COVID-19 Ruling Serves as Cautionary Tale for Policyholders to Satisfy Pleading Requirements
The Situation: This month, a Michigan state trial court dismissed the COVID-19-related business interruption coverage lawsuit filed by two policyholder restaurants on the pleadings, finding that they had failed to allege any form of physical loss or damage to property (as required by their insurance policy).
The Result: Although the insurance industry has attempted to promote this ruling as a vindication of their COVID-19-related coverage denials, the opinion is actually of little import beyond serving as a reminder to policyholders to exercise care when pleading their COVID-19 claims.
Looking Ahead: Commercial policyholders should be undeterred by the Gavrilides ruling, but make sure to tailor their pleadings to address the particular coverage requirements of their insurance programs when pursuing their COVID-19-related claims.
Failing to Allege Physical Loss or Damage
In Gavrilides Management Co. LLC v. Michigan Ins. Co., a Michigan Circuit Court recently demonstrated what can go wrong when a policyholder fails to plead the basic elements of a covered COVID-19 business interruption claim. Case No. 20-258-CB-C30 (Cir. Ct. of the County of Ingham, Michigan). Because the restaurant policyholders seeking business interruption coverage following the imposition of COVID-19 executive orders limiting their operations had failed to allege any form of physical loss or damage to property (as required by the policy), the court summarily dismissed their complaint on the pleadings. Contrary to some insurance industry publications extoling this ruling as a victory on the merits of COVID-19 coverage issues, the opinion is of little import beyond serving as a reminder to policyholders to plead the necessary elements of a covered claim.
By way of background, in Gavrilides, two restaurants sought $650,000 in damages for losses suffered after Michigan issued executive orders in March limiting the two restaurants to take-out and delivery orders. The restaurants claimed that the requirement in their policy that any "suspension of operations" must be caused by direct physical loss or damage to one of their insured properties had been satisfied, because the restaurants were "damaged during the pendency of the [executive orders] because people were physically restricted from dine-in services."
Ruling from the bench on July 1, the Michigan Circuit Court immediately noted that plaintiffs' complaint "does not allege any physical loss of or damage to the property." In support of its dismissal, the court further explained that: "[T]he complaint also states that at no time has COVID-19 entered the Soup Spoon or The Bistro through any employee or customer, and in fact states it has never been present in either location. So there simply are no allegations of direct physical loss of or damage to either property."
In contrast to the pleadings in Gavrilides, numerous other complaints filed across the country have alleged the presence of COVID-19 at, in, or adjacent to restaurants, bars, beauty parlors, office buildings, casinos, and other properties following either the positive testing of employees or patrons at the insured's properties, or because of findings by governmental authorities imposing executive orders due to the recognized presence of COVID-19 throughout their respective jurisdictions.
Unlike in Gavrilides, these other complaints actually allege the existence of physical loss of or damage to property as a result of the presence of COVID-19, and they often cite numerous civil authority orders predicated on the physical loss of or damage to property caused by COVID-19. See, e.g., N.Y. City Emergency Executive Order No. 100, issued, in relevant part, "because the virus physically is causing property loss and damage" (emphasis added).
Existing Michigan Precedent
Similarly, the trial court's finding that Michigan law requires that direct physical loss or damage must take a tangible form and somehow alter "the physical integrity of the [insured] property" may also have been avoided if the plaintiffs had pointed out the fact that such findings are contrary to existing Michigan precedent, as well as the decisions of the courts of numerous other states. For example, in Sloan v. Phoenix of Hartford Ins. Co., 46 Mich. App. 46, 50-51, 207 N.W.2d 434, 436-37 (1973), a Michigan appellate court held that business interruption coverage was available as a result of the closure of movie theaters due to a state order during a period of riots in the city, and when "the physical integrity" of the movie theaters had not been altered.
Likewise, various other courts have found that the presence of hazardous substances, and odors, that rendered a property unfit for its intended use constituted "direct physical loss or damage" to a building sufficient to trigger business interruption coverage. See, e.g., Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., 2014 U.S. Dist. LEXIS 165232 (D. N.J. 2014) (release of ammonia); Motorists Mutual Ins. Co. v. Hardinger, 131 Fed.Appx. 823, 825-27 (3d Cir. 2005) (bacteria contamination of home water supply ); Essex v. BloomSouth Flooring Corp., 562 F.3d 399, 406 (1st Cir. 2009) (unpleasant odor ); Farmers Ins. Co. v. Trutanich, 858 P.2d 1332 (Or. Ct. App. 1983) (odors from methamphetamine lab). However, none of these cases was addressed by the parties during the July 1 hearing.
While insurers are attempting to use the Gavrilides ruling as a "vindication" of their denials of COVID-19 business interruption claims (often following no claims investigation whatsoever), their reliance upon the Michigan trial court's ruling is not well-founded. The ruling is, at most, a reminder to policyholders to plead the essential elements of a covered claim.
Two Key Takeaways
- While the insurance industry has attempted to overstate its import, the recent Gavrilides decision is significant only insofar as it illustrates the need for policyholders to exercise care when pleading their COVID-19 claims.
- Policyholders should accordingly remain mindful of the fact that there continue to be potentially available avenues for the recovery of COVID-19-related business interruption losses under the terms of many commercial property insurance policies.
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