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

The second case where a federal court has ruled in favor of restaurant owners in their claims made pursuant to their business interruption insurance policies is In Re Society Insurance Co., found here. However, in Society, the Court merely denied summary judgment to the insurer but did not rule that coverage existed at the early motions stage.

As in Henderson Road Restaurant Systems, found here, the federal court was presented with hospitality operators’ claims (this ruling is actually from consolidated multi-district litigation concerning Society Insurance policies) based on decreased restaurant business after several states restricted restaurant operations in response to the coronavirus pandemic. They, too, filed claims under their commercial insurance policies for loss of business income, which Society denied.   

As with Henderson Road, the Society Court focused on the language of the policy and the initial coverage grant, which included the “physical loss of or damage to property” language.  The policy also contained, albeit worded slightly differently, additional coverages for civil authority prohibitions and contamination. 

Looking at the primary coverage grant – loss of business income due to direct physical loss of or damage to property – the Court recognized, as with Henderson Road, the use of the disjunctive “or.” Based on this, the Court ruled that “physical loss of” implicates something different from “physical damage” and that plaintiffs “need not plead or show a change to a property’s physical characteristics.” The Court rejected Society’s arguments, which focused on the facts that the losses were not physical because the floors, chairs, tables, etc. remained in working order and that plaintiffs could still use the premises to conduct business.

Because the term “direct physical loss” was susceptible to different interpretations (ambiguous in legal parlance, and as discussed in Henderson Road), the Court permitted plaintiffs’ claims to proceed and noted that extrinsic evidence would be allowed.  This contrasts with the court in Henderson Road, which ruled that since the policy in that case was ambiguous, it would interpret it against the insurance company as the drafter of the document.

The Society Court did dismiss plaintiffs’ claims pursuant to the civil authority and contamination provisions.  Regarding civil authority coverage, it noted that the policy explicitly stated that such coverage would apply only if the civil authority prohibited (a) access to the premises and (b) surrounding area. This did not happen and, as such, the Court dismissed those claims. 

Likewise, the policy defines contamination as “a defect, deficiency, inadequacy, or dangerous condition in your products, merchandise[,] or premises.” That, too, did not occur.  Moreover, business interruption damages based on contamination require the additional element that a civil authority prohibit access, which, as noted above, was not present.  Because of these two deficiencies, the Court dismissed plaintiffs’ contamination claims.

 While most cases thus far have gone in favor of the insurer, Henderson Road and Society have given businesses a glimmer of hope and, just as important, provided a road map for future claims.