks” property insurance policy issued by Lloyd’s of London must cover losses resulting from the closure of the restaurant following an order by the Governor of Louisiana restricting public gatherings and the Mayor of New Orleans’ order closing restaurants.
The Lloyds’ policy, like most first-party property insurance policies, affords coverage for business- interruption losses and contains an “extension of coverage in the event of the businesses closure by order of Civil Authority.” Specifically, the lawsuit seeks a declaration that “the policy provides coverage to plaintiffs for any future civil authority shutdowns of restaurants in the New Orleans area due to physical loss from Coronavirus contamination and that the policy provides business income coverage in the event that the coronavirus has contaminated the insured premises.” Furthermore, according to the complaint, “[t]he policy does not provide any exclusion due to losses, business or property, from a virus or global pandemic.”
As the complaint implies, an important issue will be whether the novel coronavirus constitutes the requisite “direct physical loss or damage” under the policy. Understanding COVID-19, its manner of transmission and its ability to live beyond a host organism helps support a conclusion that COVID-19 does indeed amount to the required direct physical loss or damage.
According to the CDC, the novel coronavirus is believed to spread mainly from direct contact with an affected person. However, COVID-19 also is understood to remain on surfaces. The duration can last at least three-weeks, depending on the type of surface material. This supports the conclusion that the presence of COVID-19 on business personal property, such as desks, computers and other office equipment, kitchen worktables and appliances, and dining room furniture and tableware can constitute direct physical loss or damage. This is especially so where the insurance policy contains no limiting language or definitions, as is often the case.
But findings of “direct physical loss or damage” as a result of some pathogen or irritant are not unique to COVID-19. For example, in Motorists Mutual Ins. Co. v. Hardinger, the U.S. Court of Appeals for the Third Circuit held that the presence of E. coli bacteria in the well of a house, which made the inhabitants of the house ill with respiratory, viral, and skin conditions, could constitute physical loss or damage to a structure. The issue turned on “whether the functionality of the [ ] property was nearly eliminated or destroyed, or whether th[e] property was made useless or uninhabitable.”
This issue unfolds in the light of case law in other fact situations in which courts have confirmed that airborne contamination also can qualify as “physical loss.” For example, a federal court in New Jersey concluded in Gregory Packaging Inc. v. Travelers Prop. Cas. Co. of Am., that “courts considering non-structural property damage claims have found that buildings rendered uninhabitable by dangerous gases or bacteria suffered direct physical loss or damage.” From there, the court found that an ammonia discharge in a building inflicted direct physical loss of, or damage to, the insured’s facility because the release, which made the air unsafe, rendered the facility unfit for occupancy until the ammonia dissipated.
As we discussed on the blog Monday, the first event-driven securities lawsuit to arise from COVID-19 was filed last week. This week, the first suit to enforce business interruption coverage is on the books. What next week holds remains to be seen in what is now the “new normal.” No matter what the loss, however, policyholders should consider their insurance when quantifying losses resulting from COVID-19. Where covered, prompt action to notify insurers, mitigate loss, and properly categorize and quantify potential claims is critical.