Earlier this month a state court in Lansing, Michigan ruled a small business owner’s insurance policy did not cover business income losses related to the state’s COVID-19 lockdown orders. While an interesting first-mover in what may be many months if not years of coverage litigation, Gavrilides Management Company et al. vs. Michigan Insurance Co. is a far from certain forecast for similar disputes pending throughout the country. However, it does clearly mark the battle lines.
From the outset Gavrilides Management had to make some tough decisions. While the policy included standard business interruption insurance coverage wording, it also contained a virus exclusion. If the restaurant owner argued COVID-19 had caused property damage at its restaurants, this claim for coverage would have run smack into the virus exclusion. If it wanted to try to steer clear of the virus exclusion, the owner had to identify some other cause of loss that resulted in direct physical loss of the restaurants.
Presumably figuring there was little ground to be gained in a frontal assault on the virus exclusion, the Gavrilides Management affirmatively disavowed any suggestion COVID-19 had caused property damage at its properties. Indeed, the complaint affirmatively alleged “at no time has COVID-19 entered the [restaurants] through any employee or customer” and COVID-19 “has never been present” in the restaurants.
The restaurant owner instead built its claim for coverage exclusively on the Governor’s lockdown orders. First, Gavrilides Management argued the lockdown order itself was the cause of loss, not the virus. Second, it pointed to the order’s prohibition of indoor dining as the direct physical loss of the restaurants (although the locations continued carryout and delivery services).
The court would have none of it. The judge reasoned that an allegation of “direct physical loss of or damage to property” would describe “something with material existence, something that is tangible . . . something that alters the physical integrity of the property.” She saw equating the loss of indoor dining to a “direct physical loss of property” as “just simply nonsense” because “it is nowhere close to meeting the requirement there has to be some physical alteration to or physical damage to the integrity of the building.” The court hardly mentioned the virus exclusion in her ruling.
The bulk of pending cases appear headed down the other path — vigorously embracing the idea of COVID-19 as a cause of property damage. For example, the recently filed Chattanooga Professional Baseball v. Philadelphia Indemnity Insurance alleges “[a]lthough these [virus laden] droplets are smaller than mold, rust, or paint chips, they are physical objects that travel and attach to other surfaces and cause harm.” The complaint further alleges “it is statistically certain that the virus is present at the Teams’ ballparks and nearby properties or that the threat of the virus’s presence at the ballparks is imminent.”
Further, many of these lawsuits look broadly for “causes of loss.” For example, in Chattanooga Professional Baseball, the complaint alleges “[a]s a result of the virus, the governmental response, and Major League Baseball’s failure to provide baseball players, the Teams have been deprived of their primary source of revenue — fans coming to the ballpark.”
Finally, policyholders are willing to take on the validity of the virus exclusion. Again, in Chattanooga Professional Baseball, such an attack is foreshadowed by an allegation the “[Virus] Exclusion does not preclude the Teams’ claims for coverage because, among other reasons, it is void, unenforceable, and inapplicable.”
Gavrilides Management’s real value may be in shaping how we think about the pandemic risk going forward. While many proposals are calling for a public-private partnership with the insurance industry, each of them fixates on the question: What do we want the insurance industry to do? Gavrilides Management’s urges us to start designing any insurance program by first asking: What do we want to get to small businesses?
We can surely put our financial wizards to work designing the a sophisticated parametric, capital markets-backed reinsurance pool offering the most compelling surcharge-financed quota shares ever devised by humankind. But, if this contraption requires a mom and pop restaurant facing closure to file a lawsuit asking a judge to rule on the physics of virus-laden droplets, the persistency of spores on linoleum or whether the Governor inserted a comma in the proper spot in her latest lockdown order, we are lost.
Good public policy, just like good business, starts by asking what the customer needs. Let’s start there by asking what Gavrilides Management needs to prepare for the risk of a future pandemic and then figure out how the insurance industry can contribute to that solution.