Restaurants in Michigan, like many around the United States, were subject to stay-at-home orders that limited their ability to operate their business at the start of the COVID-19 pandemic. The executive orders in Michigan required restaurants to close or close for in-person dining while encouraging them to remain open and provide carry-out services. Naturally, these restrictions led to a loss of revenue. Some restaurants turned to their insurance companies to cover their losses, but two courts applying Michigan law – one state court and one federal court – recently ruled, within weeks of one another, that the losses the restaurants suffered as a result of the COVID-19 pandemic and Governor Gretchen Whitmer’s executive orders were not covered by their commercial insurance policies.

Michigan Court of Appeals

The first opinion came from the Michigan Court of Appeals and was issued on February 1, 2022. That case – Gavrilides Mgmt. Co., LLC v. Michigan Ins. Co. – involved the businesses that operated two restaurants in Michigan that were subject to the restrictions imposed by the executive orders. But the Court of Appeals held that the business income losses caused by the pandemic were not covered by the commercial policies, and even if they were, two exclusions barred coverage.

The court first held the policy did not cover the restaurants’ lost income because there was no direct physical loss or damage to property. Under the standard insurance form for a commercial property policy, the policy only promised to pay for lost business income if there were a suspension of the business’s operations “caused by a direct physical loss of or damage to property.” This did not describe the restaurants’ losses according to the court.

The court emphasized that the plaintiffs did not allege that their restaurants were contaminated by the virus, so their losses were based solely on the complete or partial shutdowns mandated by the executive orders. This did not result in any physical damage or change to the restaurants, and therefore did not cause any direct physical loss or damage covered by the policy.

The policy did not insure the business’s losses for another reason: the policy only covered a suspension of the business’s operations “during the ‘period of restoration’” and there was no period of restoration. This language, the court held, “expects the loss or damage to be amendable to some kind of physical remediation – either by making tangible alterations or repairs to the premises or by replacing the premises,” which was not the case here because “[no] alteration to, replacement of plaintiffs’ premises would have permitted the restaurants to open.”

The policy also did not provide coverage based on what the court described as the civil authority provision. This part of the policy covered losses when there was damage to a nearby property, leading a civil authority to prohibit the insured from accessing its property. This provision, however, did not apply because it required there to be damage to nearby property, which was not the case here.

Even if there was a direct physical loss or some other covered loss, the court held that two exclusions barred coverage. First, the Ordinance or Law exclusion applied, which removed coverage for “[the] enforcement of any ordinance or law … [regulating] the construction, use or repair of any property.” Because the lost income was caused by the enforcement of the executive orders and those orders regulated the use of the property, the court found this exclusion eliminated coverage.

Second, the policy had a virus exclusion that precluded coverage “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,” which the court found applied. If the restaurants suffered any covered loss, it could only have been caused by a virus. And because there is “no serious dispute that SARS-CoV-2 is a virus that induces disease,” the court said the exclusion had to apply.

U.S. Court of Appeals for the Sixth Circuit

In Brown Jug, Inc. v. Cincinnati Ins. Co., the Sixth Circuit issued its decision on February 23, 2022, and, similar to the Michigan Court of Appeals ruling, held that “direct physical loss” to property covers only tangible harm or damage to property, rather than mere loss of use. The plaintiffs, which included six Michigan-based businesses, operated restaurants that were covered by similar commercial property insurance policies in the early stages of the COVID-19 pandemic. Michigan’s stay-at-home orders restricted in-person activities at their facilities, which economically affected these businesses. To offset their losses, they submitted claims for reimbursement to their insurance carriers.

In determining whether the plaintiffs’ losses were covered under their respective policies, the court analyzed three separate policy provisions, which all included either a “direct loss” or “physical loss” requirement. Plaintiffs’ insurance would only kick in if a “loss” occurred. The issue was whether the plaintiffs’ economic losses constituted a physical loss or damage to their property.

The Sixth Circuit looked to Michigan law, but there was no decision from the state’s highest court on the issue, so it made an “Erie guess” and decided the case as it thought Michigan’s Supreme Court would rule if it were to address the issue. In doing so, the court determined that the COVID-19-related shutdown orders did not cause “direct physical loss or direct physical damage” to property because “a loss of use simply is not the same as a physical loss.” Although the plaintiffs alleged the pandemic caused economic harm to their businesses, they did not allege that covered property was harmed by the virus. Plaintiffs’ losses were simply not tangible, then, according to the court.

The plaintiffs further argued that the COVID-19 shutdowns created recoverable losses, citing government shutdown orders issued during the uprisings in Detroit in the summers of 1967 and 1968. In those cases, the plaintiffs’ businesses were not physically damaged, but Michigan courts still found that they suffered compensable losses under their business interruption insurance policies.

The Sixth Circuit, however, found that the 1960s shutdowns were dissimilar because those orders set curfews, closed all places of amusement and prevented access to businesses. The Michigan shutdown orders issued in 2020, on the other hand, permitted and encouraged businesses to remain operational. In other words, although access was limited, it was not prohibited.

Summary

In short, in the span of just a few weeks, state and federal appellate courts issued similar rulings and concluded that business losses caused by pandemic-related orders did not qualify as recoverable losses under the commercial policies issued to the subject businesses and under Michigan law. This appears to settle this issue under Michigan law, at least for now.