On October 6, 2020, U.S. District Judge Thomas Thrash Jr. issued Georgia’s first COVID-19 business interruption insurance decision, finding Governor Brian Kemp’s State of Emergency Executive Order did not cause “physical loss of” the policyholders’ closed dining rooms. Henry’s Louisiana Grill, Inc. et al. v. Allied Ins. Co. of Am., No. 1:20-cv-2939-TWT (N.D. Ga. Oct. 6, 2020). The decision takes an unusually narrow view of the phrase “loss of,” as it is used in the policy and, consequently, reaches a conclusion that is inconsistent with how other courts have analyzed the phrase.

In their briefing on the insurers’ motion to dismiss, the parties asked the Court to address three issues: (1) whether the Governor’s Executive Order caused “direct physical loss of” the policyholders’ dining rooms, (2) whether the policyholders plausibly alleged coverage under the policy’s Civil Authority provision, and (3) whether the policy’s “Virus or Bacteria” exclusion precluded coverage for the policyholders’ claim.

Georgia Contract Interpretation Process

Before delving in, the Court stated step one of the three-step process Georgia courts undertake in the construction of a contract, which is “to determine if the instrument’s language is clear and unambiguous.” (Order, p. 6) (citing Am. Empire Surplus Lines Ins. Co. v. Hathaway Dev. Co., 288 Ga. 749, 750 (2011)). If so, “the language is unambiguous, the court simply enforces the contract according to its terms, and looks to the contract alone for the meaning.” Id. The Court did not provide the final two steps of the process, which are:

[Second,] if the contract is ambiguous in some respect, the court must apply the rules of contract construction to resolve the ambiguity. Finally, if the ambiguity remains after applying the rules of construction,the issue of what the ambiguous language means and what the parties intended must be resolved by a jury.

RLI Ins. Co. v. Highlands on Ponce, 280 Ga. App. 798, 800-801 (2006).

Whether the Governor’s Executive Order caused “direct physical loss of” covered property

The Court began its analysis with the key phrase: “direct physical loss of or damage to” covered property. The insurer took the position that the phrase requires “some form of physical change” to property. The policyholders argued that the phrase is satisfied if their property is no longer physically available to patrons.

Both parties cited to AFLAC, Inc. v. Chubb & Sons, Inc., 260 Ga. App. 306 (2003). In AFLAC, the insured sought coverage for expenses related to software updates made in preparation for potential Y2K losses. While acknowledging the general dearth of Georgia cases and the specific difference in underlying facts, the Court acknowledged that AFLAC supplied some relevant terms:

• “[O]r” in this context is a coordinating conjunction connecting “loss” and “damage” such that “direct physical” modifies both “loss” and “damage.” Id. at 308 (citing Harbrace College Handbook, (11th ed.)).

• “Direct” means “without intervening persons, conditions, or agencies; immediate.” (citing The American Heritage Dictionary, (2nd college ed. abridged, Dell, 1985); see also Merriam-Webster.com Dictionary (defining “direct” as “stemming immediately from a source”).

The Court looked to Black’s Law Dictionary and Merriam-Webster for definitions of other policy terms:

• “Loss” means “the disappearance or diminution of value” (Black’s Law Dictionary) and “the act of losing possession” (Merriam-Webster.com Dictionary).

• “Damage” means “loss or injury to person or property” (Black’s Law Dictionary) and “loss or harm resulting from injury to person, property, or reputation” (Merriam-Webster.com Dictionary).

The AFLAC court, taking these words together, found the phrase “contemplates an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so.” AFLAC, 260 Ga. App. at 308.

Applying AFLAC, the policyholders argued that the Governor’s Executive Order caused a physical change that rendered the once-satisfactory dining rooms “unsatisfactory.” The Court deemed this argument “curious”: “Under the Plaintiffs’ logic, a minute before the Governor issued the Order, the dining rooms existed in one state. A minute later, the Governor issued the Order, and the restaurant underwent a direct physical change that left the dining rooms in a different state.” (Order, pp. 9-10).

The Court went on to find no coverage for three reasons. First, the loss was not “immediate” because the policyholders made the “prudent” choice to close their business. That decision was an intervening (not immediate) cause of loss separate from the Order, which did not impose limitations on the business.

Second, the Court expressed concern that finding a physical loss here would “massively expand” the scope of coverage to include “the negative effects of operational changes resulting from any regulation or executive decree, such as a reduction in a space’s maximum occupancy.” Id. at p. 11.

Finally, the Court dismissed the policyholders’ argument that “loss of” must include loss of use not requiring damage, otherwise “damage to” would be surplusage, which is disfavored under Georgia law. Looking to the dictionary and the “period of restoration” provision, the Court found that “loss of” and “damage to” did mean different things, but “loss of” meant “complete destruction,” and “damage is any other injury requiring repair.” Id. at p. 12. “Loss of,” therefore, did not include loss of use.

Whether the policyholders plausibly alleged coverage under the policy’s Civil Authority provision

The Court also found that the claim did not trigger the policy’s Civil Authority coverage for three reasons. First, the Order did not prohibit access to the insured property; it merely “advised” citizens to stay home. Second, the policyholders did not allege that the areas “immediately surrounding” the insured properties were blocked by the Order or that those areas had been damaged by COVID-19. And third, the policyholders did not allege that the Order’s access limitations resulted from COVID-19 or were necessary to allow the civil authority access to the area.

Whether the policy’s “Virus or Bacteria” exclusion precluded coverage for the policyholders’ claim

The Court declined to address the policy’s “Virus or Bacteria” exclusion, finding the policyholders had not pleaded sufficient facts to support a claim for coverage.

After granting the insurer Allied’s motion to dismiss, the court decided not to certify the question to the Georgia Supreme Court, because the policy’s unambiguous language did not generate substantial doubt regarding the status of state law.

Lessons Learned

While insurers will trumpet Henry’s as a victory, like so many of these cases being decided in the insurers’ favor, Henry’s provides policyholders a roadmap to coverage. It is critical to allege the actual presence of the virus on insured property. The policyholders did not do so here, likely in an effort to plead around the virus exclusion. If they had, though, the Court implied this case might align more closely with those cases finding physical loss. See, e.g., Studio 417, Inc. v. Cincinnati Ins. Co., Civ. A. No. 20-cv-03127, 2020 WL 4692385 (W.D. Mo. Aug. 12, 2020).

However, the Court went further than most decisions in defining “loss of” to mean “total destruction” of property, even though one of the definitions of “loss” was the “disappearance of value,” which was surely true of the policyholders’ dining rooms after being rendered unusable by the Governor’s Executive Order. That finding is out of step even with courts that have applied AFLAC. For example, a New Jersey federal court found that an ammonia discharge in a manufacturing facility constituted “direct physical loss of or damage to” the facility because it “physically rendered the facility unusable for a period of time.” See, e.g., Gregory Packaging, Inc. v. Travelers Prop. & Cas. Co. of Am., 2014 WL 6675934, at *7 (D. N.J. Nov. 25, 2014). The Gregory Packaging court, which also found New Jersey law to be substantively identical to Georgia law, found this result consistent with AFLAC’s premise that “loss of” includes a condition that changes a facility from “a satisfactory state for human occupancy” to an “unsatisfactory” state requiring remediation.

Other courts, citing Gregory Packaging, have found that COVID‑19 can cause physical loss under commercial property policies, lending further support to the policyholder’s reasonable interpretation of Georgia law. Blue Springs Dental Care, LLC, et al. v. Owners Ins. Co., No. CV-00383 (W.D. Mo. Sep. 21, 2020); Optical Services USA/JC1 v. Franklin Mutual Ins. Co., No. BER-L-3681-20 (N.J. Super. Ct. Bergen Cty. Aug. 13, 2020); K.C. Hopps, Ltd. v. The Cincinnati Ins. Co., 20-cv-00437 (W.D. Mo. Aug. 12, 2020); Studio 417, Inc., et al. v. The Cincinnati Ins. Co., No. 20-cv-03127 (W.D. Mo. Aug. 12, 2020).

Finally, although the Court acknowledged that the Governor’s Executive Order was issued to manage the “already present threat” of COVID-19, the Court did not consider whether the threat of COVID-19 itself could constitute physical loss of property.

Given the policyholders’ decision not to plead the presence of COVID-19 on their property and the Court’s exceptionally narrow interpretation of “loss of,” it is likely that Henry’s is not the last word on COVID-19 coverage in Georgia.