Reinsurance News

Courts rule insurers not responsible for COVID-19 BI losses

11th August 2020 - Author: Katie Baker

American multinational investment bank, Morgan Stanley (MS), has commented on a decision made by the Superior Court of D.C. which finds that the COVID-19 pandemic does not cause direct physical damage which would be a required trigger for business interruption (BI).

According to MS, this ruling offers further support for its belief that U.S. domestic insurers will not be responsible for the influx of COVID-19-related BI losses throughout the nation.

litigationThe judge’s ruling found that the plaintiff would be required to show a direct physical loss even with the absence of a virus exclusion. Direct physical loss was ruled not to be a result of civil authority that required the Plaintiff’s shutdown.

Furthermore, it was ruled that stay at home orders were not deemed direct physical loss therefore insurers will not be enforced to pay out.

This follows a similar recent ruling out of the Michigan Circuit Court.


A District of Columbia judge has awarded Erie Insurance Exchange summary judgment in a case involving coverage for COVID-19-related BI losses.

She ruled that the plaintiffs, a group of prominent restaurants in the D.C. area, did not suffer any “direct and accidental loss of or damage to covered property.”

The ruling was made on August 6th where Associate Judge Kelly Higashi of the District of Columbia Superior Court found that none of the cases summoned by the restaurants have a stance for the proposition that a government order can ordain a direct physical loss for insurance purposes.

On 6th August Judge Higashi ruled for defence in Rose’s 1, LLC, et al. v. Erie Insurance Exchange. She stated that mayoral orders didn’t constitute the direct physical loss needed to trigger business interruption, and that the plaintiff didn’t prove that the virus was actually at the insured locations.

As noted by analysts at KBW, there is an expectation that BI ligation will persist for several years, but three domestic rulings to date that have denied BI coverage represent an important precedent.

However, courts in other states or jurisdictions could have different precedents or define ‘physical damage’ differently.

The plaintiffs argued that the restaurants’ losses of use were “direct” because they resulted directly from a mayoral order.

Judge Higashi ruled that government orders didn’t cause any direct changes to the properties as they only guided the restaurants to take particular actions.

The plaintiffs also argued that the losses were “physical” since COVID-19 is a deadly virus which is what had initially prompted the mayor’s orders.

The judge noted that the plaintiff didn’t prove that the virus was at the insured properties when they were forced to close. This meant that ultimately, the mayor’s orders didn’t have any effect on the material or tangible structure of insured properties.

The loss in context of the policy can mean loss of use and not just damage. However, Judge Higashi ruled that when policies require “direct physical loss”, the words “direct” and “physical” modify the word “loss”, meaning that loss of use must be caused by a direct physical intrusion on the insured property, which the mayor’s orders didn’t constitute.

KBW analysts note that Judge Higashi’s ruling is undeniably positive for the P&C industry, but expects BI litigation to continue for several years. At the same time, analysts warn that it is possible that some losses will occur, since courts aren’t expected to rule uniformly.

Although favourable from the insurers’ perspective, decisions could guide jurisdictions where no opposing precedent exists, some other states or jurisdictions do have precedents that define damage differently, which could produce some adverse rulings for re/insurers, warns KBW.

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