Two More Appeals Courts Rule Against Businesses in COVID-Interruption Suits

By | August 12, 2022
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Federal and state appeals courts in two Southeastern states have ruled against pandemic-affected businesses, adding to the list of decisions that have found that insurance policies cover only physical damages.

In South Carolina, the state Supreme Court this week became the fourth state high court in the nation to rule that the virus that causes COVID-19 cannot produce a direct physical damage or loss covered by a commercial property insurance policy.

The Court decided the issue by answering a certified question from a federal district court judge who is deciding a lawsuit filed by a chain of sports bars that were forced to close because of state public health orders.

“The contention that a government shutdown order caused direct physical loss or damage is meritless,” the court’s 5-0 opinion says. “While the order prohibiting indoor dining certainly affected Sullivan’s financial well-being, the order itself was not directly physical.”

High courts in Iowa, Massachusetts and Wisconsin have issued similar rulings, as have all of the regional U.S, Circuit Courts of Appeal.

Sullivan Management operates six Carolina Ale House establishments in South Carolina and one in Georgia. The company had to shut down in-person drinking and dining to comply with a March 17, 2020 order by South Carolina Gov. Henry McMaster. The mayor of Augusta, Georgia issued a similar order on March 21, forcing the closure of its establishment there.

Because of the lost income from the shutdown, the restaurant company filed a claim with Fireman’s Fund, a unit of Allianz Global Corporate and Specialty Insurance Co. The insurer rejected the claim, saying there was no physical loss or damage that was covered under the policy.

Sullivan filed a lawsuit in Richland County, South Carolina, and the suit was removed to federal court. Last October, U.S. District Judge Mary Geiger Lewis issued an order sending five certified questions to the South Carolina Supreme Court.

The Supreme Court answered only one of them, the threshold query as to whether SARS-CoV-2 can cause a direct physical loss or damage covered by the policy. Sullivan argued that it did because the virus was physically present on its property.

Also this week, the 4th U.S. Circuit Court of Appeals upheld a district court’s decision that Illinois Union Insurance Co. did not owe benefits to Golden Corral restaurants in North Carolina.

The appeals court cited its 2022 decision in a similar case, Uncork & Create vs. Cincinnati Insurance Co. and found that the insurance policy’s coverage for business income loss and other expenses did not apply to the restaurant’s claim for financial losses caused by the COVID pandemic, “in the absence of any material destruction or material harm to its covered premises.”

The court’s per curiam opinion also noted that “our holding is consistent with the unanimous decisions by our sister circuits, which have applied various states’ laws to similar insurance claims and policy provisions.”

The majority of court decision across the country have held that business-interruption and property policies do not allow coverage for COVID closings. State courts have dismissed 69% of lawsuits brought by policyholder businesses and federal courts have dismissed 86%, according to the University of Pennsylvania’s COVID litigation tracking site.

Claims Journal Editor Jim Sams contributed to this report.

Topics Lawsuits COVID-19 Numbers

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