An Ohio federal court ruled that a restaurant group was entitled to “Business Income” insurance coverage, allowing it to recover its lost net income and certain continuing expenses resulting from government shutdown orders, and that the policy’s “Microorganisms” (or virus) exclusion and “Loss of Market or Delay” exclusion did not apply. Henderson Road Restaurant Systems, Inc. v. Zurich American Insurance Company, No. 1:20-CV-1239 (N.D. Ohio Jan. 19, 2021). The case has been certified for an immediate appeal.

The decision has four key holdings.

First, the court rejected the insurer’s argument that the promise to pay for “direct physical loss of or damage to” covered property required structural property damage as a precondition to coverage. The court held that the phrase was instead ambiguous and could reasonably be interpreted to include a policyholder’s loss of use of insured property, in addition to physically damaged property. The court found that the government orders preventing the use of the restaurants’ indoor dining services resulted in a loss of use of insured property.

Second, the policy’s Microorganisms exclusion did not apply to preclude coverage because the exclusion was intended to prohibit policyholders from recovering losses for virus-induced property damage at the restaurants. Because the parties stipulated that the virus that causes COVID-19 was not present at any of the plaintiffs’ restaurants, the court found that the exclusion did not apply. The court also believed that the connection between the government shutdown orders and the virus exclusion was too tenuous to preclude coverage.

Third, the court held that the Loss of Market or Delay (or loss of use) exclusion did not apply because it would vitiate the intent of the Business Income coverage.

Finally, the court denied the plaintiffs’ bad faith claim against the insurer from denying their claims finding that “no amount of discovery would change the fact that Zurich had a reasonable justification for determining that there was no coverage under its policy.”

The court did not address whether the plaintiffs would have been able to recover their losses under the policy’s Civil Authority coverage because the plaintiffs did not move for summary judgment on that claim. The Civil Authority provision requires the insurer to pay for lost net income and certain extra expenses sustained over 30 days resulting from the suspension of business operations if the suspension is caused by order of civil authority that prohibits access to the premises.

We don’t think there is any ambiguity as to whether the policies intend to include loss of use damages in the term “direct physical loss of or damage to” property. Policies have to be read as a whole from the perspective of an ordinary policyholder of average intelligence. In our class action lawsuits pending in Illinois, we have argued that when you consider the policies as a whole, the definition of “property damage” includes loss of use damages. For instance, under the policy’s commercial general liability coverage, the term property damage expressly includes loss of use damages. In one case, the insurance company has an endorsement that states it covers “direct physical loss or damage to property, including loss of use.” When considered as a whole, a fair reading of the term “property damage” under these policies should include loss of use damages. And as the judge held, loss of use does not require permanent loss of use; temporary loss of use may suffice. We have made similar arguments in another case in Ohio.

The virus exclusion analysis is a bit more nuanced. Does it mean businesses that had the virus at their place of business have no coverage? We don’t believe so since the holding implies that businesses that had the virus present onsite may still be able to recover damages if they were otherwise forced to close even after having cleaned or disinfected for the virus.

On Jan. 19, 2021, another Ohio federal judge, Judge Benita Pearson, in Neuro-Communication Services, Inc. v. Cincinnati Insurance, No. 4:20-CV-1275 (N.D. Ohio) certified the following question of law to the Ohio Supreme Court: Does the general presence in the community, or on surfaces at a premises, of the novel coronavirus known as SARS-CoV-2, constitute direct physical loss or damage to property; or does the presence on a premises of a person infected with COVID-19 constitute direct physical loss or damage to property at that premises?

Should Judge Polster’s decision survive on appeal, every Ohio business that closed as a result of a shutdown order may be entitled to recover their losses in some form from their insurer. Certainly, the insurers that chose not to have a virus exclusion in their policies are expected to submit friend of the court briefs in both matters.

So if you haven’t made a claim against your insurer for losses after closing your business as a result of a shutdown order, you should promptly do so. You should also review your policy to see whether it imposes a deadline for filing a lawsuit for your claim. Some policies require that a lawsuit be filed within a year from the date of loss.

Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.