Litigation
Lost Business Income Caused by COVID-19 Covered by Insurance, Court Says
The Louisiana Fourth Circuit Court of Appeal held that an all-risks insurance policy covered lost business income caused by pandemic disruptions.
By Bradley C. Guin
4 min read
Is lost business income caused by COVID-19 disruptions covered by insurance? Since the start of the pandemic, this question has plagued court systems across the country. And, generally speaking, the majority view has been that this type of loss is not covered, since insurance policies require “direct physical loss or damage” to the insured property. See Business Interruption Insurance FAQ, La. Dep’t Ins., https://www.ldi.la.gov/consumers/insurance-type/healthinsurance/bi-insurance-faq/ (last visited June 19, 2022). But in a recent decision from the Louisiana Fourth Circuit Court of Appeal, the court found that this policy language was ambiguous in the context of viral contamination.
In Cajun Conti LLC v. Certain Underwriters at Lloyd’s, London, 21-0343 (La. App. 4 Cir. 6/15/22), ___ So. 3d ____, 2022 WL 2154863, a restaurant owner was forced to close its restaurant at the start of the COVID-19 pandemic. Id. at *2. While it eventually reopened, the restaurant operated under capacity due to pandemic restrictions. Id. The restaurant owner sued its insurer for a declaration that its all-risks insurance policy provided coverage for lost business income as a result of continuous contamination by COVID-19 Id. at *1. The insurer argued that contamination due to COVID-19 did not constitute “direct physical loss or damage.” Id. The trial court agreed, ruled for the insurer, and the plaintiff appealed. Id.
In a 2–1–2 decision (two in the majority, one concurrence, and two dissents), the Fourth Circuit held that the policy language “direct physical loss or damage” was ambiguous and capable of more than one reasonable interpretation with respect to the coverage of lost business income. Id. The insurer argued that the loss itself must be “physical,” in that there must be a tangible or corporeal loss of property or damage. Id. at *5. For example, a car crashing into the restaurant would constitute direct physical loss or damage under the insurer’s interpretation. In disagreeing with this view, the Fourth Circuit explained two competing interpretations of the policy language: “One reasonable interpretation of the provision is that suspension of business operations due to ‘direct physical loss of or damage to the property’ means the loss of the property’s full use . . . .” Id. at *5. According to the court, the restaurant owner was unable to fully use the insured property due to viral particles inside the property. Id. Specifically, “[t]he physical presence of these viral particles necessitated diminished capacity, constant decontamination efforts, and caused a slowdown of their business.” Id. (emphasis added).
On the other hand, the court recognized that “[a]nother reasonable interpretation of the provision is that the suspension of business operations due to ‘direct physical loss of or damage to the property’ requires the full loss of the property’s use . . . .” Id. at *6. Under this scenario, the restaurant owner would be required to shut down the restaurant completely for a period of time to qualify for coverage. Id.
The Fourth Circuit also noted that the word “loss” underscored the ambiguity in the phrase “direct physical loss or damage.” Id. The court referred to several dictionary definitions of “loss,” one of which defined “loss” as an inability to have something or to have less of something. Id. Another dictionary defined “loss” in terms of destruction or ruin. Id. Based on these two interpretations—and the differing definitions of “loss”—the Fourth Circuit found that the insurance policy was ambiguous and construed that ambiguity against the insurer as the drafter of the policy. Id. at *7. Since the policy was found to be ambiguous, the court considered evidence outside the four corners of the policy (also known as “parol evidence”) to conclude that the restaurant owner reasonably believed that the policy covered this type of loss. Id. at *7. Ultimately, the Fourth Circuit reversed the judgment of the trial court and held that coverage existed for loss or damage caused by “direct physical loss of or damage to” the restaurant owner’s insured premises as a result of COVID-19 contamination. Id. at *8.
While likely to be appealed, the Fourth Circuit’s decision in Cajun Conti may increase the likelihood that other courts find coverage for lost business income caused by COVID-19 disruptions.
You can view the court’s decision below:
In Cajun Conti LLC v. Certain Underwriters at Lloyd’s, London, 21-0343 (La. App. 4 Cir. 6/15/22), ___ So. 3d ____, 2022 WL 2154863, a restaurant owner was forced to close its restaurant at the start of the COVID-19 pandemic. Id. at *2. While it eventually reopened, the restaurant operated under capacity due to pandemic restrictions. Id. The restaurant owner sued its insurer for a declaration that its all-risks insurance policy provided coverage for lost business income as a result of continuous contamination by COVID-19 Id. at *1. The insurer argued that contamination due to COVID-19 did not constitute “direct physical loss or damage.” Id. The trial court agreed, ruled for the insurer, and the plaintiff appealed. Id.
In a 2–1–2 decision (two in the majority, one concurrence, and two dissents), the Fourth Circuit held that the policy language “direct physical loss or damage” was ambiguous and capable of more than one reasonable interpretation with respect to the coverage of lost business income. Id. The insurer argued that the loss itself must be “physical,” in that there must be a tangible or corporeal loss of property or damage. Id. at *5. For example, a car crashing into the restaurant would constitute direct physical loss or damage under the insurer’s interpretation. In disagreeing with this view, the Fourth Circuit explained two competing interpretations of the policy language: “One reasonable interpretation of the provision is that suspension of business operations due to ‘direct physical loss of or damage to the property’ means the loss of the property’s full use . . . .” Id. at *5. According to the court, the restaurant owner was unable to fully use the insured property due to viral particles inside the property. Id. Specifically, “[t]he physical presence of these viral particles necessitated diminished capacity, constant decontamination efforts, and caused a slowdown of their business.” Id. (emphasis added).
On the other hand, the court recognized that “[a]nother reasonable interpretation of the provision is that the suspension of business operations due to ‘direct physical loss of or damage to the property’ requires the full loss of the property’s use . . . .” Id. at *6. Under this scenario, the restaurant owner would be required to shut down the restaurant completely for a period of time to qualify for coverage. Id.
The Fourth Circuit also noted that the word “loss” underscored the ambiguity in the phrase “direct physical loss or damage.” Id. The court referred to several dictionary definitions of “loss,” one of which defined “loss” as an inability to have something or to have less of something. Id. Another dictionary defined “loss” in terms of destruction or ruin. Id. Based on these two interpretations—and the differing definitions of “loss”—the Fourth Circuit found that the insurance policy was ambiguous and construed that ambiguity against the insurer as the drafter of the policy. Id. at *7. Since the policy was found to be ambiguous, the court considered evidence outside the four corners of the policy (also known as “parol evidence”) to conclude that the restaurant owner reasonably believed that the policy covered this type of loss. Id. at *7. Ultimately, the Fourth Circuit reversed the judgment of the trial court and held that coverage existed for loss or damage caused by “direct physical loss of or damage to” the restaurant owner’s insured premises as a result of COVID-19 contamination. Id. at *8.
While likely to be appealed, the Fourth Circuit’s decision in Cajun Conti may increase the likelihood that other courts find coverage for lost business income caused by COVID-19 disruptions.
You can view the court’s decision below: