COVID-19 shutdowns and restrictions may have caused enormous disruption to the business operations of Iowa restaurants, but the Iowa Supreme Court ruled Friday that their insurers aren’t liable for their losses.
The court specifically ruled against the Wakonda Club, a Des Moines southside landmark, and Ingersoll Avenue steakhouse Jesse’s Embers. Both were closed and later had to limit capacity for months under emergency orders by Gov. Kim Reynolds after the Iowa arrival of the pandemic in March 2020.
The closures caused substantial financial losses — Wakonda has said in court filings that it was forced to fire or furlough dozens of workers and incurred losses of more than $100,000 for each month it was closed. Both it and Jesse’s Embers filed claims with their insurers under business interruption policies.
But the insurers denied their claims. Business interruption policies generally cover lost income due to loss of the insured property or similar catastrophes. The policies, however, are written to apply to the “direct physical loss” of a property, which the insurers argued does not apply to a government-ordered closure.Â
In addition, such policies routinely include a key exemption for “loss or damages caused by or resulting from any virus,” as stated in Wakonda’s policy.
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In both lawsuits, district courts had ruled for the insurers. Friday’s decisions, both unanimous and written by Justice Dana Oxley, affirmed those rulings.
“We conclude the language ‘direct physical loss of’ property requires a physical aspect to the loss of the property before coverage is triggered,” Oxley wrote in her Wakonda decision. “We reject Wakonda Club’s argument that loss of use, without something more, is enough.”
Attorney James Carney, who represented both restaurants, declined to comment on the decisions beyond saying his clients were “disappointed in the court’s decision.”
Iowa Supreme Court: only physical damage covered by insurance
Key to the decisions was the policies’ limitation of coverage to business disruptions resulting from direct physical damage.
“‘Physical’Â has to mean something,” Oxley wrote. “Based on our prior cases addressing the meaning of ‘physical’Â in the context of property damage or loss, we agree with the conclusion … that Iowa law requires there to be a physical aspect to the loss of the property to satisfy the requirement for a ‘direct physical loss of or damage to property.'”
An insured business might make a claim when its property is rendered unsafe by a landslide or risk of falling rocks, but not for a threat that presents no danger to its physical property, Oxley said.
“Proclamations like the one issued by Governor Reynolds were triggered by attempts to stop the spread of the COVID-19 virus, not because facilities like Wakonda Club were in imminent danger of physical harm that would cause a loss of the property,” Oxley wrote.
Previously:Iowa Supreme Court won’t weigh in on challenge to governor’s long-expired COVID-19 bar closures
The district court also had ruled that the insurers were not liable due to their policy exemptions for losses caused by a virus. During oral arguments in February, Carney contended that that exemption didn’t apply, saying it wasn’t COVID-19 that forced the restaurants’ closures and noting there had been no known positive cases among patrons or staff before the shutdowns. Instead, he said, it was Reynold’s order that closed the establishments, and there is no exemption in the policy for government-ordered closures.
Friday’s rulings did not address that issue. Because neither restaurant suffered physical damage that would be covered by the policy, Oxley wrote, the court did not need to resolve the dispute over whether the virus directly or indirectly caused the business closures.
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Jesse’s Embers additionally argued it was covered due to a “civil authority” provision of its policy, which kicks in when damage to nearby properties causes government officials to block access to the insured property. This claim too failed, Oxley wrote, because once again the policy only applies in cases where nearby properties suffer physical damage.
Courts nationwide side with insurers on COVID claims
The two lawsuits were among thousands of similar ones filed by other businesses around the country. A litigation tracker maintained by the University of Pennsylvania Carey Law School records more than 2,200 COVID business insurance cases filed to date.
Those lawsuits by and large have not gone well for the plaintiffs. In state court cases where a judge has ruled on a motion for dismissal, two thirds have been thrown out. In federal court, judges have fully dismissed more than 85% of the cases that have come before them, including at least two from Iowa businesses.
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Oxley acknowledged that trend in her decisions, noting that every federal or state appellate court to consider the question has agreed that shutdowns caused by COVID-19 do not constitute “direct physical loss” of the insured property.
Selective Insurance of America and Farm Bureau Financial Services, the insurers for Wakonda and Jesse’s Embers respectively, urged the Iowa Supreme Court to reach the same conclusion. In an email Friday, Selective attorney Douglas Haas said the resulting decision would be cited in many other pending cases.
“This ruling by our Supreme Court will immediately resolve the many cases pending in the Iowa state and federal courts which involve the same claims pursued by Wakonda Club,” Haas said.
An attorney for Farm Bureau Financial Services did not respond to a message seeking comment.
William Morris covers courts for the Des Moines Register. He can be contacted at wrmorris2@registermedia.com, 715-573-8166 or on Twitter at @DMRMorris.
Based in New York, Stephen Freeman is a Senior Editor at Trending Insurance News. Previously he has worked for Forbes and The Huffington Post. Steven is a graduate of Risk Management at the University of New York.