Eleventh Circuit Confirms No Coverage for COVID-19 Business Interruption Claims

By: Mishael Najm

Since the onset of the COVID-19 pandemic, businesses have sought to recover losses from their property insurers due to the interruption the pandemic caused to their business. Insurers have largely denied such claims, relying on textual analysis of the contract and policy rationales that highlight the difficulty, if not impossibility, in pricing and scaling a pandemic-related risk. Most businesses claiming such losses rushed to file lawsuits, and now courts have been tasked with deciding if economic losses resulting from government shutdown orders issued as a result of the COVID-19 pandemic are covered under all-risk commercial insurance policies. Recently, the U.S. Court of Appeals for the Eleventh Circuit issued an opinion affirming the District Court’s decision to dismiss a business interruption loss claimed by Henry’s Louisiana Grill – a restaurant in Acworth, Georgia. Henry’s Louisiana Grill v. Allied Ins., 35 F.4th 1318 (11th Cir. 2022).

The Henry’s Louisiana Grill lawsuit stems from the business seeking to recover lost income after Governor Kemp declared a public state of emergency in March 2020. Henry’s filed a claim with Allied Insurance Company. Henry’s Louisiana Grill, 35 F.4th at 1319. Ultimately, Allied denied coverage based on Henry’s closure not being caused by any “direct physical loss or damage.”

Under the policy, Allied agreed to cover “direct physical loss of or damage to Covered Property” if it was “caused by or resulting from any covered cause of loss.” Id. The policy also provided that Allied agreed to “pay for the actual loss of business income” due to the suspension of Henry’s operations in two circumstances. Id. First, Allied would cover business interruption losses based on the business income provision, which covered suspension of operation caused by “direct physical loss of or damage to property at the described premises” for a “period of restoration” following the loss. Id. The policy defined period of restoration as the time for the property to “be repaired, rebuilt, or replaced with reasonable speed and similar quality,” unless the business “resumed at a new permanent location.” Id.

Second, Allied would cover business interruption losses based on the Civil Authority provision covering interruptions caused by “an action of civil authority” that prohibited “access” to Henry’s business as part of its “response to dangerous physical conditions” on a nearby property – so long as those conditions resulted “from the damage or continuation of the covered cause of loss that caused the damage” to that nearby property. Id.

Henry’s argued that it did suffer a physical loss of property when it lost the use of its dining room during the COVID-19 closure. Id. at 1320. In the alternative, Henry’s argued that Allied should cover the losses under the Civil Authority provision because the Governor had restricted access to the area based on “physical damage” or COVID-19 contamination to nearby properties. Id.

The court found that under Georgia law a “direct physical loss” always involves a tangible change to a property. Id. at 1321. In response, Henry’s argued that the loss was physical as there was a loss or deprivation of a physical space, namely, the dining room. Id. The court found that because there had not been an actual physical effect to the property (for example, actual ruin, destruction, or damage), a physical loss had not occurred. Id. Similarly, the court determined Henry’s was not entitled to coverage under the Civil Authority provision. The court reasoned that even if the COVID-19 contamination damaged other nearby properties, thereby affecting Henry’s access to its business, the virus did not cause tangible physical change on the nearby properties. Id. Finally, the court explained the limit on business income coverage in the policy, which allowed for coverage until the lost or damaged property was repaired and the business was brought back to working order, signaled that a “physical loss of property” inherently meant a tangible change to the property. Id.

In sum, the courts in Georgia that have addressed coverage for business interruption losses due to the COVID-19 pandemic have held that the presence of COVID-19 causes intangible harm to property, not the direct physical harm that is required to trigger coverage under all-risk commercial insurance policies. Henry’s Louisiana Grill provides additional support on which insurers can rely to reject business interruption claims resulting from the COVID-19 pandemic.

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Mishael Najm

The court found that because there had not been an actual physical effect to the property, a physical loss had not occurred.
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