Type: Law Bulletins
Date: 03/17/2021

Indiana COVID-19 Business Interruption Case Raises Questions About "Physical Loss"

The first round, and certainly not the last, of an Indiana COVID-19 business interruption insurance claim went to an insurance company. In Indiana Repertory Theatre, Inc. v. Cincinnati Casualty Co., the Indiana Repertory Theatre (IRT) pursued a business interruption insurance claim against Cincinnati on grounds that the theatre was required to close in response to government shutdown orders resulting from the coronavirus pandemic. The IRT believed its claim was covered because Cincinnati’s policy covered all risks of loss unless specifically excluded, and the policy did not have either a virus or pandemic exclusion. An Indiana trial court, however, held that the IRT failed to prove that it suffered an “accidental physical loss or accidental physical damage” so as to trigger insurance coverage because there was no evidence that the virus was present in the theatre or that the virus caused damage to the IRT’s covered property or rendered it unusable.

The court’s decision turned on the policy’s requirement for a “physical loss” needed to trigger coverage. The insurer, not wanting to pay the claim, argued that the undefined term “physical loss” required the policyholder to prove that its insured property suffered an “alteration.” It further argued that because the virus is incapable of physically altering property, the IRT was not entitled to coverage.

Indiana law requires that undefined words in an insurance policy be given their ordinary meaning. To this end, courts regularly look to dictionaries to gain such an understanding. One would be hard pressed to find an ordinary dictionary defining the word “loss” in terms of an “alteration,” although that term has been used when describing “damage.” The insurer’s argument that “loss” requires that the insured property be physically “altered” is essentially claiming that the phrase “physical loss” requires “physical damage.” But those terms must mean something else or, as an Ohio federal court recently put it, why would both phrases appear side-by-side separated by the disjunctive conjunction “or”? Henderson Road Restaurant Systems, Inc. v. Zurich Am. Ins. Co., No. 1:20-CV-1239, 2021 WL 168422 (N.D. Ohio Jan. 19, 2021). Instead, dictionaries define a “loss,” in part, in terms of being deprived of one’s property. The IRT argued that the shutdown orders deprived the theatre of use of its seating, refreshment areas, and other spaces for their intended purpose. The shutdown orders forbade the IRT from physically using its property for its intended purpose, which may be considered a “physical loss.”

Other courts have decided this same issue in favor of policyholders. In a recent ruling in the Society Insurance Multi-District Litigation (MDL) pending in an Illinois federal court, the court reasoned that “the pandemic-caused shutdown orders do impose a physical limit: the restaurants are limited or prevented from using much of their physical space. It is not as if the shutdown orders imposed a financial limit on the restaurants by, for example, capping the dollar-amount of daily sales that each restaurant could make. No, instead the Plaintiffs cannot use (or cannot fully use) the physical space. Indeed, the policy defines ‘covered property’ to include buildings at the premises, not just personal property of movable items.” In re: Society Ins. Co. COVID-19 Business Interruption Protection Ins. Litig., MDL No. 2964, 2021 WL 679109 (N.D. Ill. Feb. 22, 2021). Similarly, the Indiana shutdown orders prevented the IRT from using its physical space for its intended purpose of hosting guests, so as to arguably result in a direct “accidental physical loss” to trigger coverage.

The Indiana trial court also relied on a provision pertaining to quantifying a business income loss as a basis for its coverage determination. The policy language allows policyholders to only recover lost business income during the “period of suspension” that ends when the covered property is repaired, rebuilt, or replaced. The court reasoned that because the policyholder failed to show that the covered property suffered a physical loss (in terms of an alteration), and nothing had to be repaired, rebuilt, or replaced, there was no coverage.

However, as the court explained in the Society Insurance MDL ruling, “first and foremost, the ‘period of restoration’ describes a time period during which loss of business income will be covered, rather than an explicit definition of coverage. Instead, the explicit definition of coverage is that direct physical ‘loss of’ property is covered—not just ‘damage to’ property. Second, the limit on the ‘period of restoration’ does include the words ‘repaired’ and ‘replaced.’ There is nothing inherent in the meaning of those words that would be inconsistent with the characterization of Plaintiffs’ loss of their space due to the shutdown orders as a physical loss. If, for example, the coronavirus risk could be minimized by the installation of partitions and a particular ventilation system, then the restaurants would be expected to ‘repair’ the space by installing those safety features. As another example, if a restaurant could mitigate the loss caused by a percentage-capacity limit by ‘replacing’ some of its dining-room space by opening its adjacent banquet-hall room to increase the number of guests it could serve, then the restaurant would be expected to ‘replace’ the loss of space by doing so. So the definition of ‘period of restoration’ is consistent with interpreting direct physical loss of property to include the loss of physical use of the covered property imposed by the shutdown orders.” Id. The IRT likewise argued that an ordinary policyholder could conclude that the pandemic-caused shutdown orders forced the IRT to suspend its operations, and the loss will end when the suspension is lifted.

Finally, the court allowed the IRT an opportunity to determine if it can gather any proof of the virus being present at the theatre and resulting in damage before it makes its judgment final. The case was decided by an Indiana Commercial Court sitting in Marion County under Cause No. 49D01-2004-PL-013137 on March 12, 2021. Policyholders should not throw in the towel based on this ruling because other courts have ruled for policyholders on this issue. In addition, the case is likely to be appealed, and, as a trial court ruling, it does not establish a precedent for any other courts.

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