Court Ruling Denies Insurance For Restaurants Hit by Pandemic

August 10, 2020 by Tom Ramstack
O'Connell's restaurant and bar, Alexandria, Virginia. (Photo by Dan McCue)

WASHINGTON – A District of Columbia judge’s ruling this week is the latest court judgment that absolves insurers from obligations to cover the losses of businesses during the coronavirus pandemic.

A group of restaurants sued their insurer after the company declined to reimburse them under their business interruption insurance policies.

Business interruption insurance, also known as business income insurance, covers income losses businesses suffer during a disaster. The losses typically result from closings forced by a disaster or because of the need to rebuild.

Washington, D.C., Judge Kelly A. Higashi said the restaurants failed to show how Mayor Muriel Bowser’s shutdown order to prevent the spread of disease represented a “direct physical loss” that Erie Insurance Exchange needed to cover.

In a similar ruling last month, a Michigan judge said coronavirus did not cause a tangible alteration to property that would require insurers to reimburse the owners under property insurance policies.

About 300,000 small businesses have closed permanently because of the pandemic, according to government estimates.

So far, their primary financial backstop has been the Paycheck Protection Program, which refers to government loans designed to provide an incentive for small businesses to keep workers on their payrolls.The Small Business Administration will forgive the loans if all employee retention criteria are met and the funds are used for eligible expenses.

Many restaurateurs say the Paycheck Protection Program provides too little financial backing against the devastation of the pandemic.

In the lawsuit led by Rose’s 1 LLC, which owns and operates several restaurants in the Washington area, the owners argued their losses resulted from more than an “abstract mental phenomenon” that insurers could avoid covering.

“The restaurants have suffered direct physical loss because they have been forced to shut down their normal operations to prevent the spread of a pandemic virus,” the lawsuit says. “That loss falls within the policies’ grant of coverage for income protection.”

Many of the restaurants have continued operating with limited service but found it drives them deeper into debt, according to the plaintiffs. 

“They have also incurred extra expenses to maintain limited operations, including, to the extent possible, carry-out and delivery services, and to take precautionary measures to protect the health and safety of their employees and patrons,” the lawsuit said.

Judge Higashi disagreed the restaurants suffered a “direct physical loss.”

She said the mayor’s shutdown order directed businesses to take specified actions but did not cause a physical change to their properties.

She also said the restaurants could offer no proof the virus was present inside their buildings when they shut down operations in March, which would be required for insurance coverage. Instead, the shutdown was preemptive.

She denied the restaurateurs’ argument that an insurable loss includes “loss of use” because of disease.

Judge Higashi wrote that “even if ‘loss of use’ was covered, plaintiffs would still have to show that the loss of use was a ‘direct physical loss.’”

Rose’s 1 LLC was joined in the lawsuit by nine other Washington-based restaurant companies. Their complaints are similar to restaurant owners nationwide.

“Long-established restaurants that have weathered decades of wars and economic turbulence and massive industry changes are closing their doors permanently because of the pandemic,” Restaurant Business newsletter reported in its latest edition. “Some of these restaurants have been serving food and drink for a century.”

The lawsuit is Rose’s 1 LLC et al. v. Erie Insurance Exchange, Case No. 2020 CA 002424 B, Superior Court of the District of Columbia, Civil Division.

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