Business Interruption Lawsuits Begin: “Physical Loss” and “Civil Authority” at Issue

Well-known New Orleans restaurant, the Oceana Grill, was the first to file a business interruption insurance lawsuit against its insurer, Certain Underwriters at Lloyd’s, London (“Lloyd’s”), last week in Louisiana state court.  While the complaint is lacking in some policy specifics, the issues raised suggest this may be a test case of sort for coronavirus business interruption issues generally.

Oceana Grill is seeking a declaration that the Lloyd’s “all risk” policy “provides coverage to [Oceana Grill] for any future civil authority shutdowns of restaurants in the New Orleans area due to physical loss from [c]oronavirus contamination and that the policy provides business income coverage in the event that the coronavirus has contaminated the insured premises.”  According to Oceana Grill, the policy is an “all risk policy” because “it’s designated as a Special Form providing that covered causes of loss means direct physical loss unless the loss is specifically excluded or limited in the policy.”  This may require that there be a confirmed coronavirus exposure at the restaurant or at least a credible unconfirmed exposure.  In previous factually comparable situations, the courts have reached different conclusions as to what constitutes “physical loss or damage.”  In Widder v. Louisiana Citizens Property Insurance Corporation, 82 So.3d 294 (La. App. Ct. 2011), a Louisiana state court held that the intrusion of a contaminant rendering a home unusable and/or uninhabitable constituted “direct physical loss” to property.

Oceana Grill alleges that the “all risk” coverage includes the extension of coverage in the event of a business closure by order of Civil Authority.  Civil Authority coverage typically requires direct physical loss or damage to premises within a defined distance of the insured premises.  Accordingly, in the event that a federal, state, or local governmental authority limits access to or from areas where active transmission of an infectious disease has been identified, “civil authority” coverage may respond with insurance for the associated income losses of affected businesses.

This would appear to require a yet-to-be-determined scientific determination of the extent to which the coronavirus / COVID-19 contaminates and damages property and the duration of the infection.  This presumably requires scientific consideration of how long the virus survives on various types of surfaces.  When the law and novel science intersect with so much money at stake, this can be expected to take years if not decades to resolve.

Notably, Oceana Grill alleges that Lloyd’s policy does not include a virus or global pandemic exclusion.  However, virus or global pandemic exclusions for business or property losses have been widely used in commercial policies since introduced by ISO in 2006.  The speed by which the complaint was filed, the unique coverage posture of the policyholder, and the Louisiana jurisdiction – which is generally considered tort-friendly – suggests that this case bears close observation in the coming months.  Cajun Conti LLC v. Certain Underwriters at Lloyd’s, London, No. 2020-02558 (La Dist. Ct. Orleans Parish Mar. 16, 2020).