Michigan Restaurants Lose Lawsuit Seeking Insurance Proceeds for Covid-19 Shutdown

The restaurant industry is already reeling from the effects of the pandemic. Now, a first of its kind case out of Michigan underscores the difficulties restaurants may have recovering under their insurance policies for Covid-19 related losses. The Michigan case is the first to opine on a direct Covid-19 coverage claim.

Gavrilides Management Co sued Michigan Insurance Co for $650,000 based on losses suffered due to government shut-down orders. Governor Whitmer had issued executive orders in March 2020 limiting restaurants to take-out and delivery orders. Business plummeted at Gavrilides’ two restaurants, and it sought recovery under its business interruption insurance.  Gavrilides sought recovery under the policy due to a suspension of operations caused by physical loss or damage.

The judge swiftly and emphatically dismissed the case.  She stressed the need to read the entire policy, not just cherry pick phrases. She then interpreted Michigan case law to find that direct physical loss or damage must be tangible. The loss or damage must alter the physical location. Here, however, Gavrilides alleged that it had lost use of its properties, not physical alteration to the restaurants’ integrity.  In addition, the judge dismissed as “nonsense” the argument that patrons had lost use of the restaurants, therefore creating physical damage.

The judge did note that the restaurant had no direct exposure to COVID-19 among the restaurant patrons or employees. Therefore, the case does not opine on coverage if there were evidence linking the virus physically to a restaurant.

It is worth noting that there are other cases in other jurisdictions in which an insured’s loss of ability to use its property for its intended purpose can constitute physical loss or damage. It is possible that if Covid-19 were present or potentially present at Gavrilides restaurants, the court might have ruled the other way.

The court also addressed the exclusions in most policies for losses stemming from “virus, bacterium or other microorganism” or losses caused by “acts or decisions” of a “government body.” Gavrilides argued that its losses came not from the virus, but from the government order. The judge found that both exclusions were relevant. In addition, the exception to losses from government acts for covered direct physical loss or damage did not apply here in the absence of physical damage.

The judge heard argument in this case over Zoom. The arguments are available to hear on YouTube, with the decision starting at 23:12. The case will likely be appealed. It seems, however that restaurants face an uphill battle in securing insurance payouts for losses stemming solely from shutdowns.

WHAT TO DO: Restaurant owners should keep careful records not only of their losses during the pandemic, but also of any direct exposure to Covid-19 among their staff or patrons. If they can prove that Covid-19 caused their losses, as opposed to government orders, it is still possible, but not certain, that a court may order an insurer to pay. Watch out for policy exclusions for viruses that could still defeat these claims.

For advice about how to market your restaurant lawfully during any shutdown, contact us or click here.