Oceana Grill contends that “contamination of the insured premises by the coronavirus would be a direct physical loss needing remediation to clean the surfaces of the establishment.”

In the first of what will likely be an exponentially growing tide of businesses turning to insurance coverage for financial relief from the economic downturn caused by the global coronavirus pandemic and response, on March 17, 2020, a restaurant filed a lawsuit seeking business interruption insurance coverage for alleged losses caused by executive orders issued by Louisiana Governor John Bel Edwards. In Cajun Conti LLC, et al. v. Certain Underwriters, et al., the plaintiff-restaurant (“Oceana Grill”) filed its lawsuit seeking coverage under an alleged “all risks” commercial property insurance policy that Oceana Grill purchased from the defendant-insurer. Oceana Grill alleges that the policy provides “property, business personal property, business income and extra expense, and ordinance or law coverage” caused by “all risks” unless specifically excluded (unlike a “specified” or “named” “perils” policy, which provides coverage for loss resulting from specific, named risks).

Oceana Grill contends that “contamination of the insured premises by the coronavirus would be a direct physical loss needing remediation to clean the surfaces of the establishment.” And, accordingly, it seeks a declaratory judgment that because its policy does not contain an “exclusion for a viral pandemic” the policy provides coverage under two theories. First, according to Oceana Grill, the policy provides coverage for loss caused by any “future civil authority shutdowns of restaurants in the New Orleans area due to physical loss from coronavirus contamination.” Second, according to Oceana Grill, the policy provides “business income coverage in the event that the coronavirus has contaminated the insured premises.”

Oceana Grill’s allegations repeatedly contend that the coronavirus is causing or threatening to cause “direct physical loss” to the premises; in particular, “contamination” that requires “clean[ing] the surfaces of the establishment.” “Direct physical loss or damage” is often a prerequisite to coverage. For example, the ISO “business income” form in commercial property insurance policies generally provides:

We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration.” The “suspension” must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit Of Insurance is shown in the Declarations…

Similarly, coverage under the “civil authority” portion of a commercial property insurance policy typically requires “direct physical loss or damage” and, in response to that loss or damage, the government issues an order restricting or preventing access to the insured’s premises.

Oceana Grill does not allege that its policy has a “contingent business interruption” provision, but some policies (subject to their terms, conditions and exclusions) provide coverage for damage caused by interruptions to others’ business (e.g., a disruption in the insured’s supply chain). See, e.g., Pentair. Inc. v. Am. Guar. and Liab. Ins. Co., 400 F.3d 613, 615 n. 3(8th Cir. 2005) (“The word ‘contingent’ is something of a misnomer; it simply means that the insured's business interruption loss resulted from damage to a third party's property.”) A policy providing “contingent business interruption” coverage might state, for example, that it covers loss:

[D]ue to the necessary interruption of business as the result of direct physical loss or damage of the type insured against to properties not operated by the Insured which wholly or partially prevents any direct supplier of goods and/or services to the Insured from rendering their goods and/or services[.]

See, e.g., Zurich Am. Ins. Co. v. ABM Indus., 397 F.3d 158, 162 (2d Cir. 2005) (emphasis added). While such a policy might provide coverage for losses caused by interrupted supply chains, the “direct physical loss or damage” requirement is still a prerequisite to coverage.

Even if an insured can demonstrate “direct physical loss or damage,” exclusions might apply to preclude coverage. For instance, while Oceana Grill contends that there is no “exclusion for a viral pandemic” in its policy, many policies contain exclusions for “bacteria” and “virus,” such as the aptly titled, “Loss Due to Virus or Bacteria” exclusion. That ISO form exclusion provides, in part:

We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.

Another virus-type exclusion provides:

We will not pay for loss or damage caused by or resulting from any of the following, regardless of any other cause or event, including a peril insured against, that contribute to the loss at the same time or in any other sequence:

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      10. The actual or suspected presence of any virus, organism or like substance that is capable of inducing disease, illness, physical distress or death, whether infectious or otherwise, including but not limited to any epidemic, pandemic, influenza, plague, SARS, or Avian Flu.

See, e.g., Meyer Natural Foods, LLC. v. Liberty Mutual Fire Ins. Co., 218 F. Supp. 3d 1034, 1037-1038 (D. Neb. 2016) (excluding coverage for “personal property of others” losses caused by beef contaminated with E. coli, under separate “contamination” exclusion).

As with almost every insurance coverage matter, the determination of whether coverage will be extended, excluded or limited depends on the particular policy’s terms, conditions and exclusions, and the facts of the case.

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