US court rules that there is no business interruption coverage for COVID-19 because there was no direct physical loss

A circuit court judge in the US State of Michigan has ruled in favour of the Michigan Insurance Company in the high-profile Gavrilides case, which related to business interruption insurance for restaurants that had been temporarily closed under COVID-19-related government orders.

On 1st July, the court concluded that no coverage is owed because there was no direct physical loss of or damage to the property.

Ironically, the judge’s ruling was handed down following a Zoom court hearing and is, of course, now available via YouTube.

Judge Joyce Draganchuk explained that although coverage is provided for actual loss of business income sustained during a suspension of operations, the suspension must be caused by direct physical loss of or damage to property. With this as the framework, the Judge concluded that direct physical loss of or damage to the property “has to be something with material existence. Something that is tangible. Something . . . that alters the physical integrity of property.”

The Judge emphasized that the complaint did not allege any physical loss of or damage to the restaurants. Rather, it merely alleged loss of business due to executive orders shutting down dining in the restaurant due to the COVID-19 threat. The Judge noted that the complaint states that at no time did COVID-19 enter the restaurants through an employee or patron.

The court further rejected the insured’s argument that the Virus Exclusion is “vague.” The court held that the virus exclusion would apply even if direct physical loss or damage existed.

The court additionally observed that, while government acts are covered, they must result in direct physical loss or damage.
Finally, the court concluded that the insured, the Gavrilides Management Company, could not amend its complaint, as there is no factual development that could change that the complaint alleges loss of access to the premises, and not direct physical damage to property, as required under the policy.

Alpha comment

A number of US insureds have brought cases against their insurers, demanding payments to cover BI losses arising from the global pandemic. Although this judgement only covers one of these cases, it appears to be an early victory for the insurance sector.