On April 7, 2020, a Birmingham area restaurant doing business as “Ollie Irene” filed a Declaratory Judgment Action in the Circuit Court of Jefferson County, Alabama against Farmers Insurance Exchange, Inc. (“Farmers”)[1].  The Complaint is among the first of its kind in Alabama, and seeks a declaration that an Order of the Alabama State Health Officer (the “Order”), suspending dine-in services at restaurants due to the risks of the COVID-19 virus, caused a direct physical loss and damage to Ollie Irene’s premises, entitling Ollie Irene to coverage for loss of business income under its all-risk Commercial Insurance Policy with Farmers.  According to the Complaint, Farmers has denied coverage.

Ollie Irene is a fine dining restaurant, which prior to the Order only offered dine-in beverage and food services.  According to the Complaint, the Farmers’ policy covered “direct physical loss of or damage to Covered Property … caused by or resulting from any Covered Cause of Loss.”  Ollie Irene claims that the Order resulted in a direct physical loss of and damage to covered property, namely Ollie Irene’s premises, because it “deprived Ollie Irene of the value and function of its Premises, thereby impairing said Premises.”  Because a Covered Cause of Loss includes all “[r]isks of Direct Physical Loss,” unless excluded or limited, Ollie Irene claims that the direct physical loss resulting from impairment of its premises is a covered loss under the Farmers’ policy.

According to the Complaint, Farmers denied coverage on grounds that there was no direct physical damage or loss to Ollie Irene’s premises, that the Order did not prohibit dine-in services due to direct physical loss or damage to property other than at Ollie Irene’s premises, and that the policy excludes “loss or damage caused by or resulting from any virus that is capable of inducing physical distress, illness or disease.”

As to the virus exclusion, Ollie Irene contends it does not apply because Ollie Irene does not claim the damage to its property was caused by a virus, and its claim “is not based on the presence of COVID-19.”  Therefore Ollie Irene does not seek a determination of whether the COVID-19 virus is in its premises, or of the validity or merits of the State Health Officer’s Order.  Instead, according to Ollie Irene the damage was caused by “an act or decision” of government, and the relevant inquiry is simply “whether the alleged loss or damage was the result of or caused by an act or decision of government that is not otherwise excluded.”

The Farmer’s policy excludes coverage for loss or damage resulting from any “acts or decisions, including the failure to act or decide,” of any governmental body.  While the Order is a governmental act and therefore falls within this exclusion, Ollie Irene claims the policy contains an exception to this exclusion “if any excluded cause of loss … results in a Covered Cause of Loss.”  According to Ollie Irene, because the Order resulted in direct physical loss to Covered Property, it also resulted in a covered cause of loss, and therefore the exception applies and coverage exists under the policy.

It remains to be seen whether the court will find that the impairment to Ollie Irene’s property resulting from the Order suspending dine-in services constitutes a direct physical loss or damage to property under the Farmer’s policy.  There is no doubt, however, that these and similar insurance coverage issues will be raised throughout the country in the wake of numerous state orders limiting public gatherings and suspending commercial activities in the fight against the Coronavirus, and that their resolution will be of great consequence to insureds and insurers alike.

[1] Sharecropper LLC d/b/a Ollie Irene v. Farmers Insurance Exchange, Inc., in the Circuit Court of Jefferson County, Alabama, Civil Action No. CV-2020-901319.

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