Thousands of claims and lawsuits have been filed across the country primarily by small and mid-size businesses based upon their insurers refusing to extend coverage or pay claims for business interruption losses. But a federal judge in Cleveland has determined that Zurich American Insurance Company owes coverage to an Ohio restaurant group for losses that came about from the COVID-19 pandemic and government shut-down orders. The decision in Henderson Rd. Rest. Sys. v. Zurich Am. Ins. Co., N.D. Ohio No. 1:20 CV 1239, 210 U.S. LEXIS 9521 (Jan. 19, 2021), applying Ohio law, is most significant for its interpretation of the coverage requirement that a necessary suspension of business operations during the period of restoration must be caused by “direct physical loss of or damage to property.” The standard coverage clause in the Zurich policies provided:

We will pay for the actual loss of “business income” you sustain due to the necessary “suspension” of your “operation” during the “period of restoration”. The “suspension” must be caused by direct physical loss of or damage to property at a “premises” at which a Limit of Insurance is shown on the Declarations for Business Income. The loss or damage must be directly caused by a “Covered cause of loss”. We will not pay more than the applicable Limit of Insurance shown on the Declarations for Business Income at that “premises”. Here, the stipulated facts were that the policyholders’ business was primarily based on in-person dining, and the restaurants were closed (and later restricted) to in-person dining in compliance with State orders issued to control the coronavirus pandemic, and not because the restaurants were contaminated by or because employees had contracted COVID-19.

Direct Physical Loss of Property

The Court rejected Zurich’s argument that the policyholders must establish tangible physical injury or damage to their real property. The Court noted that the use of the disjunctive conjunction “or” in the coverage phrase “direct physical loss of or damage to property” means that “physical loss of property” is distinct from “physical damage to property”. The Court agreed that when the state governments issued their orders requiring the policyholders to discontinue the use of their restaurants for their intended in-dining purpose, this loss of use of restaurant property constitutes direct physical loss of property under the policy’s coverage clause.

Suspension of Operations

The Court rejected Zurich’s argument that a direct physical loss of property requires permanent loss. The policy defines “suspension” as “[t]he slowdown or cessation of your business activities,” and it defines “operations” as “[y]our business activities occurring at the covered location prior to the physical loss or damage.” Here, because the policyholders closed their restaurants to indoor dining at various times in compliance with state government orders, the policyholders established that “there was a necessary ‘suspension’ or ‘slowdown or cessation’ of their business activities.”

Period of Restoration

The Court held that, applying a plain reading of the definition of “period of restoration,” the period began on the dates when the applicable state government orders went into effect and ended or will end on the dates when the in-person dining restrictions were or are fully lifted. The Court’s decision leaves open coverage for period when state governments permit in-person dining with significant restrictions.

Covered Cause of Loss

The Zurich policies defined “covered cause of loss” as “a fortuitous cause or event, not otherwise excluded, which actually occurs during this policy period.” The Court found that because the state orders were chance occurrences not reasonably anticipated, the policyholders’ loss of use of their restaurants were a covered fortuitous event, unless otherwise excluded.

Microorganism Exclusion

The Zurich policies did not have a standard Virus exclusion. Because the claimed physical loss of use was attributable to state government closure orders in the absence of the presence of coronavirus or any outbreaks in their restaurants, the Court held that the Microorganism exclusion did not apply. The Court rejected Zurich’s argument that the anti-concurrent causation language (stating that “regardless of any other cause or event … that contributes concurrently or in any sequence to the loss, even if such other cause or event would otherwise be covered“) applies to bar coverage because the presence and prevention of the state government closure orders. The Court held that the intent of this exclusion was “to exclude coverage for damage to properties caused by contamination of viruses or bacteria on the premises.” The Court reasoned that because the anti-concurrent causation language requires that the coronavirus “caused, at least in part, damage to the [policyholders’] property,” a finding of exclusion would be contrary to the stipulation that none of the policyholders’ restaurants “were closed as the result of the known or confirmed presence of SARS-CoV-2 or COVID 19 at any of the Insured Premises.”

Caution

Because the Zurich policies had a Microorganism exclusion, this decision does not reach the standard Virus exclusion found in many policies.

Certification of Interlocutory Appeal

Because this was not a final, appealable order, the Court exercised its discretion to certify these legal issues for immediate appeal to the Sixth Circuit Court of Appeals. Policyholders and insurers will want to pay close attention to this appeal.