A federal judge has kept alive a restaurant group’s chances of collecting on its business interruption insurance policy for revenues lost during the pandemic, ruling that the covered establishments’ lack of physical damage is insufficient grounds to throw out the case.
The ruling by Judge Madeline Haikala of the U.S. District Court for Northern Alabama addresses one of the key reasons for similar cases being dismissed or decided in favor of insurance companies. Insurers have argued that business-interruption policies are intended to compensate establishments that suffer a loss because of physical damage, often from a natural disaster such as a hurricane or tornado. Courts have largely agreed with that assertion.
But Haikala essentially ruled that “loss” and “damage” are two distinct areas of coverage. The plaintiffs—Serendipitous, Fancy on Fifth and Melt Food Truck—were not left in need of repairs when their operation was disrupted last year, Haikala acknowledged. But they did suffer losses because of government-directed shutdowns and a voluntary decision to close after seven employees were found to be infected with coronavirus.
The suspension of normal operations resulted in a loss because the restaurants were unable to use their dining rooms, Haikala wrote. She likened the situation to an establishment being closed by authorities following a fire because the undestroyed portions of the business are unsafe to use.
“The fact that the COVID-19 virus has not physically altered the restaurants’ property does not mean that coverage necessarily is not available for impacts to the property that are invisible to the naked eye,” the judge wrote. “The policy language indicates that the insurer understands that an insured may suffer physical loss without physical alteration of property because the policy excludes from coverage some expenses incurred because of invisible substances like vapor and fumes”—or in this case, a pernicious virus.
Haikala denied the motion from the restaurants’ insurer, The Cincinnati Insurance Co., to throw out the case because no physical damage had been done.
Court documents indicate that the Serendipitous group’s policies did not include a provision expressly exempting coverage for situations involving a virus or other pathogen, as is common in business-interruption insurance.
Many restaurant operators have sued the holders of their interruption policies in hopes of being compensated for the loss of revenues due to COVID-related shutdowns. They have failed in those efforts because of insurers’ no-damage argument and specific exemptions for losses related to an epidemic or pandemic.
It is unclear what impact Haikala’s ruling will have on courts’ interpretation of insurers’ obligations under their business-interruption policies. In her memorandum delivering the decision, she cited Alabama insurance rules several times, which limits the applicability of what she wrote.
But the situation holds a lot of parallels to the plight of restaurants across the country. The Serendipitous Group was forced to close its dining facilities by directives of the state and their host counties and rely exclusively on takeout. Facilities did voluntarily close at one point, but because of the need to sanitize the facilities against COVID-19.