Court Sides With Insurers in Denying Restaurants Coverage for Pandemic

WASHINGTON — A restaurant group lost out last week at a Washington, D.C., court in their attempt to recover lost profits from the COVID-19 pandemic under their insurance policies.

The U.S. Court of Appeals for the District of Columbia said the restaurants failed to prove they suffered any physical damage to their property, which is required before their insurers must cover their losses.

The restaurants in Rose’s 1, LLC, et al. v. Erie Ins. Exch. argued their business interruption policies were supposed to protect them against the kind of natural disaster created by the pandemic.

It resulted in a government-ordered shutdown of restaurants and other retail establishments as the pandemic sickened millions of Americans. It also continued to keep customers away after the quarantine orders were lifted.

From the time the shutdown orders were issued in March 2020 until the devastation for the industry eased in June 2021, an estimated 90,000 restaurants and taverns were forced to close, according to the National Restaurant Association.

The original lawsuit was filed in D.C. Superior Court by Washington, D.C., restaurant business Rose’s 1 LLC, doing business as Rose’s Luxury, along with more than a dozen other restaurants. The Restaurant Law Center and the Restaurant Association of Metropolitan Washington filed an amicus curiae brief that agrees with the restaurants.

Business interruption insurance “is designed to protect the business’ commercial viability by allowing it to meet its ongoing obligations and to replace lost revenue when confronted with a sudden, unplanned closure,” the brief says.

The failure of the insurance policies to list exclusions for pandemics is a risk assumed by insurers, the brief says.

“District law requiring insurance contracts to be construed in favor of the insured should apply with particular force here, where insurers were aware of pandemic risk yet failed to exclude it in unambiguous terms,” the brief says.

The D.C. Court of Appeals disagreed based largely on policy terms that allowed coverage only for “direct” and “physical” losses. The court’s ruling said that “loss of covered property must be tangible and material,” which did not include customers staying away because of a disease.

The court concluded that “‘direct physical loss of or damage’ does not include a loss of use, and coverage of ‘all risks’ does not mean that coverage can be extended beyond the policy’s terms.”

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