Wow! Another COVID Decision in Ohio Favoring the Insured

Something must be in Ohio’s air. Another Ohio court recorded a pro-insured COVID decision on January 19, 2021.

In Henderson Road Restaurant Systems, Inc v. Zurich American Insurance Company, the United States District Court for the Northern District of Ohio Eastern Division decided that the business income policy may provide coverage for the restaurant chain’s business income losses for two key reasons:

• The policy requirement that the suspension of business must be caused by “…direct physical loss of or damage to property…” is potentially ambiguous; and
• The Loss of Use exclusion does not apply because loss of income naturally flows from loss of use, and if loss of use is excluded, business income coverage would essentially be illusory.

The Ambiguity of “…Direct Physical Loss of or Damage to Property…”

Is the business income policy requirement that the loss of income result from “…direct physical loss of or damage to property…” ambiguous? Ambiguity requires more than simply a difference of opinion. To properly debate ambiguities in policy language generally requires answering four questions:

“Yes” answers to questions “1.” and “2.” point to the possibility of ambiguity. “Yes” answers to questions “3.” and/or “4.” hint that ambiguity likely does not exist.

If ambiguity is possible, courts often make the final decision by:

In insurance contracts, every word matters. To decide whether the “…direct physical loss of or damage to property…” requirement is ambiguous, let’s review and define four undefined terms “direct,” “physical,” “loss” and “damage”:

• Direct: “Characterized by close logical, causal, or consequential relationship.” Synonyms: firsthand, immediate, primary, unmediated. Antonym: indirect (from Webster’s);
• Physical: “Having material existence; perceptible especially through the senses and subject to the laws of nature.” Basically, something physical is measurable by weight, motion and resistance. Black’s Law: “Pertaining to real, tangible objects.” Synonym: material. Antonym: nonmaterial, nonphysical;
• Loss: Black’s Law: “The financial detriment…caused by an insured property’s damage….” “The amount of an insured’s financial detriment by…damage that the insurer is liable for;”
• Damage: Black’s Law: “Loss…to…property especially physical harm that is done to something. By extension, any bad effect on something.” “Loss or harm resulting from injury to person, property, or reputation.”

Is the governmental order the “direct” or causally connected to the insured’s loss of income? Yes, it is. Minus the order, the insured would not have lost income.

Does the governmental order cause a “loss”? Yes, it does. The order was financially detrimental.

Can the governmental order be considered “damage”? No, unless the second part of the definition found in Black’s Law, “any bad effect on something” is applied very broadly. But this is almost and unreasonable stretch.

This leaves “physical.” Is a governmental order “physical”? The paper on which the order is written may be physical (if it’s even in hard copy form), but the order itself is not physical. An edict does not have physical properties. The effect of the order is not something that has physical properties and is not subject to the laws of nature – like a fire or windstorm is.

Read the supposed ambiguous phrase in context of its construction, paying attention to the conjunction “or” and there is no ambiguity. The policy responds when there is either “…direct physical loss of…” or “…direct physical damage to…” the insured locations. The insured suffered neither direct physical loss nor direct physical damage to the property.

In its attempt to support its reasoning for considering the phrase “…direct physical loss of or damage to property…” ambiguous, the court agreed with the plaintiff’s argument that, “…physical loss of the real property means something different than damage to the real property….” (see Henderson Road Restaurant Systems, Inc v. Zurich American Insurance Company pg. 18).

Simply, “loss of” and “damage to” are different degrees of physical destruction. “Loss of” means the building cannot be used in whole or in part and must essentially be rebuilt. “Damage to” potentially allows for the continued use of at least part of the building (one section of the building was damaged by fire, but the remainder of the building can potentially still be used). Essentially, “loss of” is a level of destruction that requires more than just repair while “damage to” allows for repair.

Either way, the loss of or damage to the building must result from a direct and physical event – a peril.

Because there is not “physical” loss of or “physical” damage to the building, there is no coverage. But even if, by some weird incantation, as in the subject case, a court concludes that an order constitutes “physical” damage, there is still one key fact – the business income policy is subject to the cause of loss form attached to the policy.

Although Zurich’s form is not available to review, ISO’s Causes of Loss – Special Form (CP 10 30) can be analyzed as an example. The CP 10 30 specifically states:

When Special is shown in the Declarations, Covered Causes of Loss means direct physical loss unless the loss is excluded or limited in this policy.

Notice how the form defines what qualifies as a covered cause of loss, “…direct physical loss unless the loss is excluded or limited in this policy.” This same requirement applies to the business income policy, there is no exception for the business income policy to which this form is attached. The loss must be caused by direct physical loss. Thus, coverage applies only when there is direct physical loss; the “loss of” versus “damage to” debate is somewhat nullified by the cause of loss form language.

One other fact to consider, the CP 10 30 contains additional exclusions applicable to only the business income form. An exclusion specifically relevant to this case (and others) is:

“We will not pay for:

(5) Any other consequential loss.”

“Consequential” means “following as a result or effect.” Black’s Law defines it in context as, “Flowing from a cause; resulting from a particular even or situation.” This seems to additionally intimate that there must be actual physical damage TO the building, not simply the inability to use the building because of a government order.

The loss of income is a consequence of the government order, not the required direct physical loss. More proof there is no coverage. (Again, this is ISO language; Zurich’s language is currently unavailable for review.)

Loss of Use Exclusion

Insurance Services Office’s (ISO’s) Causes of Loss – Special Form (CP 10 30) and the applicable Zurich policy contain essentially the same loss of use exclusionary wording.

ISO’s CP 10 30 specifically reads:

Zurich’s form is a bit more verbose, reading:

We will not pay for loss or damage caused by or resulting from loss of market, loss of use, or delay. This exclusion applies even if one of these excluded causes of loss was caused by or resulted from a “mistake” or “malfunction.”

Clearly neither form is designed or intended to cover a loss which has as its efficient proximate cause the loss of use. This is a “market condition” or “business” risk exclusion – a speculative risk exclusion. A speculative risk has three possible outcomes: 1) nothing, 2) something bad, or 3) something good.

Traditionally, insurance covers only Pure risk (meaning there are only two possible outcomes, something bad or nothing). The inability to use a property is a speculative risk unless the inability to use the property arises from a pure risk loss.

Given the facts of insurable risks, the court’s opinion of the loss of use exclusion is puzzling. In its ruling, the court states:

Zurich argues that this provision [loss of use] would not bar coverage when there is physical damage caused by a covered peril, such as a fire, that closes a restaurant while it is being repaired…. But that is not at all clear from a plain reading of the Loss of Market or Delay exclusion. In fact, this exclusion could be argued to exclude coverage if an insured lost the use of property. The Business Income Coverage provides that Zurich will pay for “loss of business income” sustained “due to the necessary suspension of operations caused by direct physical loss of or damage to property”. Here, the Loss of Use exclusion would vitiate the Loss of Business Income coverage…. Because the Policy must be read in its entirety and disputed terms interpreted in a manner calculated to give the agreement its intended effect, the “Loss of Use” exclusion does not exclude coverage under the Business Income coverage of the Policy.

Three reasons the court’s logic is – illogical:

• Efficient proximate cause. Both ISO’s a Zurich’s exclusionary wording excludes coverage when loss of use is the efficient proximate cause of the loss – “caused by or resulting from.” If the cause of income loss is solely the loss of use of the property, there is no coverage. When the efficient proximate cause of income loss is direct loss or direct damage from a covered cause of loss, the business income policy is triggered. Remember, insurance is for the results of a Pure Risk, including the loss of use from such pure risk loss (fire, wind lightning, etc.).
• Business income coverage is NOT a stand-alone coverage. Business income pays for the indirect loss (income) arising from a direct loss. Business income payments are not triggered until there is property damage (pointing back to the first misstep in the court’s decision regarding what constitutes property damage). Unless a property claim is made, a business income claim cannot be made. And if there is no direct loss claim paid (or payable), there can be no indirect loss.
• The breadth of coverage arising from the court’s interpretation is antithetical. If the court holds that the loss of use exclusion does not apply to business income claims, and that direct damage to the building (other than a closure or taking order) is not required, then payment for income loss would be owed if the bank foreclosed on the building. Coverage would be owed if the government condemned it. (Both of these arguments could also apply to the court’s interpretation of “direct physical loss of or damage to property.”)

If the court’s belief that the loss of use exclusion does not apply stands, the ramifications are significant. This coverage interpretation may lead to unimaginable unintended consequences. Appling this standard expands the breadth of coverage beyond traditional insurance to include speculative risks.

The Great Unknown – The Governmental Acts Exclusion

Not addressed in the court’s finding is whether Zurich’s policy contained the largely ubiquitous governmental acts exclusion. ISO’s property policy specifically excludes governmental actions or decisions:

Actions of a governmental body are specifically excluded. Any closure order is excluded. Further, the order does not create a direct physical loss as required by paragraph A in ISO’s Causes of Loss – Special Form (CP 10 30).

Defense attorneys should pay special attention to this exclusionary wording.

Microorganism Exclusion

Zurich’s policy contained a microorganism exclusion proprietary to their policy. Because this is largely proprietary, the court’s reasoning for denying the viability of this exclusion is not detailed in this whitepaper.

Primarily the court disallowed the application of the microorganism exclusion because the insured did not claim that the virus or any other organism caused the loss. It was a moot point in the mind of the plaintiff, and the court agreed.

The Fight Goes On

Finding for the plaintiff in this case strains or “tortures” the policy language, resulting in an expansion of coverage that a reasonable person would not and should not expect. When the subject policy provisions are considered in context of the policy as a whole, the only reasonable conclusion is no coverage exists for losses caused government shutdown orders for COVID.

Reports are that the number of newly filed COVID-based business income cases is falling. Additionally, some plaintiffs have dropped their cases for various reasons. But the fight continues. Findings such as this do still make news. When they do, the industry perks up.

So far there does not appear to be a “cornerstone” insured’s win with the possibility to change the COVID coverage landscape moving forward. This ruling certainly does not qualify as such an event. But this finding does remind every insurance professional of one key fact, NOT EVERY INSURANCE POLICY IS THE SAME. It is about coverage; it’s about policy wording.