In Brown Jug, Inc v Cincinnati Ins Co, Nos 21-2644 et al, ___ F3d ___ (6th Cir Feb 23, 2022), plaintiffs, restaurants and entertainment venues, made claims against their policies with defendant, Cincinnati Insurance Company, for loss of income as a result of COVID-19 and related executive orders. The policies’ relevant provisions provided that defendant would compensate plaintiffs if, and only if, plaintiffs suffered a “direct physical loss or damage to” its covered property or if a loss to a nonpolicy holder’s property prevented access to plaintiffs’ property.
Definition of Loss
Directly at issue to the three policy provisions is the phrase “direct physical loss.” The policies defined loss as “accidental physical loss or accidental physical damage.” The court, noting that loss is partially defined as itself, turned to the Michigan Court of Appeals decision in Gavrilides Mgmt Co, LLC v Michigan Ins Co, No 354418, ___ Mich App ___, ___ NW2d ___ (Feb 1, 2022), for guidance, which construed “direct physical loss” in a commercial policy to require “some manner of tangible and measurable presence or effect in, on, or to the premises,” rather than a mere loss of use. Id. at *4.
Plaintiffs’ Failure to Demonstrate a “Physical Loss”
The plaintiffs in Brown Jug, Inc, alleged that
- COVID-19 caused tangible harm to individuals who entered affected restaurants and subsequently became infected;
- COVID-19 caused economic harm to the businesses because customers were unwilling or unable to patronize the establishments;
- COVID-19 caused physical loss and damage by destroying and physically altering property (such as surfaces) and by rendering the property unusable and unsafe, specifically, when droplets containing the virus landed on surfaces, they transformed them into a “fomite”; and
- money was spent on cleaning supplies and rearranging furniture after a COVID-19 outbreak.
Rejecting the first three arguments, the court ruled that plaintiffs failed to allege sufficient facts that COVID-19 caused a direct physical loss of or damage to their property or that the virus physically and directly altered property by its mere presence. This is true even for plaintiff, Brown Jug, who was the source of a COVID-19 outbreak, because it failed to demonstrate that property was lost or damaged in a manner that required it to suspend operations to “repair, rebuild, or replace” the establishment, a requirement under the policy. The court rejected the final argument, noting that cleaning and reconfiguring are precisely the kinds of losses that have previously been determined to not constitute physical or economic losses. See Universal Image Prods, Inc v Federal Ins Co, No 10-1564 (6th Cir Apr 10, 2012).
Loss to Other Properties and Effect of Executive Orders
The court next rejected plaintiffs’ argument that COVID-19 caused a loss or damage to properties “other than the covered property” under the civil authority provision of the policies, noting that plaintiffs’ complaints failed to allege more than conclusory statements that physical loss or damage to properties other than their own occurred.
Finally, the court rejected plaintiffs’ argument that shutdown executive orders signed by Governor Whitmer are analogous to the line of cases following the government shutdown orders issued during the 1960s riots in Detroit. In those cases, Michigan courts found that plaintiffs suffered a compensable loss under their business interruption policies. Distinguishing that line of cases, the Sixth Circuit ruled that the executive orders prevented the public from entering some buildings, but allowed for walk-up service, delivery, and other means of service; whereas the 1960s orders completely shut down plaintiffs’ businesses. Thus, access to the area immediately surrounding plaintiffs’ properties was limited, but not “prohibited,” as required by the civil authority provision.