No Business Interruption Coverage During COVID-19 Shutdowns
Name: Gavrilides Management Co. v Michigan Insurance Co., Docket No. 20-000258-CB
Court/Judge: 30th Circuit Court, Ingham County – Judge Joyce Draganuck
Decided: July 1, 2020
The COVID-19 social distancing measures in Michigan and selective shutdowns pursuant to Governor Whitmer's Executive Orders have resulted in a vast influx of business income loss and business interruption claims under Commercial Property policies over the last few months. Michigan Courts had not interpreted whether business interruption coverage applies to income losses resulting from the shutdown. That was until July 1, 2020, when Judge Draganuck in Ingham County issued the first opinion when granting the defendant insurer's Motion for Summary Disposition in Gavrilides Management Co. v Michigan Insurance Co. ("Gavrilides"). The Summary Disposition hearing is available on YouTube through the following link: https://www.youtube.com/watch?v=Dsy4pA5NoPw&feature=youtu.be.
In Gavrilides, the plaintiff insured sued its insurer after denying its business interruption claim from the COVID-19 shutdown. Plaintiff owned two restaurants that were restricted to take-out and delivery. The subject policy extended coverage for "suspension of operations" resulting from physical loss or damage to the insured's property, and the plaintiff claimed this coverage applied to losses it incurred for having to restrict its operations due to the shutdown orders.
At the hearing, Plaintiff argued that the loss of use and loss of physical access due to the governor's orders constituted physical loss sufficient to trigger coverage for business interruption and losses resulting form civil authority. Plaintiff further argued that the subject policy covered losses resulting from governmental acts or decisions. Conversely, the defendant insurer argued that to establish direct physical loss or damage for coverage under the policy, there must be some physical alteration of or physical damage to the integrity of the building. The defendant also noted the plaintiff's admission that there was no such damage claimed, nor was the COVID-19 virus present in any way at the insured property locations.
Judge Draganuck agreed with defendant and issued an oral opinion from the bench granting its Summary Disposition Motion. The judge found that there was no coverage because there was no direct physical loss or damage to the insured property or to adjacent or nearby property. Specifically, the judge advised that plaintiff's arguments ignored the fundamental for coverage that there be a tangible physical loss or damage to property. Judge Draganuck further stated that the "virus exclusion" in the policy barred coverage even if physical loss was established.
IMPACT OF COVERAGE FOR COVID-19 BUSINESS INTERRUPTION CLAIMS
We will continue monitoring this case as the decision will likely be appealed since this a such a novel issue. As it currently stands, this is the first Michigan case to decide this coverage issue on its merits. In fact, Judge Draganuck's decision is being touted as the first case in the United States where a final judgment has been entered with respect to business interruption claims as a result of the COVID-19 shutdown.
The judge's opinion also can be argued to stand for the proposition that being physically unable to access the premises is not the same as direct physical loss or damage. However, plaintiff's admissions that COVID-19 was never present at the insured locations had a large impact on the ultimate ruling. Accordingly, it is important to note that Judge Draganuck did not address whether the direct physical loss or damage requirement would be met for a COVID-19 business interruption claim if COVID-19 is detected on the property.