Trend or Anomaly? New Orleans Restaurant May Proceed with COVID-Related BI Claim
The COVID-19 pandemic in early 2020 and subsequent government lockdown periods forced businesses across the United States to close their doors for several months, including restaurants (which were among the hardest-hit sector). It’s estimated, according to the National Restaurant Association, that more than 110,000 restaurants closed for business, either temporarily or permanently, in 2020. Nearly 2.5 million jobs from pre-pandemic levels were erased. Moreover, restaurant and foodservice industry sales, according to the National Restaurant Association, fell by $240 billion to $659 billion in 2020 from an anticipated level of $899 billion.
Although government programs, including the Paycheck Protection Plan (PPP), were put into place to help restaurants stay afloat, these initiatives were insufficient to enable many establishments to remain open, while others were able to stay afloat by pivoting to food delivery, takeout, and outdoor dining.
Business Interruption Losses Abound with Most Cases Dismissed
In the wake of the pandemic, restaurants turned to insurance for financial recovery, seeking payment from Business Interruption (BI) policies for loss of income due to the mandatory shutdown. However, BI policies are designed to provide coverage for income loss and ongoing business expenses (such as payroll and utilities) as a result of physical damage, like a fire or a natural catastrophe, not because of a pandemic or virus.
Lawsuits against insurers were subsequently filed on behalf of restaurant owners as carriers denied claims, with the majority of court cases shut down due to the specific language requiring direct physical damage for coverage to respond in the BI policy form. Some courts ruled that the presence of the virus that causes COVID-19 cannot satisfy that requirement. Other court decisions have been based on the policy’s inclusion or exclusion of viruses. (Since 2020, most BI policies now specifically include a virus/pandemic exclusion.)
Is the Tide Turning?
There have been some cases that have turned the tide for claimants suing insurers for coverage. Recently, for example, the Louisiana Court of Appeals reversed the decision (3-2) of the lower court, allowing a restaurant to pursue its claim for COVID-related Business Interruption losses. The case involves Oceana Grill, a 500-seat restaurant in New Orleans owned by Cajun Conti LLC, versus Lloyd’s of London.
The initial lawsuit was filed in March 2020 with a bench trial in late 2020 rejecting Oceana’s request for declaratory judgment, which prompted the appeal. The appellate court, however, found the policy wording is open to interpretation and that physical damage did not have to be “obvious and observable.”
“The policy’s words anticipate a situation in which business losses can be covered by less than total destruction of the property or less than total loss of the property’s utility,” wrote Chief Judge Terri F. Love in the majority decision. According to the court, the term “loss” has multiple definitions.
The judge also pointed out that the insurer could have included a virus exclusion in the policy.
“The general manager of the appellants testified that he would not have purchased a policy that excluded coverage for viruses or bacteria because the company sold raw oysters to customers.” “His testimony sheds light on how the appellants reasonably interpreted the policy at the time of purchase,” wrote Judge Love.
Another judge agreed, but on the grounds that COVID-19 can cause direct physical harm.
As more cases continue to take shape, the insurance industry is looking to see if this recent ruling will pave the way for other appellate courts to agree. It’s worth watching.
Our RBTN Program
ISC MGA’s Restaurant, Bar, Tavern, and Nightclubs (RBTN) program provides competitive and comprehensive Liability and Property insurance coverage for insureds. Our program footprint spans the country, excluding Florida, New Mexico, Alaska, and DC, and is written with a carrier with an A- rating. Brokers who are already appointed with ISC can submit a completed supplemental application to rbtn@iscmga.com.