The financial difficulties of the COVID-19 pandemic have created disputes between businesses and their insurers around the nation. While it may be tempting to file lawsuits as a creative way to recoup lost revenues, businesses should carefully review their insurance policies before filing suit in order to minimize the risk of losing their limited revenues.
In Graspa Consulting Inc., v. United National Insurance Company1, a consulting company in the restaurant industry purchased a commercial insurance policy that provided protection against losses and expenses due to the involuntary interruption of business operations. In response to the COVID-19 pandemic, the Florida Governor issued executive orders restricting access to non-essential businesses. The consulting company viewed these orders as an involuntary interruption of its business and filed a claim with its insurer. When the insurer denied the claim, the consulting company sued, alleging the insurer violated the terms of the insurance policy by refusing to pay. In response, the insurance company moved to dismiss the entire lawsuit.
To support its motion to dismiss, the insurance company claimed insurance coverage is only available when there is a direct physical loss or physical damage. Simply stated, the insured property must suffer actual harm to trigger insurance coverage. The insurance company also argued that every claim alleged by the company should fail because the policy requires actual harm, not purely economic losses.
In response, the consulting company argued that the insurance policy should be construed in its favor. The phrase "direct physical loss" is not limited to actual harm because the policy excluded governmental seizures, nuclear reactions and war-related damages, which did not require any structural or tangible harm. The consulting company also argued that several courts have determined a direct physical loss occurred when a business becomes unusable.
While applying Florida law, the court stated that insurance policies are contracts that should be interpreted according to their plain meaning. When there are multiple interpretations of the provisions, the policy should be construed against the insurer, but the court noted that an ambiguous policy must "have a genuine inconsistency, uncertainty, or ambiguity in meaning after the court has applied the ordinary rules of construction."
The "direct physical loss" and "direct physical damage" language in the policy was also discussed. Although neither phrase was defined, the court stated that the failure to define a particular word or phrase will not make the policy ambiguous. After analyzing prior court rulings, the court determined that the terms "direct and physical modify loss and impose the requirement that the damage be actual." As such, the insurance policy was clear, and coverage would only be available if there was a physical loss or physical damage.
Next, the court evaluated the substance of the allegations, noting "[plaintiff's] claim for coverage is not based on a virus contaminating its premises, and Plaintiff is not seeking to be indemnified for the cost of decontamination or business income loss due to contamination of its premises." The consulting company's allegation was simply "that Florida's Government temporarily closed its business," which did not arise to actual damage. As a result, the entire lawsuit was dismissed.
The court's ruling highlights the risk that business owners could experience a second loss as a result of COVID-19. The limited funds collected during immensely restricted business operations could be squandered in lawsuits creatively designed to replace lost revenues. Moreover, there have been similar outcomes around the country. In a footnote, the court noted that a Michigan chiropractor's lawsuit against their insurance company was dismissed when it was based on executive orders that restricted the use of the property. In Connecticut, a case was dismissed when claims were based on government shutdown orders. The court also summarized the developing law on COVID-19 business interruption litigation by stating plaintiffs "cannot recover by attempting to artfully plead impairment to economically valuable use of property as a physical loss or damage" and impaired use or value cannot substitute for the physical loss or damage requirement.
The decision to file a lawsuit is actually a decision about how a company will invest its revenues. The benefits should outweigh the risks. Businesses should carefully review their insurance policies before suing their insurer for failing to pay a claim related to COVID-19 business interruption. Courts are likely to use the definition in the policy to determine the outcome of the case; therefore, companies should determine how their policy defines a "loss." Companies should also think through whether the premises were actually contaminated. Moreover, companies should evaluate whether increased operating expenses are a safety precaution for customers or the result of some physical damage to the property.
The law applicable to these disputes may vary from one state to another, and insurance policies are very nuanced. Consulting legal counsel may also be very beneficial. In addition to helping determine whether litigation is a worthwhile investment, an attorney could also determine whether the business qualifies for alternative sources of funding that could replace lost revenues.
1. GRASPA CONSULTING, INC. Plaintiff, v. UNITED NATIONAL INSURANCE COMPANY, Defendant., No. 20-23245-CIV, 2020 WL 7062449, at *1 (S.D. Fla. Nov. 17, 2020)
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