Insurers and policyholders long have debated whether business interruption insurance covers losses resulting from governmental orders – a debate intensified by numerous recent coverage claims arising from COVID-19 forced shutdowns of businesses and social distancing guidelines. Insurers now hail a recent decision from a Michigan state court as supporting their view that insurance policies provide no such coverage. They, however, overstate the ruling and its applicability outside of Michigan.

In Gavrilides Management Co. v. Michigan Insurance Co., Case Number 20-258-CB-C30, filed in the Thirtieth Judicial Circuit Court of the County of Ingham, Michigan, the owner of restaurants sought coverage for business income losses resulting from Governor Whitmer’s Executive Order precluding dine-in operations because of the coronavirus pandemic. On the insurer’s motion based on the pleadings, the court dismissed the policyholder’s lawsuit, finding no “direct physical loss of or damage to property” as the policy required. The court specifically held that under Michigan law, the phrase “direct physical loss” means something with “material existence,” that is “tangible,” or that “alters the physical integrity of the property.” The court also determined that while the policy provided coverage for the suspension of business due to an act of civil authority, such suspension must result from direct physical loss. The court found the policyholder failed to allege any direct physical loss of or damage to property. In fact, the policyholder alleged that COVID-19 had not entered the restaurants through an employee or a patron. For that reason, the court found no further factual development could create coverage and refused to permit the plaintiffs to amend their complaint. The court also rejected the policyholder’s argument that the virus exclusion was “vague.” The court held the virus exclusion would apply even if there existed direct physical loss of or damage to property.

Although the insurance industry already has begun pointing to this decision as supporting its denials of coverage for COVID-related losses, several reasons preclude broad application of this ruling. The terms of insurance policies vary, and some expressly cover communicable disease. Courts outside Michigan have found coverage where the insured suffers a loss of use of its property, even if the property incurs no physical damage. See, e.g., Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 968 A.2d 724 (N.J. Super. Ct. App. Div. 2009) (finding the term “physical damage” ambiguous and interpreting the same to include the loss of a property’s function); Total Intermodal Serv., Inc. v. Travelers Prop. & Cas. Co., 2018 WL 3829767, at *3 (C.D. Cal. July 11, 2018) (“[T]o interpret ‘physical loss of’ as requiring ‘damage to’ would render meaningless the ‘or damage to’ portion of the same clause, thereby violating a black-letter canon of contract interpretation – that every word be given a meaning.”); Hughes v. Potomac Ins. Co., 199 Cal. App. 2d 239 (1962) (“Despite the fact that a ‘dwelling building’ might be rendered completely useless to its owners, [the insurer] would deny that any loss or damage had occurred unless some tangible injury to the physical structure itself could be detected. Common sense requires that a policy should not be so interpreted in the absence of a provision specifically limiting coverage in this manner.”); Am. Guar. & Liab. Ins. Co. v. Ingram Micro, Inc., 2000 WL 726789 (D. Ariz. Apr. 18, 2000) (“‘[P]hysical damage’ is not restricted to the physical destruction or harm of computer circuitry but includes loss of access, loss of use, and loss of functionality.”); Dundee Mut. Ins. Co. v. Marifjeren, 587 N.W.2d 191 (N.D. 1998) (“Clearly, without qualification, the term ‘damage’ encompasses more than physical or tangible damage.”); Gen. Mills, Inc. v. Gold Medal Ins. Co., 622 N.W.2d 147 (Minn. Ct. App. 2001) (“[T]he District Court did not err in finding this to be an impairment of function and value sufficient to support a finding of physical damage.”).

Moreover, the Gavrilides ruling was driven by, and therefore limited to, the allegations of the involved complaint, which affirmatively alleged that no one with COVID-19 came onto the insured property, suggesting no SARS-CoV-2 (the viral particle that leads to COVID-19) on the premises. Given these affirmative allegations by the insured, the court did not address whether the “direct physical loss” requirement could be satisfied were the virus detected at the insured property. In that circumstance, even applying the stringent standard utilized by the Michigan trial court, there would be the “physical loss” required by the court – that is, a foreign substance that materially “exists.” Indeed, courts have found coverage in similar cases. See, e.g., Gregory Packaging, Inc. v. Travelers Prop. & Cas. Co. of Am., 2014 U.S. Dist. LEXIS 165232 (D.N.J. Nov. 25, 2014) (finding coverage for loss of use and functionality due to ammonia discharge); W. Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52 (Colo. 1968) (finding building’s saturation with gasoline vapors constituted direct physical loss; it could not be occupied or used).

The court’s finding as to the virus exclusion also has limited value, if any. Not only do policyholders’ factual circumstances vary, but so do their policies’ provisions, including coverage grants and exclusions. Careful attention must be paid to the exact language of an exclusion that provides the basis for a carrier’s denial of coverage. The insurer bears the burden of showing coverage is barred because of the application of an exclusion. In sum, this decision is not the insurers’ silver bullet as they now seem to claim. The construction of insurance policies is a matter of state law, and the insurers’ policy provisions are far from uniform. How a policy is interpreted also depends on the factual circumstances; here, the policyholder affirmatively alleged no persons on its premises had the virus, and no known virus particles were found there. Other courts may well find that Gavrilides is neither persuasive nor accurate, or find they are bound by precedent holding loss of use, value and function is physical loss or damage triggering coverage. As is always the case, policyholders must review their policies, consider what law controls and their unique circumstances of loss, and make informed decisions respecting their coverage rights.

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