This month we report on a familiar story happening in Florida federal courts: a business seeks coverage from its insurance carrier for losses related to the COVID-19 pandemic, the insurer denies the claim, the business sues in court to recover damages from its insurer, and the court rejects the lawsuit.
The decision is El Novillo Restaurant v. Certain Underwriters at Lloyd’s of London (S.D. Fla., Dec. 7, 2020, No. 1:20-CV-21525-UU) 2020 WL 7251362. The case concerns a proposed class of Florida restaurants seeking coverage from their insurance carrier, Lloyd’s of London (“Lloyds”), for business interruption losses the restaurants allege they sustained due to the pandemic.
Plaintiffs’ operative complaint was filed July 6, 2020, in the United States District Court for the Southern District of Florida. Judge Ursula Ungaro presided.
The plaintiffs’ class consisted of just two restaurants, each doing business under the El Novillo name. The subject insurance policies were “all-risk” commercial property policies issued by Lloyds.
The complaint alleged that as a direct result of the global pandemic and certain governmental orders issued in Florida, plaintiffs have “suffered both direct physical losses and damage to the properties in the form of diminished value, lost business income, a reduction in right of full ownership, and forced physical alterations during a period of restoration.” El Novillo, WL 7251362 at *1. The complaint cited two emergency orders issued by Miami-Dade County mayor Carlos Gimenez, one which restricted restaurant operating hours, and one which closed all restaurants in the county other than for delivery. Id.
The complaint alleged Lloyds “has no intention” of covering the purported business income losses stemming from the pandemic and has taken the position that the losses are not covered. Id. The operative complaint stated causes of action for Declaratory Judgment and Anticipatory Breach of Contract. Id. at *2.
In response to the complaint, Lloyd’s filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). Id. Well-established federal law holds that to survive a motion to dismiss, “a complaint must contain sufficient factual matter, accepted as true, to state a claim of relief that is plausible on its face.” Ashcroft v. Iqbal (2009) 556 U.S. 662, 678. Further, “recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id.
Coverage under the Lloyds Policies
As relevant here, the Lloyds policies provided coverage to the restaurants for lost income and certain expenses in the event of a business interruption or suspension. El Novillo, WL 7251362 at *3. The policies also provided some coverage for losses resulting from actions taken by a “Civil Authority.” Id.
Business interruption coverage is triggered by a necessary suspension of operations caused by “direct physical loss of or damage to property” at the business’s premises. Id. The “Civil Authority” coverage applies if: 1) access to the area surrounding the damaged property is prohibited by civil authority as a result of the damage, and 2) the action of civil authority is taken in response to dangerous physical conditions resulting from damage caused by a covered loss. Id.
Analysis of the Court
Judge Ungaro held there was no coverage under the Lloyds policies for business interruption losses, nor under the policies’ additional civil authority coverage.
In the motion to dismiss, Lloyds argued the operative complaint made no “plausible” allegations of direct physical loss or damage, and the Court should disregard plaintiffs’ unsubstantiated and conclusory allegations. Id.
Plaintiffs agreed coverage depended on whether there had been any “direct physical loss of or damage to property.” Id. at *4. Plaintiffs argued, however, that because this term was not defined in the policies, it should not be limited to only “structural damage.” Id.
Judge Ungaro rejected plaintiffs’ argument, explaining plaintiffs were essentially arguing in favor of coverage by relying on the provisions of certain exclusions in the Lloyds’ policies. Id. For example, plaintiffs pointed out that some of the exclusions contemplated losses that do not arise from physical damage. Id. According to plaintiffs, there would be no reason to exclude losses that do not arise from physical damage if such losses are not covered in the first place. Id. Therefore, plaintiffs argued the interpretation of the triggering term “direct physical loss of or damage to property” must be broad and not limited only to “structural damage.”
Unfortunately for plaintiffs, Judge Ungaro found the Florida Supreme Court in prior decisions “squarely rejected” this approach to establish insurance coverage. In Siegle v. Progressive Consumers Insurance Co. (2002) 819 So.2d 732, the Court held unequivocally, “policy exclusions cannot create coverage where there is no coverage in the first place.”
Judge Ungaro further found that numerous prior Florida decisions have analyzed what is required to trigger coverage under a policy providing coverage in the event of “direct physical loss of or damage to property.” Florida case law on this issue is clear: coverage for direct physical loss requires actual physical damage to property. See Mama Jo’s, Inc. v. Sparta Insurance Co. (S.D. Fla. June 11, 2018 No. 17-CV-23362) 2018 WL 3412974, at *1.
Finally, Judge Ungaro cited the recent decision of Raymond H Nahmad DDS PA v. Hartford Casualty Insurance Company (S.D. Fla., Nov. 2, 2020, No. 1:20-CV-22833) 2020 WL 6392841, which held economic losses caused by a COVID-19 pandemic business closure did not constitute a direct physical loss. We previously reported on Nahmad and analyzed in depth Judge Beth Bloom’s analysis that there was no coverage for plaintiff’s economic losses stemming from the pandemic.
In this case, Judge Ungaro held plaintiffs’ complaint failed to allege any actual direct physical loss to their property. El Novillo, WL 7251362 at *6. Plaintiffs’ conclusory allegations they suffered direct physical loss due to the suspension of their operations from the pandemic were insufficient. Plaintiffs allegation the pandemic caused “forced physical alterations” during a period of restoration was also insufficient. Judge Ungaro held that ultimately, these allegations failed to allege plaintiffs’ properties sustained any physical damage. Id.
With respect to the “civil authority” coverage, Judge Ungaro held this coverage did not apply because it too required an underlying allegation of direct physical loss or damage. Id. at *7. Judge Ungaro also noted plaintiffs failed to allege access to their restaurants was “completely prohibited by order of a civil authority,” as required by the policies to trigger civil authority coverage. Id. Although Miami-Dade County did issue emergency orders imposing restrictions on restaurants, these restrictions did not result in the restaurants being completely shut down. Id.
Judge Ungaro’s opinion also relied on the fact that “federal district courts throughout the country have dismissed substantially similar COVID-19 related lawsuits for failing to state a claim for business income coverage.” Id. at *6.
This case brings some additional clarity to businesses with respect to the bar they need to clear to survive a motion to dismiss in federal court for COVID-19 related insurance suits. Here, although the restaurant plaintiffs alleged direct physical loss due to suspension of their operations, the Court found the allegations insufficient to overcome a motion to dismiss. Even alleging “forced physical alterations” was not enough.
The clear message is that plaintiffs must specifically allege actual, direct, physical loss to their covered properties before federal courts will consider allowing the case to proceed to discovery.