Two federal cases in the Northern District of Ohio recently reached very different conclusions on whether the state\u2019s COVID-19 shutdowns of restaurants permit valid claims for business interruption insurance coverage. Reviewing essentially the same facts and policy provisions, one court found for the insurer, holding no coverage to exist. The other found for the policyholder, awarding coverage. The opposite results will no doubt lead to further upcoming appellate activity in Ohio. The reasoning in these cases may also lead to further clarifications in Ohio about the rules for interpreting insurance policies.<\/p>\n\n\n\n
In Santo\u2019s<\/em> case, Judge Pamela Barker dismissed the policyholder\u2019s claims for business interruption coverage on two main grounds. First, the court found: (a) Santo\u2019s failed to plead a threshold claim of \u201cdirect physical loss of or damage to\u201d its insured premises, given the absence of any alleged \u201ctangible\u201d or \u201cstructural\u201d damage beyond \u201ceconomic losses\u201d; and (b) even if a covered claim had been alleged, coverage was precluded by the \u201cvirus exclusion\u201d in the coverage forms. <\/p>\n\n\n\n On the first issue, the court first noted the language of the insuring agreement in the Property Coverage Form:<\/p>\n\n\n\n \u201cWe will pay for direct physical loss of or damage to<\/strong> Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.\u201d<\/strong><\/p>\n\n\n\n The Court further noted that the form listed \u201cadditional coverages\u201d including the following:<\/p>\n\n\n\n \u201cg. Business Income and Extra Expense<\/strong><\/p>\n\n\n\n (1) We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your operations<\/em> during the period of restoration<\/em>. The suspension must be caused by direct physical loss of or damage to property<\/strong> at the described premises. The loss or damage must be caused by or result from a Covered Cause of Los<\/strong>s.\u201d<\/p>\n\n\n\n (Emphasis in the court\u2019s quotations.)<\/p>\n\n\n\n Acuity Insurance argued there had been no \u201cdirect physical loss of or damage to property,\u201d since there had been no allegation of \u201cdemonstrable, physical alteration\u201d or \u201ctangible alteration\u201d of the property. (Santo\u2019s <\/em>Case Opinion and Order at p. 14.) On the other hand, Santo\u2019s argued the concept of \u201cphysical loss\u201d can include a \u201closs of functionality,\u201d \u201clost operations or inability to use the business.\u201d (Id.<\/em> at 15.)<\/p>\n\n\n\n The Court found under Ohio law, these policy terms required the policyholder to allege and prove a \u201cdistinct, demonstrable physical alternation\u201d of its property, beyond \u201cmere economic effects.\u201d (Id. <\/em>at 24.) In support, it cited Mastellone v. Lightning Rod Mut. Ins. Co.<\/em>, 175 Ohio App. 3d 23, 40 (Ohio 8th Dist. Ct. App. 2008) (denying coverage for mold stains), where the court construed the similar term \u201cphysical injury\u201d to require an adverse effect on the \u201cstructural integrity\u201d of the property beyond mere \u201cintangible\u201d loss. (Santo\u2019s <\/em>Case Opinion and Order at pp. 17-20.) It also cited Universal Image Prods., Inc. v. Federal Ins. Co.<\/em>, 475 Fed. App\u2019x 569, 573 (6th Cir. 2012) (denying coverage for a persistent odor from mold or bacteria), where the court interpreted the similar phrase \u201cdirect physical loss or damage\u201d to require \u201ctangible, physical losses\u201d beyond mere \u201ceconomic losses.\u201d (Santo\u2019s <\/em>Case Opinion and Order at pp. 17-20.) The court rejected the invitation to rely on other states\u2019 case law because Ohio law appears to differ. It added the claim would still \u201clikely remain insufficient\u201d under other states\u2019 law given the lack of any \u201cphysical force on Santo\u2019s property.\u201d (Id.<\/em> at 21.)<\/p>\n\n\n\n Santo\u2019s also argued coverage could exist under the policy\u2019s \u201cCivil Authority Coverage.\u201d This provision could provide coverage if Santo\u2019s property were not damaged, so long as other local properties were damaged in a way that affected Santo\u2019s. However, the court denied coverage under this provision as well, employing the same reasoning it used to deny Business Income coverage. It emphasized neither Santo\u2019s property nor was any nearby property alleged or proven to have structural or tangible damage. (Id.<\/em> at 26.)<\/p>\n\n\n\n On the second issue \u2013 the applicability of the virus exclusion \u2013 the court found further grounds for dismissal. It cited the terms of the exclusion, which state:<\/p>\n\n\n\n \u201c1. We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss\u2026<\/p>\n\n\n\n \u201ci. Virus or Bacteria<\/strong><\/p>\n\n\n\n (1) Any virus, bacterium, or other microorganisms that induces or is capable of inducing physical distress, illness or disease.\u201d<\/p>\n\n\n\n Santo\u2019s argued: (a) The Ohio Closure Orders caused the loss, not the COVID-19 virus; and (b) the exclusion is ambiguous because it does not reference the term \u201cpandemic.\u201d The court found the policyholders\u2019 arguments to be unpersuasive. It noted the complaint acknowledged the Closure Orders were issued due to the spread of the COVID-19 virus and the pandemic arose from the same virus. (Id.<\/em> at 30-32.) It further noted the exclusion\u2019s broad terms and anti-concurrent causation language, which excludes damage caused \u201cdirect or indirectly\u201d by the cited causes \u201cregardless of any other cause or event that contributes\u201d to it. (Id.<\/em>)<\/p>\n\n\n\n In sum, the court found multiple reasons to deny business interruption coverage to Santo\u2019s.<\/p>\n\n\n\n In the Henderson<\/em> case, Judge Polster granted the policyholder\u2019s motion for summary judgment, crediting the same key policyholder arguments that Judge Barker had rejected in Santo\u2019s<\/em>. The Henderson <\/em>case thus found business interruption coverage to be available to a restaurant group under a policy issued by Zurich American Insurance Company (Zurich). The operative portions of the policy in Henderson <\/em>read as follows (and are virtually identical to the key provisions interpreted in Santos):<\/p>\n\n\n\n \u201cBusiness Income Coverage Form<\/strong><\/p>\n\n\n\n \u201cA. COVERAGE<\/strong><\/p>\n\n\n\n \u201cWe will pay for the actual loss of \u2018business income\u2019 <\/strong>you sustain due to the necessary \u2018suspension\u2019<\/strong> of your \u2018operations\u2019<\/strong> during the \u2018period of restoration.\u2019<\/strong> The \u2018suspension\u2019 <\/strong>must be caused by direct physical loss of or damage to property at a \u2018premises.\u2019 \u2026 <\/strong>The loss or damage must be directly caused by a \u2018Covered cause of loss.\u2019\u201d<\/strong><\/p>\n\n\n\n The Henderson <\/em>court accepted the policyholder\u2019s argument about the meaning, or at least the ambiguity, of the phrase \u201cdirect physical loss of\u201d the real property. Interpreting what it found to be ambiguities, and construing them in the policyholder\u2019s favor, the court agreed that the key phrase could mean something different than \u201cdamage to\u201d the property. Thus, the court further agreed that the policyholders \u201clost their real property\u201d under the policies\u2019 terms \u201cwhen the state governments ordered that the properties could no longer be used for their intended purpose.\u201d (Henderson <\/em>Opinion and Order at 18.) The court found it to be irrelevant that no permanent loss occurred. (Id.<\/em> at 21.)<\/p>\n\n\n\n As for prior binding cases involving Ohio law, the court found none to be pertinent. It said none involve \u201cinterpreting the same policy language and applying it to real property.\u201d (Id.<\/em>) It discussed Mastellone <\/em>and Universal Image<\/em> as involving somewhat different terms than those at issue here. the court noted Zurich cited another case involving the same terms as the Henderson policy, S<\/em>c<\/em>h<\/em>midt v. Travelers Indemnity Co. of America, <\/em>101 F. Supp.3d 768, 781 (S.D. Ohio 2015). The Schmidt<\/em> case did indeed apply the phrase \u201cdirect physical loss\u201d to the facts involving some fraudulent cashier\u2019s checks. The Schmidt <\/em>court found no covered loss where fraudulent checks \u201cwere not physically lost or damaged.\u201d But the Henderson <\/em>court simply stated, \u201cthe application of the language \u2018loss of\u2019 to personal property is different than it is to real property.\u201d (Id.<\/em> at 20.) It did not explain why the analysis is different for real versus personal property, but it concluded that it \u201cis different.\u201d<\/p>\n\n\n\n As for the \u201cmicroorganisms\u201d exclusion that existed in the policy, Zurich argued that it barred coverage here. The court first quoted it as follows:<\/p>\n\n\n\n \u201c12<\/strong>. Microorganisms<\/strong><\/p>\n\n\n\n We will not pay for loss or damage consisting of, directly or indirectly caused by, contributed to, or aggravated by the presence, growth, proliferation, spread, or any activity of \u2018microorganisms,\u2019 <\/strong>unless resulting from fire or lightning. Such loss or damage is excluded regardless of any other cause or event, including a \u2018mistake\u2019 <\/strong>or \u2018malfunction,\u2019 <\/strong>or weather condition, that contributes concurrently or in any sequence to the loss, even if such other cause or event would otherwise be covered.\u201d<\/p>\n\n\n\n Analyzing this exclusion, the court rejected its application here, stating: \u201cPlaintiffs\u2019 restaurants were not closed because there was an outbreak of COVID-19 at their properties; they were closed as a result of governmental orders.\u201d (Id.<\/em> at 27-28) It said that the microorganisms exclusion \u201cdid not clearly exclude loss of property caused by a government closure,\u201d faulting Zurich for not being specific enough to reference \u201cgovernment closures\u201d in the exclusion. (Id.<\/em>) The court also noted the parties\u2019 stipulation that \u201cnone of Plaintiffs\u2019 Insured Premises were closed as a result of the known or confirmed presence of SARS-CoV-2 or COVID-19 at any of the Insured Premises.\u201d (Id.<\/em> at 27.)<\/p>\n\n\n\n The Court did not cite any language in the exclusion as requiring a microorganism to be present at the insured\u2019s premises<\/em> in order for coverage to be excluded. Nor did it cite any ambiguity on that point. But it did reference a Zurich submission to the Department of Insurance as discussing this exclusion\u2019s intended application to viruses and bacteria on the insured\u2019s premises. (Id.<\/em> at 28-29.)<\/p>\n\n\n\n It is interesting the Henderson <\/em>court cites the well-known principle of interpreting ambiguities in favor of the policyholder (id.<\/em> at 16-17) but then relies on extra-contractual materials in aid of interpretation without citing any ambiguity on the point at issue. (Id.<\/em> at 27-30.) The court\u2019s reasoning on the exclusion raises three interesting, related questions about the rules for interpreting insurance policies:<\/p>\n\n\n\n Note that Santo\u2019s<\/em> court stated several principles pertinent to policy interpretation, including that \u201cif a contract is ambiguous, a court may consider extrinsic evidence to ascertain the parties\u2019 intent.\u2019\u201d (Santos<\/em> Opinion and Order at 13, citing Westfield Ins. Co. v. Galatis<\/em>, 797 N.E.2d 1256, 1261 (Ohio 2003)). These questions about policy interpretation may prove critical on appeal of this case.<\/p>\n\n\n\n The Santo\u2019s<\/em> and Henderson<\/em> decisions are polar opposites, from two different judges, albeit both in the Northern District of Ohio, less than a month apart. Addressing coverage for COVID-19 business shutdowns, one finds business interruption coverage requires \u201cstructural\u201d or \u201ctangible\u201d damage beyond \u201ceconomic loss.\u201d The other finds a \u201cphysical loss\u201d occurs when a property cannot be used for its intended purposes during a pandemic-related shutdown. Likewise, one finds losses from governmental closure orders are sufficiently related to COVID-19 to fall under a virus exclusion. The other finds an exclusion for microorganisms is inapplicable due the insurer\u2019s failure to specifically reference government closures.<\/p>\n\n\n\n Fully aware of the controversy and importance of these decisions, the Henderson<\/em> court provided for interlocutory appeal of its coverage ruling. Insurers and policyholders in Ohio thus await the further resolution of these key issues and clarification of the pertinent rules of policy interpretation by the Sixth Circuit or the Ohio Supreme Court.<\/p>\n","protected":false},"excerpt":{"rendered":" Two federal cases in the Northern District of Ohio recently reached very different conclusions on whether the state\u2019s COVID-19 shutdowns of restaurants permit valid claims for business interruption insurance coverage. Reviewing essentially the same facts and policy provisions, one court found for the insurer, holding no coverage to exist. The other found for the policyholder,\u2026<\/p>\n","protected":false},"author":8,"featured_media":0,"menu_order":0,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"tags":[],"publication-type":[12],"class_list":["post-34136","publications","type-publications","status-publish","format-standard","hentry","publication-type-legal-alerts"],"acf":[],"yoast_head":"\nB. Henderson Road Restaurant Systems, Inc., v. Zurich Am. Ins. Co.,<\/em> (Jan. 19, 2021), N.D. Ohio No. <\/strong>1<\/strong>:<\/strong>20-<\/strong>CV-<\/strong>123<\/strong>9<\/strong><\/h3>\n\n\n\n
C. Implications for Policy Interpretation Rules<\/strong><\/h3>\n\n\n\n
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D. Conclusion<\/strong><\/h3>\n\n\n\n