Two Federal Courts Rule in Favor of Restaurant Owners Claiming Under Business Interruption Polices – Part One

Since the beginning of 2021, two federal courts have ruled in favor of restaurant owners in their claims made pursuant to their business interruption insurance policies.

The first is Henderson Road Restaurant Systems, Inc., v. Zurich American Ins. Co., decided by the federal court in the Northern District of Ohio, and can be found here. Henderson involves several restaurant owners who operate restaurants throughout the Midwest and who purchased business interruption insurance from Zurich American. After several states restricted restaurant operations in response to the coronavirus pandemic, the owners closed all but four restaurants in Ohio (with the remining four only providing carry-out) and filed claims under their commercial insurance policies for loss of business income, which Zurich denied.   

Plaintiffs ultimately filed a lawsuit in Ohio state court, which was removed to federal court.  Both sides filed motions for summary judgment arguing that the Zurich policy’s language favored their positions. Rejecting coverage, Zurich argued that

•           the economic losses were not covered by the policy’s primary coverage grant (all owners were covered under the same Zurich commercial insurance policy) because they were not caused by “physical loss or damage to property”;

 •           the coronavirus pandemic triggered the policy’s microorganism exclusion; and

 •           the civil authority provision in the policies (an additional coverage grant) did not apply because the state's orders permitted the plaintiffs to operate carry out and delivery and did not prohibit access to the premises, nor did it respond to direct physical loss or damage to the promises.

 Examining the policy, the Court first ruled that the language was ambiguous and, therefore, construed it against the insurer. The court carefully reviewed the coverage grant (the first step in any coverage analysis), which covers “direct physical loss of or damage to real property” (bold and italics mine) and agreed with plaintiffs that “physical loss of” must mean something different from “damage to” real property. Accepting the owners’ construction of the policy, the Court found that the other elements giving rise to coverage existed.

As to the policy's microorganism exclusion, the Court ruled that the government closures caused the actual loss, not the known or confirmed presence of coronavirus. Indeed, the parties stipulated that no restaurant was closed due to known or confirmed presence of coronavirus.

While most courts have ruled against insureds in these business interruption cases, the tide seems to be turning just a bit.