Sixth Circuit Finds No Coverage For COVID-19 Claims Based On No Direct Physical Loss | Hinshaw & Culbertson – Perspectives for Insurers


The U.S. Sixth Circuit Court of Appeals recently upheld the dismissal of a policyholder’s COVID-19 insurance action in Santo’s Italian Café LLC v. Acuity Insurance Co., n ° 21-3068 (6th Cir. 22 Sep 2021). In its decision, the Sixth Circuit began by pointing out that the COVID-19 pandemic was not good for the operations of the restaurant of the police holder given the reluctance of customers to enter closed public spaces such as restaurants. and an order for Ohio restaurants to suspend all in-person catering to slow the spread of the virus. Although the closure order allowed restaurants to offer take-out services, the restaurant suffered significant losses and laid off employees.

The restaurant sued its insurer, Acuity Insurance Company, for coverage under a commercial property insurance policy, which covers business disruptions “caused by direct physical loss or property damage.” The lawsuit was filed in Ohio state court, but returned to federal court. The district court granted Acuity’s motion 12 (b) (6) to dismiss, finding that the policy did not cover this type of risk. The Sixth Circuit claimed that there had been no direct physical loss as required by business interruption (and other) coverage.

Ohio law governed this dispute. The court recognized that the dispute is resolved by the wording of the contract and gave the undefined terms their “common and ordinary” meaning to the words “direct physical loss or damage to” the goods covered. The core of the Court’s analysis was as follows:

Nothing unexpected results from consulting the dictionary definitions of the main contested terms of this clause: “direct physical loss of” property. “Direct” means “[e]assigned or existing without intermediation or intervening body; immediate. “Oxford English Dictionary Online (3rd ed. 2021).” Physical “means” natural; tangible, concrete. User ID. “Loss” means “[p]erdition, ruin, destruction; the condition or fact of being “lost,” destroyed or ruined “, or” being deprived of “. User ID. And “property” means “any residential or other building (with or without associated land) or a part separately belonging to such a building (such as an apartment, etc.)”, as well as “[s]something belonging to a thing; an addiction ; a supplement. . . . . Whether one sticks to the terms themselves (a “direct physical loss of property”) or a thesaurus-rich paraphrase (an “immediate” “material” “deprivation” of property), the conclusion is same. The policy does not cover this loss. The restaurant was not tangibly destroyed, either in part or in whole. And the owner was not materially or concretely deprived of anything. He still owns the restaurant and everything inside the space. And it can still use every square foot of the premises, even if it’s not used for in-person meals. Think about the different potential sources of lost restaurant revenue – the virus and state shutdown orders – and whether either has created “direct physical loss or damage to” property. The new coronavirus did not physically affect the property in the same way, for example, as a fire or water damage. No one is claiming that the virus has physically and directly altered the property. The restaurant does not put forward such an argument. The governor’s closure orders also did not create any direct physical loss of property or direct physical damage. They simply banned one use of the property – in-person meals – while allowing take-out meals and through it all did not remotely cause direct physical damage to the property. It was as if the government had temporarily dezoned all restaurants in the state just for take out. While restaurateurs would undoubtedly suffer from such a move and arguably have reason to oppose it, government regulation would not create a direct physical loss of property. Loss of use is just not the same as physical loss. It is one thing for the government to ban the use of a bicycle or scooter on city sidewalks; it’s another for someone to steal it. . . The imperative of “direct physical loss” or “direct physical damage” does not suddenly appear in the section of the policy for additional coverage, such as business interruption. It is the North Star of this property insurance policy from start to finish. Remember how the policy begins: “We will pay for the direct physical loss or damage to the Covered Property. . . caused by or resulting from any Covered Cause of Loss. . . . Other terms of the policy reinforce this conclusion. Acuity has promised to pay for lost business income only during the “restore period”. . . . . This period begins 24 hours after the “moment of loss or direct physical damage” and ends either when the insured property “must be repaired, rebuilt or replaced at a reasonable speed” or when “resumption of activities in a new permanent location », Depending on the first case. . . . This timing provision includes the understanding that any covered “direct physical loss or damage to property” could be remedied by repairing, rebuilding or replacing the property or relocating the business. But what would that mean according to Santo’s Café’s interpretation of the policy? He did not claim any problem with the building. There is nothing to repair, rebuild or replace that would allow restoration operations to resume in person. What the restaurant needed was an end to the ban on in-person dining, not the repair, reconstruction or replacement of its property. Traditional uses of commercial property insurance also support this interpretation. Even when referred to as “comprehensive” policies, as these policies sometimes are, they still only cover risks which result in tangible “physical” loss or damage, for example by fire, water, wind. , freezing and overheating.

While acknowledging that some cases have argued that a loss of the ability to use property may in some cases constitute a “physical loss”, the Sixth Circuit emphasized that these cases, whether properly decided or not, concerned matters. goods become practically useless for anything. He noted that Santo’s Café has not alleged that its property is unusable or uninhabitable, only that it is “dangerous, dangerous and unfit for the use for which it is intended”.

The court was sensitive to the fate of hotel companies, but recognized that the solution did not lie in a misinterpretation of the wording of the contract:

The unique challenges that restaurants, bars and other hotel services have faced over the past eighteen months are not lost on us. Staying in business during a unique (hopefully) pandemic that has sparked all kinds of new government regulations, including bans on many in-person services, has to be taxing. Of course, state and federal loans and grants have offered some support to entities that have suffered losses of this type created by the government, and this assistance has certainly enabled some businesses to survive. But this truth brings little comfort to those who have not. . . . This leaves a harsh reality on insurance. It is not a general safety net for all hazards. If the risk is not having money when you need it, insurance is a response to perilous events that could lead to a sudden drop in income. The correct pricing of insurance correctly takes into account the probability of occurrence of each defined peril and the cost of its cover. Efforts to push coverage beyond its terms create a mismatch, an insurance product that covers something no one has paid for and, worse yet, risks leaving insufficient funds to pay for the risks policyholders have. paid. This is why the courts must honor the coverage that the parties have – and have not – provided in their written insurance contracts.

In addition to relying on two other earlier decisions of the United States Court of Appeals, the court found Mastellone c. Lightning Rod Mutual Insurance Co., 884 NE2d 1130, 1133 (Ohio Ct. App. 2008) supported the conclusion that a change or physical modification is necessary to involve coverage. In view of this ruling on coverage, the court found it unnecessary to address the exclusion of the virus.


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