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Publications | February 9, 2022
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MI Court of Appeals Holds Stay-At-Home Orders Did Not Cause “Physical Loss or Damage”

In Gavrilides Management Company, LLC et al v. Michigan Insurance Company, No. 20-000258-CB, the Michigan Court of Appeals affirmed a ruling against policyholders who sought insurance coverage for COVID-19-related business losses, holding that the defendant, Michigan Insurance Company, properly denied coverage. The court reasoned that the executive orders (EOs) issued by Governor Gretchen Whitmer did not cause “physical loss or damage” at the two restaurants owned by the policyholders, and that the virus exclusion applied. You can find the opinion here.

Governor Whitmer issued a number of EOs in an effort to reduce the rising rate of COVID-19 infections in Michigan. Specifically, effective March 24, 2020, the governor signed EO 2020-21, ordering persons to stay home, prohibiting nonessential in-person work and requiring social distancing of at least six feet. The policyholders’ restaurants lost income as a result of the EOs, and they filed suit to recover those losses after the carrier denied coverage.

The policyholders argued that they suffered “direct physical loss of or damage to property” within the meaning of the insurance policy, and that such loss or damage can include contamination to the air or environment within the building, even in the absence of any detectible alteration to the premises. The three-judge panel of the Michigan Court of Appeals rejected these arguments, reasoning that “the word ‘physical’ necessarily requires the loss or damage to have some manner of tangible and measureable presence or effect in, on, or to the premises.” Referring to the EOs and noting that the complaint did not assert that physical damage actually occurred or that the restaurants were contaminated with the SARS-CoV-2 virus, the court stated that the “restaurants were unambiguously closed by impersonal operation of a general law, not because anything about or inside the particular premises at issue had physically changed.”

The Court of Appeals also held that, in addition to failing to establish a “direct physical loss of or damage to property,” the policyholders’ claim was likely precluded by special form policy language barring coverage for losses “caused directly or indirectly by ... [t]he enforcement of any ordinance or law ... [r]egulating the construction, use or repair of any property.” The court reasoned that, if the EOs constitute the enforcement of any ordinance or law, the policyholders “effectively claim to have suffered losses as a consequence of the closure of their restaurants due to the enforcement of a law.”

Finally, the Court of Appeals held that the policy’s virus exclusion was not vague and was properly applied by the insurer to deny coverage. The policy stated, in pertinent part, “[w]e will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” The court concluded that if the restaurants had suffered any material loss, that loss could have only been caused by the COVID-19 virus, thus triggering the virus exclusion in the policy.

The Court of Appeals’ opinion is one of the first Michigan appellate decisions to analyze business insurance coverage and its application to losses suffered as a result of the COVID-19 pandemic. Warner’s Insurance Practice Group has extensive experience analyzing business insurance coverages, including assessing the potential risks and exclusions to those coverages. For any questions related to insurance coverage or whether you are entitled to coverage under your insurance policy, please contact a member of Warner’s Insurance Law Practice Group.