Security Insurance Prevails in Pandemic Restaurant Closure Case Because No “Physical Loss”

The Supreme Court of Wisconsin, applying Wisconsin law, held state-mandated closures of in-person dining did not amount to direct physical “loss” of or “damage” to insureds’ properties; the closure did not amount to direct physical “loss” of or “damage” to property other than that of insured; and the presence of COVID-19 virus particles was not “contamination” as defined by the property-insurance policies at issue. Thus, the Wisconsin Supreme Court reversed and remanded the circuit court’s denial of Society Insurance, a mutual company’s (“Society”) motion to dismiss a putative class action complaint for declaratory judgment and breach of contract for denials of loss relating to the COVID-19 pandemic.

In March 2020, the Wisconsin Department of Health Services (“DHS”) Secretary-Designee Andrea Palm issued orders prohibiting restaurants and bars from offering dine-in services but allowing them to continue offering takeout and delivery options. After losing business income due to these restrictions, an insured, Colectivo Coffee Roasters, Inc. (“Colectivo”), filed a claim with Society under its property policy. Society denied the claim based on a lack of “direct physical loss.”

Colectivo’s property policy at issue provides coverage for “direct physical loss… or damage” to the insured’s buildings, fixtures, or other “business personal property,” including lost business income due to physical damage and extra expenses incurred while restoring the facilities or minimizing business closure. The policy also includes a contamination provision covering lost income and extra expenses if the property is contaminated, or if “an order by a civil authority” prevents access to the building. The policy defines contamination as a “defect… or dangerous condition in [Colectivo’s] products, merchandise, or premises.”

After Society’s denial, Colectivo filed a class action complaint against Society. Colectivo and the other plaintiffs all operated cafes, bars, or restaurants that were forced to close or restrict operations because of the Wisconsin DHS order prohibiting in-person dining, and accordingly suffered lost business income. The plaintiffs argued that there was coverage for lost income under any one of four policy provisions: the business-income, extra-expense, civil-authority, and contamination provisions. The Wisconsin Supreme Court rejected all four potential bases.

The circuit court denied Society’s motion to dismiss on the grounds that the insureds had incurred physical loss and alleged so in its complaint. The court of appeals permitted Society to appeal the circuit court’s non-final order, and the Wisconsin Supreme Court granted Society’s petition to bypass the court of appeals.

The Wisconsin Supreme Court held the insureds did not actually allege physical loss in their complaint. The policy provision that the insureds relied upon in the class action complaint only covered “direct physical loss,” not a loss of use of the property. The Court explained that the insureds being unable to use their undamaged property for a temporary period was not a direct physical loss, and as such could not lead to lost business income under the policy. Additionally, the Court reasoned that the extra expense provision did not apply because, absent a direct physical loss, modifying the insureds’ restaurant space to conform with COVID-19 safety guidelines did not constitute a period of restoration or repair to the property. Furthermore, the Court concluded that the civil authority provision did not apply because the HHS order did not completely bar the insureds from operating, but instead restricted them to takeout and delivery services.

Similarly, the Court also determined that the contamination provision did not apply because the insureds did not completely stop operating due to COVID-19 and instead switched to takeout and delivery options. Additionally, the HHS order did not completely restrict the insureds from accessing their property or bar them from producing products.

Therefore, the Wisconsin Supreme Court held that the putative class action complaint failed to state failed to state a claim under the insurance policy, reversing the circuit court’s denial of Society’s motion to dismiss. Colectivo Coffee Roasters, Inc. v. Soc’y Ins., a mutual co., 974 N.W.2d 442 (2022).