On The Case

As COVID-19 insurance cases loom, 11th Circuit restricts definition of property damage

(Reuters) - The Miami oceanfront restaurant Berries lost nearly $300,000 in 2014, when roadside construction on its street created dust and debris that drove customers away. Berries’ troubles that year had nothing to do with COVID-19, which hadn’t even struck the world when its parent company, Mama Jo’s, sued the insurer that refused to pay the restaurant’s claim. But a ruling Tuesday from the 11th U.S. Circuit Court of Appeals in the Mama Jo’s case is likely to reverberate in nationwide litigation by other restaurants and businesses suing their insurers over coverage for losses they suffered in COVID-19 shutdowns.

More than 1,000 COVID-19 insurance suits have been filed so far, according to the Hunton Andrew Kurth coronavirus complaint tracker. They now compromise the biggest category of cases, outstripping civil rights suits and habeas petitions by prisoners and detainees. And I’d bet the insurance case numbers will continue to rise now that the Judicial Panel on Multidistrict Litigation has denied motions to create a single, nationwide proceeding to determine whether the coronavirus pandemic triggered insurance coverage under business’ property damage and civic authority provisions.

The threshold question in these COVID-19 insurance cases, as I told you last week and as we’ve seen in early rulings, is whether policyholders can show that they experienced direct physical loss or damage from the coronavirus. Plaintiffs are relying on scattered precedent holding that policyholders may be entitled to coverage when contamination – such as from asbestos or lead – renders their properties uninhabitable and unusable, even if the properties have not suffered a tangible, physical alteration. Last week, U.S. District Judge Stephen Bough of Kansas City deemed that theory plausible enough to allow a class of restaurants and hair salons to proceed to discovery with their coverage claims against Cincinnati Insurance. (I should note that the day after Judge Bough’s decision, U.S. District Judge David Ezra of San Antonio dismissed COVID-19 business interruption insurance claims against State Farm by several barbershops, concluding that the case law requiring tangible damage is more persuasive.)

The 11th Circuit’s ruling in the Mama Jo’s case seems to add considerable heft to the precedent favoring insurers. The restaurant initially blamed dust and debris from the road construction for about $16,000 in cleaning and painting costs, plus the nearly $300,000 in lost business. It later alleged that dust had caused an additional $320,000 in damage to its outdoor awning and roof and to its air-conditioning, light and sound systems. Its insurer, Sparta Insurance, denied the initial claim, asserting that the restaurant had not experienced direct physical losses so its business interruption provision was not triggered.

In the ensuing litigation before U.S. District Judge Michael Moore of Miami, Sparta successfully challenged the admissibility of reports by Mama Jo’s experts on the alleged damage to its lighting and other systems. Without those experts, the trial judge found, the restaurant could not show it had suffered a direct physical loss so Sparta was entitled to summary judgment.

Much of the 11th Circuit’s ruling Tuesday analyzed the expert witness issue, on which it ended up in agreement with Judge Moore. The three-judge panel – Judges Kevin Newsom and Gerald Tjoflat and U.S. District Judge David Proctor of Birmingham, sitting by designation – devoted only the final three pages of the decision to the question of whether dust that could be cleaned away or painted over constitutes direct physical loss or damage. But that brevity does not undercut its definitive conclusion: “Under Florida law, an item or structure that merely needs to be cleaned has not suffered a ‘loss’ which is both ‘direct’ and ‘physical,’” Judge Proctor wrote.

And without showing a direct physical loss, the appellate court said, the restaurant could not claim insurance coverage for interruptions to its business because the provision is premised on property damage. No matter how much disruption the restaurant experienced from the road construction, the 11th Circuit said, it was not owed a payout from its insurer.

Mama Jo’s counsel Paul Feltman of Alvarez, Feltman, Da Silva & Costa was not available and his partners Leonardo Da Silva and Miguel Lara did not respond to an email query.

If you draw an analogy between the construction dust in the Mama Jo case and coronavirus in the COVID-19 insurance litigation, you can see why the ruling could be an important weapon for insurers facing suits in Florida and even the rest of the 11th Circuit. Insurers have already been arguing in COVID-19 cases that even if businesses can show the coronavirus contaminated their premises, they cannot show direct physical loss or damage because the can be cleaned away with disinfectants. Judge Bough rejected that argument in the Kansas City case, but the 11th Circuit’s Mama Jo decision gives it new potency.

Jorge Maza of Hinshaw & Culbertson, who argued for Sparta at the 11th Circuit, told me he’s expecting the decision to be broadly cited by insurers in COVID-19 litigation because it’s a clear statement, in an area where precedent is relatively scarce, of what constitutes a direct physical loss when there’s no tangible damage to a property. “There has to be a physical alteration,” Maza said, adding that when he argued this case back in January, he had no idea that it would have consequences beyond Sparta’s dispute with Mama Jo’s. “That’s going to be helpful nationwide.”