The Sixth Circuit Again Rejects COVID-19 Business Interruption Claims

Less than two months after its decision in Santo’s Italian Café LLC v. Acuity Insurance Co., 15 F.4th 398 (6th Cir. 2021), the United States Court of Appeals for the Sixth Circuit again issued a decision finding no coverage for COVID-19 related business interruption claims.  The case, Dakota Girls, LLC v. Philadelphia Indemnity Insurance Co., No. 21-3245 (6th Cir. Nov. 5, 2021), involved several preschools that suffered lost profits when the Ohio government ordered childcare programs to suspend operations due to the COVID-19 pandemic from approximately March to May 2020.

Dakota Girls invoked four coverage provisions in seeking coverage under a policy issued by Philadelphia Indemnity Insurance Company: (1) building-and-personal-property  coverage,  which  covered  “direct  physical  loss  of  or  damage  to Covered Property;” (2)  business-income coverage, which covered income lost from a “‘suspension’ of ‘operations’  during  the  ‘period  of  restoration’  caused  by  [the]  direct  physical  loss...or damage;” (3) civil-authority coverage, which responded to income  lost  and  expenses  resulting  from  a  government  order  prohibiting  access  to  covered property  due  to  damage  at  some other location; and (4) a communicable-disease  and water-borne-pathogen  provision,  which  covered  income  lost  and  expenses  that  result  from  a shutdown order in response to “an actual illness at the insured premises.” The district court held none of these provisions afforded coverage to Dakota Girls, and the Sixth Circuit affirmed.

The Court recognized that Dakota Girls’ claims for coverage under the business-and-personal-property, business-income, and civil-authority provisions, all required either “loss of” or “damage to” property—whether to the covered property itself or to other property around the covered property. Dakota Girls argued that “direct physical loss” includes loss of use that resulted from the shutdown order, and that COVID-19 was itself “damaging surfaces” within the preschools’ properties.  The Sixth Circuit rejected that argument, holding that the lost business income sustained from the COVID-19 pandemic and related government-imposed restrictions did not constitute “direct physical loss of or damage to Covered Property” under the policy.  Reviewing the issues de novo, noting the Santo’s precedent, and applying Ohio law, the Court affirmed the district court’s ruling. The Sixth Circuit agreed that, without a material change in the property’s condition, there could not have been “damage” and without dispossession or the property’s destruction, there could not have been “loss.” 

This left only the communicable disease and water-borne pathogens provision, which covered the losses that result when the government orders a shutdown of business operations “due directly to an outbreak of a communicable disease or a water-borne pathogen that causes an actual illness at the described premises[.]” The Court acknowledged, and the parties agreed, that COVID-19 constitutes a “communicable disease.”  To address coverage, the Court found there were two interpretive issues to resolve: (1) Is the endorsement triggered simply when there is a shutdown order in response to a communicable disease found somewhere, or must the shutdown order be in response to a communicable disease that caused an “actual illness” at the premises?  And (2) did Dakota Girls plausibly plead that Ohio’s statewide shutdown order resulted from an “actual” COVID-19 illness at its premises?

The Court reasoned that “[r]eading the communicable-disease coverage to not require an actual illness at the premises . . . would engender serious inconsistency within the policy.” Id. at 7. Because Dakota Girls did not plead COVID-19 or an “actual illness” existed at the preschools or that anyone at the preschools ever had COVID-19, the Court held it did not qualify for coverage. Id. at 8. Moreover, Dakota Girls did not plausibly plead that the statewide order was “due directly” to the outbreak of the coronavirus at the insured’s premises, “[n]or could it.” Id. To the contrary, the orders were created “as a prophylactic measure” to prevent widespread exposure to the virus rather than as a response to an illness at any particular insured property. Id.

As for the virus exclusion, the Court decided there was no need to rule on it because Dakota Girls “never established its initial entitlement to coverage.” Id. at 10.

Finally, the Court held there was no viable claim for bad faith because a mere denial of coverage is not actionable under Ohio law, even if done in error. Id. “Dakota Girls has never shown that it even had coverage, much less that Philadelphia’s agents knew it had coverage or that coverage was so obvious it could not have been reasonably denied,” the Court said. Id.  

Despite the “singular challenges” that businesses such as Dakota Girls faced, the Court reasoned that such challenges did “not give us license to rewrite the plain terms of an insurance policy to confer upon the appellants a form of coverage for which they never contracted.” Id. (citing Santo’s).

Crowell & Moring LLP served as counsel for amici curiae American Property Casualty Insurance Association and National Association of Mutual Insurance Companies in this appeal.  For more information, please contact the professionals listed below or your regular Crowell & Moring contact.