A trial court judge in Lansing, Michigan handed a victory to insurers in what may be the nation’s first final ruling on the question of whether a property insurer is liable for financial damages caused by a coronavirus closure order. See Gavrilides Management Company v. Michigan Insurance Company. This case arose after Michigan’s governor enacted a shelter in place order that restricted business to dine-in only. As a result, Nick Gavrilides, owner of the Soup Spoon cafe in Lansing and The Bistro in nearby Williamston, submitted a claim to Michigan Insurance, a subsidiary of Donegal Group Inc., for $650,000 for business interruption. The plaintiffs argued that coverage was due under the civil authority provision of the policy and that a virus exclusion in the policy was void because it was ambiguous.
The insurer filed a motion for summary disposition asking the Michigan Court to rule as a matter of law that its policy did not provide coverage for business interruption losses caused by COVID-19 shelter-in-place order. The judge agreed with the insurer. The hearing on the motion is posted on YouTube.
During the hearing, Michigan Insurance Company argued that the policy provided coverage only for direct physical loss of or damage to the insured’s properties and noted that missing from the insured’s Complaint was any allegation that the property had been damaged. Rather, the insured only focused on the governor’s shelter-in-place order that prevented physical access to the restaurants, causing it to lose income. In the hearing, the insurer’s attorneys argued that nothing in the governor’s order prevented access to the insured’s properties. In fact, the insured was able to enter the properties and operate as restaurants, but only for take-out orders. The insurance company’s attorneys also focused on the affidavit submitted by Mr. Gavrilides in which he admitted that there was no physical damage to its locations and that at no time had the virus entered the insured locations.. As a result, the insurer argued that there was no physical loss because the property existed in the same condition as it did before the shelter-in-place orders went into effect.
The judge ruled from the bench and explained that coverage is provided for actual loss of business income sustained during a suspension of operations, which must be caused by direct physical loss of or damage to property. With this framework, the Judge concluded that direct physical loss of or damage to the property “has to be something with material existence. Something that is tangible. Something . . . that alters the physical integrity of property.” Further, the loss of or damage must be caused by a covered cause of loss.
The Court agreed with the insurance company that the insured failed to allege in the Complaint any direct physical loss of or damage. According to the judge, a restriction preventing dine-in business is not the required direct physical loss of or damage to covered property. The Court further rejected the insured’s request to amend its complaint, finding that there were no facts that could change the fact that the business loss was not caused by a direct physical loss of or damage.
Next, the court addressed the policy’s coverage for losses caused by governmental acts. The judge held that the coverage provision required the same direct physical loss of or damage to covered property. Because there was no evidence or any allegation of such physical loss, there was no coverage under the governmental acts provisions of the policy.
Finally, the Court rejected the insured’s argument that the Virus Exclusion was vague. Even if the exclusion did not apply, the Court held that there still would be no coverage due to the lack of any alteration of the physical integrity of the property.
Of course, this decision is the first of many that will be issued by various courts but it’s an interesting example of where some business interruption claims might lead.
About Harrison Oldham
Harrison grew up in Mansfield, Texas. He attended Texas A&M University for his bachelor’s degree, where he met his wonderful wife, Kelsey. After graduating magna cum laude from Texas A&M, he attended SMU Dedman School of Law, graduating with honors in 2012. Today, Harrison and his wife live in Dallas, Texas with their son, Teddy.
Since graduating from SMU Law, Harrison has worked exclusively in the field of business law. He has spent time in private practice and in-house, working with clients of every size; from single person startups to Fortune 250 companies. Today his practice focuses on serving the diverse needs of businesses and individuals throughout Texas. You can learn more about Harrison by visiting his website, at: http://