COVID-19 Closure Orders Not 'Physical Loss,' DC Judge Rules

By Mike Curley
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Law360 (August 6, 2020, 5:31 PM EDT) -- A District of Columbia judge on Thursday shot down a bid by a group of restaurants in the area to get coverage for business interruptions during the COVID-19 pandemic, ruling that government shutdown orders don't constitute a "direct physical loss" that triggers the policy.

Superior Court Judge Kelly A. Higashi sided with Erie Insurance Exchange in a suit led by Rose's 1 LLC, which owns and operates several restaurants in the city, letting the insurer off the hook for the losses the restaurants suffered when they had to close their doors.

Like numerous businesses around the country, Rose's 1's properties shut down operations in response to government mandates — in this case, orders issued by Washington, D.C., Mayor Muriel Bowser in March prohibiting table seating and standing customers at bars and restaurants and mandating closure of nonessential businesses.

The restaurants went to Erie for coverage under their "Ultrapack Plus Commercial Property Coverage" insurance policies and were denied, prompting the suit, after which both Rose's 1 and Erie pushed for summary judgment.

In Thursday's ruling, Judge Higashi shot down each of the restaurants' arguments, saying the restaurateur failed to show how Mayor Bowser's shutdown orders in themselves constituted a "direct physical loss."

To trigger the policy, Judge Higashi ruled, the "loss" has to directly impact the property itself. While Rose's 1 argued that the orders were the "direct" reason for the closing, the judge wrote that the orders only directed businesses to take certain actions but did not effect any direct change to the properties in and of themselves.

In response to the restaurants' argument that the loss is "physical" because COVID-19 is "material," and that the loss resulted from the orders rather than "abstract mental phenomenon" like irrational fear, the judge wrote that the restaurants offered no evidence the virus was present in the insured properties, and the mayor's orders didn't have any effect on the physical structure of the properties.

Finally, while the restaurants argued that "loss" can refer to a "loss of use," the judge wrote that the word is still modified by "direct" and "physical," so any loss of use must be because of a "direct physical" effect on the properties, and the orders created no such effect by themselves.

Without demonstrating the shutdown orders caused direct physical change that caused Rose's 1 to lose the use of the properties, the orders don't trigger coverage, the judge wrote.

George E. Reede Jr. of Niles Barton & Wilmer LLP, representing Erie, said he and his client are pleased with the outcome.

"The Superior Court's decision reaffirmed the definition of 'direct physical loss' and the importance of direct physical loss to property in triggering business interruption coverage," he told Law360 on Thursday. "Erie is committed to providing the coverage and protection that its personal and commercial insurance customers have purchased and fulfilling the promises made in its policies."

Representatives for Rose's 1 could not immediately be reached for comment Thursday.

The question of how to interpret "physical loss" is at the center of a number of COVID-19 business interruption coverage cases, as businesses argue that being forced to shut down either because of government orders or the virus itself constitutes such a loss, while insurers argue that neither the orders nor the virus actually damaged the property.

Judge Higashi's ruling is the latest to side with insurance companies, after a Michigan state judge in July dismissed Gavrilides Management Co. LLC's suit seeking $650,000 from Michigan Insurance Co. for losses it suffered after Gov. Gretchen Whitmer issued executive orders in March that limited its two restaurants to takeout and delivery orders.

At a hearing in the Judicial Panel on Multidistrict Litigation to determine whether to roll such suits into an MDL, attorneys called "direct physical loss or damage" the "five simple words" that were a common thread throughout the suits.

Rose's 1 is represented by Michael C. Davis, David L. Feinberg and Mary M. Gardner of Venable LLP.

Erie is represented by Jessica E. Pak and George E. Reede Jr. of Niles Barton & Wilmer LLP.

The case is Rose's 1 LLC et al. v. Erie Insurance Exchange, case number 2020 CA 002424 B, in the Superior Court of the District of Columbia, Civil Division.

--Additional reporting by Jeff Sistrunk. Editing by Daniel King.

Correction: This article previously said the judge denied Erie's arguments, when instead she denied Rose 1's arguments.

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