544 F.Supp.3d 789
E.D. Mich.2021Background
- Plaintiffs (five restaurant entities) are Michigan restaurateurs who ceased or curtailed on-site operations after March 2020 COVID-19 civil orders.
- Cincinnati insured Plaintiffs from Aug 28, 2019 to Aug 28, 2020 under a commercial policy providing Business Income, Extra Expense, and Civil Authority coverage; the policy defines "loss" as "accidental physical loss or accidental physical damage."
- Plaintiffs claimed pandemic-related lost income and extra expenses; Cincinnati denied coverage on June 22, 2020, citing no direct physical loss to property.
- Plaintiffs sued for breach of contract, declaratory and injunctive relief, appraisal, and statutory claims; they also asserted separate claims for an August 2020 electrical fire.
- Cincinnati moved to dismiss under Rule 12(b)(6). The court applied Michigan law and concluded Plaintiffs failed to plausibly allege the required "direct physical loss," and that the remaining fire claims do not meet the amount-in-controversy for diversity jurisdiction.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Business Income/Extra Expense coverage applies (requires "direct physical loss") | "Physical loss" includes loss of use or possession and can include contamination by COVID-19 | "Physical loss" requires tangible, concrete alteration or destruction of property; COVID-19 and orders caused only economic loss or temporary contamination | Dismissed — Plaintiffs failed to plausibly allege "direct physical loss" under either tangible-harm or loss-of-use theories |
| Whether COVID-19 contamination itself (virus on surfaces/air) qualifies as physical damage | Virus presence and resulting cleaning/remodeling show physical alteration and losses during a "period of restoration" | Virus presence is ephemeral, removable by cleaning, and does not alter appearance/structure; cleaning is not "repair" or "restoration" | Dismissed — mere presence or transient contamination insufficient to show physical loss/damage |
| Whether Civil Authority coverage applies (access prohibited by civil authority in response to damage to other property) | Civil orders and pandemic conditions effectively prohibited access and were taken in response to dangerous physical conditions caused by the virus | Civil Authority requires physical damage to other property and a prohibition of access; orders restricted but did not prohibit access and did not respond to demonstrable physical damage to others’ property | Dismissed — complaint fails to allege physical damage to other property or that access was prohibited as required by the policy |
| Whether remaining fire-related claims can proceed in federal court | (Plaintiffs conceded amount) | Cincinnati: amount in controversy is below $75,000 for fire claims alone | Dismissed without prejudice for lack of diversity jurisdiction |
Key Cases Cited
- Rory v. Continental Ins. Co., 703 N.W.2d 23 (Mich. 2005) (insurance policies are contracts interpreted by ordinary contract rules)
- Wilkie v. Auto-Owners Ins. Co., 664 N.W.2d 776 (Mich. 2003) (contract interpretation and ambiguity are questions of law)
- Heniser v. Frankenmuth Mut. Ins. Co., 534 N.W.2d 502 (Mich. 1995) (court must first determine whether policy provides coverage before applying exclusions)
- Universal Image Prods., Inc. v. Fed. Ins. Co., [citation="475 F. App'x 569"] (6th Cir. 2012) (recognizing split in authority over "physical loss" definition)
- Port Auth. of N.Y. & N.J. v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir. 2002) (contamination may cause physical loss where property is rendered unusable)
- Turek Enters., Inc. v. State Farm Mut. Auto. Ins. Co., 484 F. Supp. 3d 492 (E.D. Mich. 2020) (interpreting "physical" loss to require tangible alteration)
- Mama Jo’s, Inc. v. Sparta Ins. Co., [citation="823 F. App'x 868"] (11th Cir. 2020) (cleaning/dusting is not "direct physical loss")
- Sandy Point Dental, PC v. Cincinnati Ins. Co., 488 F. Supp. 3d 690 (N.D. Ill. 2020) (discussing civil authority and physical loss in pandemic coverage disputes)