The Sixth Circuit again rejects covid-19 business interruption claims

Less than two months after his decision in Santos Italian Café LLC v. Acuity Insurance Co., 15 F.4th 398 (6th Cir. 2021), the United States Court of Appeals for the Sixth District reissued a ruling finding that COVID. it does not cover -19 in connection with business interruption claims. The Dakota Girls, LLC v Philadelphia Indemnity Insurance Co., No. 21-3245 (Cir. 6 November 5, 2021) case involved several preschools that suffered lost profits when the Ohio government ordered childcare programs to be discontinued for the following reasons of the COVID-19 pandemic from around March to May 2020.

Dakota Girls relied on four levels of coverage to apply for coverage under a policy issued by the Philadelphia Indemnity Insurance Company: (1) building and home ownership coverage that covered “direct physical loss of or damage to insured property”; (2) Operating Income Coverage, which covered loss of income from a “suspension” of “operations” during the “recovery period” caused by [the] direct physical loss … or damage; “(3) civil coverage that responded to loss of income and expenses resulting from a government order prohibiting access to insured property due to damage elsewhere; and (4) a communicable disease and waterborne disease prevention plan that covers loss of income and expenses arising from an order to shut down in response to “an actual illness in the insured premises”. The district court ruled that none of these provisions afforded protection to the Dakota Girls, and the Sixth District upheld it.

The court recognized that Dakota Girls’ claims for coverage under the business and personal property, business income and civil law provisions all required either the “loss” or “damage” of property, whether in or out of the property covered other property near the covered property. Dakota Girls argued that “direct physical loss” includes the loss of use resulting from the shutdown order and that COVID-19 itself was “surface damage” in the properties of the preschools. The Sixth District rejected this argument, arguing that the business revenue foregone as a result of the COVID-19 pandemic and related government restrictions did not constitute “direct physical loss or damage to insured property” for the purposes of the policy. The court reviewed matters de novo, took note of the precedent of the Santo and applied Ohio law and upheld the district court’s judgment. The Sixth District agreed that without a significant change in the condition of the property, no “damage” and no “loss” could have occurred without expropriation or destruction of the property.

That left only the provision for communicable diseases and waterborne pathogens, which covered losses incurred if the government shut down operations “because of an outbreak of a communicable disease or a water-borne pathogen causing an actual disease the described premises[.]“The court recognized and agreed that COVID-19 is a ‘communicable disease’. In order to deal with coverage, the Court found that there were two interpretative issues to be resolved: (1) Will the acknowledgment simply be triggered when there is a shutdown order in response to a communicable disease found somewhere, or must the shutdown order in response to a communicable disease? take place? that caused a “real illness” in the premises? And (2) did Dakota Girls plausibly argue that the Ohio state shutdown order was due to an “actual” COVID-19 illness on their premises?

The court stated that “[r]to design communicable disease coverage so that no actual illness is required on the premises. . . would lead to serious inconsistencies within the policy. ”ID. at 7. Because Dakota Girls was not pleading COVID-19 or there was an “actual illness” in the preschools, or that anyone in the preschools had ever had COVID-19, the court ruled that this was not an option for coverage. ID card. at 8. Dakota Girls also made an implausible plea that the nationwide order was “directly” due to the outbreak of the coronavirus among the insured. “[n]or it could. ”ID. On the contrary, the orders were drawn up “as a prophylactic measure” to prevent widespread exposure to the virus, rather than in response to illness in a particular insured property. ID card.

Regarding the virus exclusion, the court ruled that there was no need to rule on it as Dakota Girls “never established its original right to be reported”. ID card. at 10.

Eventually, the court found that there was no bad faith complaint because a mere denial of coverage under Ohio law is not open to challenge, even if done in error. ID card. “Dakota Girls has never shown that there was coverage at all, let alone that Philadelphia’s agents knew there was coverage or that the coverage was so obvious that it could not reasonably be denied,” the court said. ID card.

Despite the “unique challenges” faced by companies like Dakota Girls, the court found that such challenges “did not give us permission to rewrite the simple terms of an insurance policy to provide applicants with a form of coverage for which they would never contract completed. ” ID card. (citing Santos).

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