Michigan Judge Rules Direct Physical Loss Required to Trigger Business Interruption Coverage

July 23, 2020

Authors: Paul S. White, Siobhán A. Breen

On July 1, 2020, a Michigan state court dismissed a coronavirus-related business interruption lawsuit filed by policyholder restaurants on the pleadings, finding that they failed to allege any form of physical loss or damage to the property as required by the policyholders’ policy. In Gavrilides Management Co. et al. v. Michigan Insurance Co., Case Number 20-258-CB-C30, filed in the Thirtieth Judicial Circuit Court of the County of Ingham, Michigan, Judge Joyce Draganchuk ruled that direct physical loss is required to trigger business interruption coverage for loss purportedly arising out of the novel coronavirus and related government stay-at-home orders.

In Gavrilides, the insured, owner of two restaurants in Michigan, sought $650,000 in business interruption coverage under its commercial property policy for losses stemming from stay-at-home orders issued by Michigan’s governor that temporarily limited all restaurants’ business operations to take out and delivery service. The policy afforded coverage for business income loss resulting from a “suspension of operations” due to “direct physical loss of or damage to” insured property. The policy also contained a virus exclusion. The insured’s complaint did not allege that the coronavirus was present at its restaurants; however, the insured contended that the policy’s physical loss requirement was met because physical restrictions were placed on the restaurants’ use, mainly the ban of dine-in services pursuant to the executive orders. The insurer filed a motion for summary disposition regarding the insured’s complaint.

The Michigan court rejected the insured’s arguments that the policy’s standard virus exclusion was inapplicable under the circumstances because it was “vague and ambiguous” with respect to its application to losses resulting from the stay-at-home orders due to the threat of the presence of the coronavirus. In fact, the court held that the virus exclusion in the property policy would have barred coverage even if the insured had alleged that the virus caused physical damage.

In a video recording of the proceeding, Judge Draganchuk ruled that pursuant to the wording of the policy, the restaurants would have had to suffer “direct physical loss or damage” as a result of the coronavirus for coverage to apply. The Judge stated that direct physical loss must be something “with material existence, something that is tangible, something … that alters the physical integrity of the property.” The Judge further held that “the plaintiff just can’t avoid the requirement that there has to be something that physically alters the integrity of the property.”

A formal written opinion by the Judge has yet to be issued.

View the recording of the proceedings on YouTube.

For a DC ruling on this topic, see our August 14, 2020, article.

For a Missouri ruling on this topic, see our August 14, 2020, article.

View more Insights