Maybe not a landmark case, but this just released decision (August 31, 2021, U.S District Court, Miami) is important and affirming—especially for those in Florida who sell commercial property coverage or who counsel business owners on business income losses due to COVID. Johnson Strategies reached out to expert and JS contributor Barry Zalma, Esq. CFE for a summary, analysis and opinion. (See NOTE #4 below)
The Plaintiffs own Zest Restaurant in Miami. The Defendant is Lloyd’s of London. (See Note #1 below). Premiums were paid up and coverage was in effect at the time of the loss. (See Note #2 below) The Policy included a standard “Business Income and Extra Expense” insuring agreement, as follows:
We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration.” The “suspension” must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit [o]f Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss. (Emphasis added).
Acts of Governmental Authorities— Governor Ron DeSantis issued Executive Order 20-69 restricting public access to businesses and facilities deemed non-essential, including restaurants in South Florida. As a result, Zest was unable to welcome patrons and was required to drastically alter its property to reduce its operations to take-out and delivery. (See Note #3 below)
The Lawsuit-Zest sued seeking insurance coverage under the Policy for business interruption related to the COVID-19 pandemic. Lloyd’s filed a Motion to Dismiss, arguing that Zest Restaurant failed to allege any physical loss or damage. Zest alleged that it suffered physical loss and damage to its property because COVID-19 altered the property to an unsatisfactory and highly dangerous state, unusable, uninhabitable, and unfit for its intended purpose; this loss caused significant business income loss and extra expenses. Lloyd’s moved to dismiss the suit.
Discussion–First, Lloyd’s argued that Plaintiff’s allegations do not trigger coverage under the Policy. Specifically, that the Complaint fails to allege either “direct physical loss of our damage to” the insured property or a nearby property as to trigger coverage under the Policy’s Business Income and Civil Authority provisions. Second, Lloyd’s argued that coverage is barred by the Policy’s microorganism and pollution exclusions.
Insurance coverage cases under Florida law require courts to look at the insurance policy as a whole and give every provision its full meaning and operative effect. Insurance contracts are construed according to their plain meaning and courts begin their analysis by looking at the plain language of the policy, as bargained for by the parties.
To trigger coverage under the Business Income or Civil Authority provisions of the Policy, Plaintiff must prove that there was “direct physical loss of or damage to” the insured property or a nearby property while the Policy was in effect. There is no dispute that the alleged loss occurred while the Policy was in effect. Thus, a showing of direct physical loss of or damage to the property or a nearby property is the fundamental predicate to Plaintiff’s claims. Plaintiff’s Amended Complaint fails to meet this burden.
The Policy does not explicitly define “direct physical loss or damage.” A direct physical loss 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.
Zest alleged, creatively, that the presence of COVID-19 on the insured property physically altered the property from a satisfactory state to an unsatisfactory state, and it had to make substantial physical changes to the property “including the reconfiguration of seating, installation of plexiglass shields and sanitizer dispensers, and the enhancement of air filtration systems in response to the threat of transmission of the coronavirus from those coming in and out of the property.”
As a threshold matter, the mere presence of the virus on the physical structure of the premises does not amount to direct physical loss. The argument that the presence of COVID-19 made the property unsuitable for its intended purposes because it closed for business due to the pandemic does not establish the physical loss or damage required by the Policy. [Mena Catering, Inc. v. Scottsdale Ins. Co., 512 F.Supp.3d 1309, 1318 (S.D. Fla. 2021); see also Carrot Love, LLC v. Aspen Specialty Ins. Co., 513 F.Supp.3d 1364, 1367 (S.D. Fla. 2021).]
Secondly, the fact that Zest had to reconfigure furniture and make physical alterations to the layout of the property to avoid contamination of COVID-19 does not qualify as physical loss or damage. While the Court was sympathetic to the situation, it declined to depart from the prevailing consensus or rewrite the policy to provide a coverage neither party to the policy agreed to as a condition of indemnity.
The Court found, therefore, that Zest Restaurants allegations, even if taken as true, do not plausibly show direct physical loss or damage to the insured property or nearby property to trigger coverage and granted Lloyd’s motion for dismissal.
Zalma Opinion–people whose businesses were shut down as a result of governmental orders to reduce the spread of the Pandemic continue to try to get their losses covered by insurance with creative pleading claiming the existence of the virus damaged their property. They continue, with regularity, to fail. If the government orders acted to take the property of the various restaurants, like the plaintiffs, they have a remedy under the Fifth Amendment to the U.S. Constitution to obtain compensation for property taken by the government.
NOTE #1: Defendants Certain Underwriters at Lloyd’s, London moved to dismiss the Amended Class Action Complaint (the “Motion”) brought in Sun Cuisine, LLC d/b/a Zest Restaurant and Market, individually and on behalf of all others similarly situated v. Certain Underwriters at Lloyd’s London Subscribing to Contract Number B0429BA1900350 Under Collective Certificate Endorsement 350OR100802, No. 1:20-cv-21827-GAYLES/OTAZO-REYES, United States District Court, S.D. Florida (August 31, 2021)
NOTE #2: On February 23, 2020, Defendants issued a standard form ISO all-risk commercial property insurance policy to Plaintiff under which Plaintiff agreed to make premium payments in exchange for Defendants’ promise to indemnify Plaintiff for losses. Those losses include, but are not limited to, business income losses at the insured properties. The Policy provides coverage for the period between February 23, 2020, and February 23, 2021.
NOTE #3: On March 11, 2020, the World Health Organization (WHO) declared the COVID-19 outbreak a worldwide pandemic. Following the guidance from WHO, the Presidential guidelines and the act of former Miami-Dade County Mayor Carlos Gimenez who issued Emergency Order 03-20 on March 17, 2020, closing all restaurants in Miami-Dade County other than for delivery to slow the spread of COVID-19 through person-to-person and surface contact.
NOTE #4: Prior to publication we received the following note from Mr. Zalma.
I am now publishing the Zalma on Insurance blog posts and videos-in full text-on Substack. If you do not now receive Substack posts from me please subscribe, it’s free. Subscribe now. I am also considering further publications that will be available on Substack that will be available at no other location and would appreciate suggestions for new products. You can also subscribe to my blog at http://www.zalma.com.
Sincerely, Barry Zalma, Esq., CFE
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