No Direct Physical Loss, No Coverage

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COVID-19 business interruption claims have caused a groundswell of litigation, but courts continue to address business interruption claims in other contexts. The “direct physical loss” requirement remains at the heart of coverage disputes over whether business property policies are required to respond to claims.

Recently, the Eleventh Circuit addressed a business interruption coverage dispute that involved both an alleged downturn in revenue and expenses for cleaning up construction dust and debris.

In Mama Jo’s Inc. v. Sparta Insurance Co., No. 18-12887 (11th Cir. Aug. 18, 2020) (Not for Publication), a Florida restaurant (one that is also involved in COVID-19 litigation coincidentally) sought coverage under its commercial property insurance policy for damages sustained because of dust and debris from road construction. The restaurant did not close, but suspended operations of sections of the restaurant to clean the dust using normal cleaning methods.

The restaurant originally sought damages for cleaning and for a downturn in revenue during the period of the construction. The insurance company denied the claim because there was no direct physical loss. At trial the restaurant added claims for replacement of audio equipment, lighting and other items allegedly damaged by the construction dust. Three experts were presented on damages.

The insurer moved to strike the expert testimony and for summary judgment. The district court struck the expert testimony as speculative and unreliable and granted summary judgment to the insurer because there was no direct physical loss to the restaurant’s property. The Eleventh Circuit affirmed.

The expert witness discussion is interesting, but I want to focus on the direct physical loss discussion as that is pertinent to the many COVID-19 cases. The case was decided under Florida law. Citing Florida appellate cases, the circuit court defined “direct physical loss” as the diminution of value of something. Quoting Florida cases, the court stated that the words “direct” and “physical” modify loss and impose a requirement that the damage be actual. Based on this definition and other Florida cases, the court affirmed the district court’s finding that cleaning is not an insurable loss because an item or structure that merely needs to be cleaned has not suffered a loss that is both direct and physical.

The circuit court also affirmed the district court’s holding that there was no coverage for the restaurant’s business income claim because there was no direct physical loss to property. The court held that even if the restaurant had proven a “suspension” of its operations, that suspension still had to result from a direct physical loss of or damage to its property during the policy period. Because the restaurant failed to show that it suffered a direct physical loss, summary judgment was properly granted.

Even though this is not a COVID-19 case and even though it is a case not designated for publication (therefore, having no precedential effect), it gives us a good sense of how the Eleventh Circuit will address COVID-19 business interruption claims under similar policy provisions. Direct physical loss requires actual damage to the property, not merely a cleaning.