Fla. Sports Bar's COVID-19 Insurance Claim Should Proceed

By Micah Skidmore
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Law360 (May 22, 2020, 5:27 PM EDT) --
Micah Skidmore
Micah Skidmore
In the short space of two months, thousands of corporate policyholders across the country have gone from pursuing normal, prosperous business operations to substantially reduced or suspended business activity in response to state and local quarantine orders to, now, conflicts with insurance carriers over coverage for extensive business interruption losses.

Dozens of cases have been filed in venues across the country by corporate insureds seeking to recover the same thing — millions of dollars in lost revenue and extra expense incurred as the current public health crisis has denied businesses their employees, essential supplies and consumers.

In one pending case, Prime Time Sports Grill Inc. v. Certain Underwriters at Lloyd's of London, the insurer recently moved to dismiss the policyholder's claim for business interruption loss in litigation pending in the U.S. District Court for the Middle District of Florida.[1] Underwriters' dismissal brief argues primarily against the policyholder's allegations that its restaurant/bar sustained physical loss of or damage to insured property.

The arguments made in Underwriters' brief are an echo of denial letters issued to thousands of other policyholders in recent weeks. It is anticipated that the first judicial opinion on business interruption claims arising out of the current public health crisis could influence other cases to come. So, on behalf of unnumbered corporate policyholders also pursuing business interruption claims under similarly worded policies, here is an open response to Underwriters' flagship argument denying the existence of physical loss or damage to Prime Time's covered property.

Policyholders are not asking for coverage to compensate for a mere economic slowdown. In an effort both to minimize the equitable appeal of Prime Time's claim and conjure a parade of horribles, Underwriters have attempted to characterize the circumstances leading to Prime Time's loss as nothing more than an economic slowdown.[2]

American businesses are not simply stuck in an economic rut. This is not just a commercial downturn. To borrow from the webpages of the world's largest commercial insurers, conditions are unprecedented[3] and have not been seen for 100 years.[4] Businesses, including insurers, have curtailed operations, cancelled events, shutdown facilities and sent employees home.[5]

These extraordinary, once-in-a-lifetime events are not characteristic of ordinary economic cycles, as Underwriters' brief implies. Nor will granting coverage for business interruption losses arising out of the current public health crisis result in the impossible, untenable or uninsurable risk of compensating policyholders for every shift in economic fortunes, as insinuated by Underwriters.

The policy's period of restoration does not contradict Prime Time's claim for physical loss or damage. Underwriters cite to the policy's period of restoration and its endpoint, when the insured premises should be repaired, rebuilt or replaced, as evidence that business interruption loss presupposes some damage requiring the actual repair or replacement of property.[6]

Underwriters are wrong. Coverage for property damage does not depend on the actual repair or replacement of property. The valuation provisions of most commercial property policies specify that if damaged property is not repaired or replaced within a defined period (usually 2 years), the insured can still recover the actual cash value of the subject property, discounted for depreciation, as opposed to the undiscounted replacement cost value.

Likewise, general business interruption coverage under the period of liability extends until the date the property "should be repaired, rebuilt or replaced with reasonable speed and similar quality."[7] Actual repair or replacement is not a prerequisite for business interruption coverage. 

Moreover, many policies include an extended period of liability beginning on the date the general period of liability terminates and continuing through the time the insured could restore its business to the condition that would have existed had no direct physical loss or damage occurred.

Absent any actual or expected repair or replacement of damaged property, the extended period of liability incepts upon the occurrence of physical loss and continues until the insured's business is restored to preloss conditions. Reliance on a policy's extended period of liability is consistent with Prime Time's claim for physical loss without rendering the general period of liability meaningless as Underwriters allege.

Underwriters' arguments over the period of liability also ignore sublimited business interruption coverages, such as civil authority and ingress/egress coverage, which do not depend upon any period of liability, much less the repair or replacement of covered property. The argument, therefore, that claims of physical loss without damage somehow violate the terms of Underwriters' period of liability is a classic nonsequitur.

Policyholders have experienced physical loss. Underwriters apparently do not dispute the existence of loss. Underwriters deny instead that the loss was physical.[8] To qualify as physical loss, according to Underwriters, the loss must be more than intangible or incorporeal, more than economic and include a distinct, demonstrable, physical alteration of the property or a change from a satisfactory state to an unsatisfactory state.[9]

To insist on a physical alteration of property for loss to occur improperly blurs the express distinction found in the policy's terms referencing both "loss" and "damage." But setting semantics to one side, the fact is that insured commercial property all across America has been transformed from a satisfactory state of full use and functionality to an unsatisfactory state of disuse and even (in some cases) virtual obsolescence overnight.

It is not just a matter of economic value, which is distinct from utility. The commercial property that is the subject of so many business interruption claims, including restaurants, stores, clinics and travel venues — without employees, without necessary supplies and without consumers — has crossed the threshold from mere pecuniary diminution in value to the tangible and palpable realm of physical loss or damage.[10]

Ironically, insurance carriers in the past have argued that mere damage absent loss of functionality does not qualify as loss.[11] Now, out of expediency, insurers like Underwriters would have policyholders coming and going. The functional loss sustained to insured property — when states and counties have ordered nonessential businesses to limit operations and citizens to stay home — is undeniable and completely ignored by Underwriters' brief.

There are other noteworthy inconsistencies inherent in Underwriters' hopelessly narrow interpretation of physical loss. Common policy terms excluding loss of market or loss of use, for example, would be both meaningless and unnecessary if a policy's grant of coverage for physical loss or damage did not already embrace a loss of utility and functionality.

Importantly, such exclusions address the very risks Underwriters at first presaged as impossible, untenable or uninsurable — ordinary market forces, including "competition, shifts in demand, or the like."[12]  By comparison, the catastrophic losses arising out of the current public health crisis are anything but ordinary.

By way of further example, rarely, if ever, will an occurrence cause physical damage to every part of a covered piece of property. Yet, in many instances coverage for the repair or replacement of the insured property extends beyond only the damaged portions to the whole, when the property is deemed a total loss. This is not mere economic loss, but physical loss.

However casually applied, the euphemism "total loss" expresses the truth that undamaged property, attached to a damaged component, is physically lost when its utility is diminished. The existence of such physical loss does not disappear, even absent physical damage to an adjoining part, so long as the loss of use exists.  

Many will recall the image of the lone house standing after the storm surge from Hurricane Ike leveled every other structure for miles.[13]

Although at a distance the home appears totally unscathed, the physical loss to this property cannot be ignored. With the surrounding environment in ruins, the utility of this otherwise undamaged home has been unquestionably impaired, and the property physically lost.

In a similar way, public reaction to COVID-19, with consumers sheltering in place and public officials restricting access to public places and private businesses, has tangibly altered the environment surrounding businesses like Prime Time. Empty highways, parking lots and places of business are as much a testament to today's policyholders' physical loss as the wasteland left behind by Hurricane Ike.[14]

Whether Underwriters or any other carrier will acknowledge or even realize it or not, the denial of physical loss or damage is a quantitative issue of degree more than it is the qualitative issue of loss being physical or nonphysical as Underwriters have asserted. If, hypothetically, armed soldiers physically prevented employees from going to work, vendors from providing essential supplies or consumers from leaving their homes, Underwriters could hardly deny the existence of a physical loss to business.

Underwriters' brief even touts the fact that Florida's civil authority order authorizes restaurants to provide limited delivery and curbside service — as if the total, forced preclusion of any and all business operations was the missing element in Prime Time's physical loss claim.[15]

Yet, in order to maintain the argument that anything exogenous to an insured's premises cannot create physical loss, Underwriters resort to claiming that state action barring access Prime Time's property still would not qualify as physical loss.[16] The extreme position Underwriters are compelled to adopt when Underwriters' coverage argument is taken to its inevitable conclusion confirms the fallacy of Underwriters' denial.

What Underwriters' brief ultimately fails to acknowledge is the magnitude of public reaction to COVID-19, including substantial social anxiety over mortality rates and access to adequate medical care.

These conditions have created nothing short of a catastrophic public health crisis that has physically kept employees home. It has kept vendors from physically providing essential supplies — including food items, cleaning agents and sanitary materials — to businesses as well as households. And it has kept consumers, individually and as groups, physically away from countless businesses for extended periods.

The loss of employees, the loss of supplies and the loss of customers is tangible and qualifies as physical loss. Underwriters' refusal to acknowledge Prime Time's claim as one for physical loss is nothing less than a denial of the severity of the current public health crisis and the public response to a virus that has infected more than 4.3 million and claimed the lives of more than 294,000 people across the globe.

The magnitude of the current health crisis and its unique impact on businesses factually distinguishes Prime Time's claim from any of the cases cited in Underwriters' brief. To the extent that Underwriters have relied on these authorities for the broader argument that equates physical loss with physical damage, an equal number of cases stand for the contrary principle that physical loss can occur without injury or damage to property.[17]

Because Underwriters' denial of Prime Time's physical loss ignores the physical loss of employees, suppliers and customers caused by the current health crisis and is not supported by relevant case law, Underwriters' motion to dismiss Prime Time's claim should be denied.



Micah Skidmore is a partner at Haynes and Boone LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] See Doc. No. 13, Prime Time Sports Grill, Inc. d/b/a Prime Time Sports Bar v. DTW1991 Underwriting Ltd., Civil Action No. 8:20-cv-00771-CEH-JSS, in the United States District Court for the Middle District of Florida.

[2] Brief at 8.

[3] Letter to Policyholders from FM Global CEO (May 5, 2020).

[4] COVID-19: The Interconnected Consequences (Mar. 19, 2020), available at https://www.zurich.com/knowledge/topics/global-risks/covid-19-the-interconnected-consequences.

[5] Hartford, COVID-19 Resource Center ("We've already asked every employee who can work remotely to do so until further notice. We've also switched to virtual meetings and canceled or postponed company-sponsored events through April."), available at https://www.thehartford.com/coronavirus; Liberty Mutual, Measures to Keep Employees Safe and Prevent the Spread of Coronavirus ("We've enabled all our employees to work from home and implemented mandatory work from home across all offices in the US and Canada."), available at https://www.libertymutual.com/covid-19.

[6] Brief at 9-10.

[7] Id. 

[8] Brief at 8-9.

[9] Id.

[10] See, e.g., Nat'l Ink & Stitch, LLC v. State Auto Prop. & Cas. Ins. Co. , 2020 U.S. Dist. LEXIS 11411, at *16-17 (D. Md. Jan. 23, 2020) ("The more persuasive cases are those suggesting that loss of use, loss of reliability, or impaired functionality demonstrate the required damage to a computer system, consistent with the 'physical loss or damage to' language in the Policy); see also, e.g., Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co. , 968 A.2d 724 (N.J. Super. Ct. 2009); Lambrecht & Assocs., Inc. v. State Farm Lloyds , 119 S.W.3d 16, 27 (Tex. App.—Tyler 2003, no pet.).

[11] See, e.g., Great Plains Ventures, Inc. v. Liberty Mut. Fire Ins. Co. , 2016 U.S. Dist. LEXIS 57481, *11 (D. Kan. Apr. 29, 2016) (rejecting the insurer's argument that "loss" required a "functional loss").

[12] Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co. , 279 F. Supp. 2d 235, 240 (S.D.N.Y. 2003).

[13] See https://www.cnn.com/2008/US/09/18/ike.last.house.standing/.

[14] See https://www.lohud.com/story/money/2020/05/04/ny-shopping-malls-shutdowns-foreshadow-uncertain-future-what-may-change/3036037001/.

[15] Brief at 4, 13.

[16] Brief at 16.

[17] See, e.g., Motorists Mut. Ins. Co. v. Hardinger , 131 Fed. Appx. 823 (3d Cir. 2005) (finding a fact issue precluding summary judgment on a claim for "physical loss" relating to a home rendered uninhabitable by a well contaminated with e-coli bacteria); Matzner v. Seaco Ins. Co. , 1998 Mass. Super. LEXIS 407, at * 9–12 (Mass. Super. Aug. 26 1998) (interpreting "direct physical loss" broadly in favor of coverage to include carbon monoxide contamination which rendered the building unusable but did not affect its structural integrity); General Mills, Inc. v. Gold Medal Ins. Co. , 622 N.W.2d 147, 152 (Minn. Ct. App. 2001) (citing Sentinel Mgmt. Co. v. New Hampshire Ins. Co., 563 N.W.2d 296, 300 (Minn. Ct. App. 1997)) (direct physical loss can exist without destruction of property of structural damage to property).

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