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By Jamie Huffman Jones

As we enter April, most states are under some order requiring certain businesses to shutter or extensively change how they operate to stop the community spread of COVID-19. CNN reports that, as of March 30, 2020, 27 state have some shelter-in-place order, sheltering more than two-thirds of the nation’s population. ^[1] While Arkansas is not currently under any shelter-in-place orders, Governor Asa Hutchinson has issued multiple executive orders requiring certain businesses to close and restaurants to be take-out only. ^[2] The City of Little Rock is under a curfew.^[3] The impact on the business community will be historical. Insureds will turn to the language of their insurance policies to determine if there is any relief to be gained. Particular clauses will come under scrutiny, in particular business interruption and civil authority clauses. 

A business interruption clause is intended to provide coverage where a direct physical loss results in a loss of business income to the insured. Somewhat similar is the civil authority clause, which is intended to provide coverage where a civil authority has rendered a business inaccessible due to a physical damage nearby (sometimes, neighboring is required). Generally, both require direct physical damage to be triggered.  

Courts have previously held that civil authority orders that closed business for fear of something occurring was not enough to trigger coverage. For example, United Airlines sought coverage under the civil authority provision of its policy after the FAA grounded airline traffic after the September 11, 2001 terrorist attacks.^[4] The Second Circuit Court of Appeals affirmed the district court’s denial of coverage, both holding that the FAA’s decision to stop air traffic was due to its fear of a future attack, not as direct damage to any property. Another example is hurricane evacuations, which have been deemed insufficient to trigger civil authority clauses because of the lack of physical damage.^[5] Thus, it is not enough that there be a fear of property damage. Rather, there must be a causal connection between the order from the civil authority and actual, prior physical damage. 

While the Arkansas Supreme Court has not addressed a case like what might be brought in response to COVID-19, its Federal counterpart, the Eighth Circuit Court of Appeals, has rejected claims under the business interruption and civil authority clauses where no direct physical damage was shown. In 2003, the U.S. Government banned any beef products from Canada after a Canadian cow tested positive for bovine spongiform encephalopathy, or “mad cow disease.” A Minnesota Company called Source Food sold a product that contained beef, and relied upon Canadian sources to produce. The ban resulted in Source Food’s inability to deliver its product. It sought coverage under its policy for business interruption and civil authority, was denied coverage, and brought a lawsuit that made its way to the Eighth Circuit Court of Appeals in 2006.^[6] The Court of Appeals upheld the denial of coverage, concluding that there was no direct physical loss because it was undisputed that the Source Food product in Canada itself was not physically damages or contaminated. According to the Eighth Circuit Court of Appeals, 

Although Source Food's beef product in the truck could not be transported to the United States due to the closing of the border to Canadian beef products, the beef product on the truck was not--as Source Foods concedes--physically contaminated] or damaged in any manner. To characterize Source Food's inability to transport its truckload of beef product across the border and sell the beef product in the United States as direct physical loss to property would render the word "physical" meaningless. Moreover, the policy's use of the word "to" in the policy language "direct physical loss to property" is significant. Source Food's argument might be stronger if the policy's language included the word "of" rather than "to," as in "direct physical loss of property" or even "direct loss of property." But these phrases are not found in the policy. Thus, the policy's use of the words "to property" further undermines Source Food's argument that a border closing triggers insurance coverage under this policy. Source Food did not experience direct physical loss to its property. Therefore, Source Food cannot recover the loss of business income resulting from the embargo on beef products under insurance policy. ^[7]

To likely be successful in Arkansas, any suit seeking coverage for COVID-19 losses must be able to show a physical injury. Nationally, lawsuits are already being brought alleging that COVID-19 is a physical injury. In hard-hit Louisiana, the owners of the French Quarter’s restaurant Oceana Grill has brought a declaratory judgment (a lawsuit that asks the court to declare a party’s rights under a document) against its insurer Lloyd’s of London and the Governor of the State of Louisiana asking that a business income loss provision (or business interruption) or the civil authority provision of its policy be deemed to cover the pandemic. ^[8] Oceana Grill’s argument is novel — that the COVID-19 “physically infects and stays on the surface of objects or materials, ‘fomites,’ for up to twenty-eight days. . . .” ^[9] Thus, according to Oceana Grill, “[i]t is clear that contamination of the insured premises by the Coronavirus would be a direct physical loss needed remediation to clean the surfaces of the establishment.”^[10] Oceana Grill points to the business income loss provision of the policy, which it contends should cover its loss. Moreover, Oceana Grill points to the executive order by the Governor to close, arguing that the civil authority provision of the policy should thus apply to cover the loss from being required to close.  

In California, San Francisco restaurants The French Laundry and Bouchon Bistro have brought a similar lawsuit, raising similar arguments, against its insurer Hartford.^[11]  The Complaint alleges the restaurants are covered by a civil authority clause, stating that “[u]nder the policy, insurance is intended to apply to the actual loss of business income sustained and the actual, necessary, and reasonable extra expenses incurred when access to the scheduled premises is specifically prohibited by order of civil authority as the direct result of a covered cause of loss to property in the immediate areas of the plaintiffs’ scheduled premises.”^[12] The lawsuit points to a March 18, 2020 shelter-in-place order that also required all non-essential businesses to cease operations.^[13] Plaintiffs argue that (1) the “Order triggers coverage because the policy does not include an exclusion for a viral pandemic and actually extends coverage for loss or damage due to virus,”^[14] (2) that “the Order constitutes a prohibition of access to plaintiff’s Insured Premises by a Civil Authority as defined in the Policy,”^[15] and (3) that the policy provides coverage to plaintiffs for any current and future civil authority closures of restaurants in Napa County due to physical loss or damage from the Coronavirus and the policy provides business income coverage in the event that the Coronavirus has caused a loss or damage to the insured premises.”^[16]

In Oklahoma, the Choctaw Nation and the Chickasaw Nation have likewise sued their insurers over the COVID-19 related closure of their casinos.^[17] Like the others, the casino lawsuits allege that COVID-19 is a physical cause of the business interruption and the civil authority orders that closed the casinos. 

These lawsuits are setting the stage for a battle between businesses and insurers that will push the limits on the direct physical cause requirement for the business interruption and the civil authority clauses. For each insured, coverage will turn on the language of the policy, whether an exclusion applies, and whether COVID-19 is deemed to be a physical injury. For each insurer, coverage may turn on whether COVID-19 was actually found on the insured premises, whether business operations completely or partially ceased as a result, the circumstance of the presence of the virus, and the steps taken by the insured. Friday Eldredge and Clark, LLP encourages you to consult with your lawyers to discuss the steps necessary to protect yourself. 

Jamie Huffman Jones is a partner in the Litigation Practice Group and advocates for clients in jury and bench trials involving a variety of claims, including mass tort, catastrophic injury, wrongful death, business and commercial disputes, class actions, and automotive commercial disputes. 

Disclaimer: The information included here is provided for general informational purposes only and should not be a substitute for legal advice nor is it intended to be a substitute for legal counsel. For more information or if you have further questions, please contact one of our Attorneys.