Lloyd’s: COVID Business Interruption Claims Require Physical Loss

A London insurer gave hints of how the industry will fight a series of lawsuits in one of the first responses to business interruption insurance claims related to COVID-19.

Certain Underwriters at Lloyd's London is the defendant in a Florida lawsuit brought by Prime Time Sports Grill, a Tampa restaurant. Similar to defendants in many other lawsuits across the country, Lloyd's London denied Prime Time's business interruption insurance claim.

The Lloyd’s underwriter argues that the policyholder failed to allege facts showing direct physical loss to the insured property to trigger coverage. It points out that the policyholder’s allegation that the Florida governor ordered the restaurant to close for 30 days, even if true, does not meet the direct physical loss requirement.

Prime Time was shut down March 17 by a statewide order issued by Gov. Ron DeSantis and filed a business interruption claim soon afterwards. Lloyd's denied the claim March 23 and Prime Time filed its lawsuit April 2.

"Loss of business Income and operating expenses is specifically covered under the policy, and governmental suspension as a result of COVID-19 is not specifically excluded," the lawsuit said.

What constitutes a business interruption coverage event is expected to be the focal point of a drawn-out legal fight with potentially billions of dollars on the line.

'Direct Physical Loss'

The Prime Time policy requires that the loss of business income “must be caused by direct physical loss of or damage to property” at the insured premises.

Lloyd's goes on to argue that any amendment of the allegations is futile because there is no alternate basis for coverage due to the orders or the COVID-19 pandemic.

The insurer anticipates that the policyholder will argue that the COVID-19 pandemic has rendered the insured property uninhabitable and thus legally considered to have sustained a physical loss.

However, Lloyd's counters this possible theory of recovery by arguing that the orders actually encourage restaurants, like the policyholder, to remain open to provide delivery, carry-out, or curbside service. Furthermore, the insurer maintains that a physical loss is only found to an uninhabitable property where the uninhabitability is caused by a physical characteristic of the property -- not by an external condition that merely prevents access to the building.

Even if COVID-19 was actually found at the Prime Time property, the insurer argues that the building would require, at most, extra caution, cleaning, or sanitation to resolve the problem.

Lloyd's also argues against any civil authority coverage because it, too, requires physical damage to property. Even though the policyholder does have a government order limiting access to its premises, there is no physical damage to neighboring property (within one mile) as is required for coverage.

Ubiquitous Standard

The direct physical loss requirement for business interruption coverage is ubiquitous and standard for commercial property insurance policies, the law firm Goldberg Segella said in its analysis of the case.

"While some jurisdictions make distinctions in coverage depending on different phrasing and word usage, courts historically enforce the physical loss requirement," the firm said in a news release. "The purpose behind the requirement is to preclude coverage for income losses that are caused by external factors, such as bad weather, economic downturn, changes in consumer trends, etc., instead of by distinct, demonstrable, physical alteration of the property."

The physical loss requirement is important for COVID-19 claims because most business income losses likely relate only to government-imposed closures, social distancing, and/or stay at home orders.

"We have yet to review a COVID-19 claim in which a policyholder seeking business interruption coverage can show actual physical loss to the insured property," Goldberg Segella said.

In the Prime Time case, the insurer specifically argues that the claim involves only “the economic side effect of reduced sales stemming from" the governor's shut-down orders.

"We anticipate insurers will file similar motions in cases in other jurisdictions," Goldberg Segella said. "While each new COVID-19 case will present rulings and orders that will help shape the growing body of COVID-19 legal authority, it is important to understand the law that applies in the jurisdiction for a particular claim."

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.