A Connecticut federal judge issued the first decision barring a Connecticut policyholder from recovering business income losses under a property insurance policy arising from a government-ordered shutdown of its restaurant due to the coronavirus. Judge Michael Shea dismissed a proposed class action complaint filed in LJ New Haven LLC d/b/a Lenny & Joe’s Fish Tale v. Amguard Insurance Company, 2020 WL 7495622 (D. Conn. Dec. 21, 2020), concluding that the business interruption claim was excluded from coverage under an insurance policy provision that barred coverage for any loss caused by a virus.
Lenny & Joe’s restaurant filed a complaint for breach of contract and declaratory relief after suffering a loss of income when it was forced to cease in-person dining for months following an executive order issued by Connecticut Governor Ned Lamont in response to the COVID-19 pandemic and efforts to prevent the spread of the coronavirus disease. The restaurant sought to represent itself and all similarly situated insured business owners of Amguard Insurance Company who had been denied coverage for business income losses arising from the government-ordered shut down. Lenny & Joe’s sought reimbursement for its loss under a commercial property policy under which the insurer agreed to pay for “direct physical loss of or damage to Covered Property” at the insured premises “caused by or resulting from a Covered Loss.” The insurance policy defined the term “Covered Loss” to include all risk of physical loss unless excluded or limited by the terms of the policy. The policy contained a virus exclusion that stated the insurer was not obligated to pay for loss or damage caused directly or indirectly by any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease. The exclusion stated that it applied to any loss from a virus regardless of any other cause or event that contributes concurrently or in any sequence to the loss.
Lenny & Joe’s did not claim that the restaurant was contaminated with the coronavirus. Rather, its alleged loss arose from Governor Lamont’s executive order that restaurants cease in-person dining and limit operations to take-out and delivery service, which Lenny & Joe’s claimed prevented it from using its restaurant for its intended purpose. In seeking to dismiss the complaint, the insurer argued, in part, that that loss of income arising from the Governor’s executive order did not trigger coverage under the policy because the restaurant did not suffer a direct physical loss. It also argued that virus exclusion applied because the alleged loss was caused directly or indirectly by the coronavirus. In response, the restaurant argued that the exclusion did not apply because its losses were not caused by the virus, but were caused by the Governor’s executive order. The court disagreed with the insured and held that virus exclusion was broad in scope because the language in the exclusion expressly stated that it applied to any loss or damage caused directly or indirectly by a virus regardless of any other cause or event that contributes concurrently or in any sequence to the loss. The court concluded that although the coronavirus was not the direct cause of the curtailment of the plaintiff’s operations leading to the loss of income, the virus and the Governor’s order were interlocking and, therefore, the virus was at least one causal factor in the loss necessary for the exclusion to apply.
The Lenny & Joe’s decision is the first ruing by a court in Connecticut to apply the virus exclusion in an insurance policy to commercial loss of income claims arising from a government order limiting operations of certain businesses in Connecticut as a result of the coronavirus pandemic. It is important for policyholders to understand the terms of their insurance policies and the exclusions contained in a particular policy. Significantly, the court did not address the insurer’s argument that loss of income did not constitute a physical loss of property necessary to trigger coverage for business interruption income under the insurance policy. There remain other cases pending in Connecticut and across the country in which courts will decide that particular issue raised by insurance companies in response to claims for business income loss arising government shut-down orders issued in response to the coronavirus pandemic.
When the pandemic started in Wuhan, China, perhaps none of us could imagine the effects of the coronavirus pandemic. Small businesses like restaurants and hotels … are the first to be affected.