The attorney who filed the first U.S. lawsuit seeking insurance coverage for a business shut down because of coronavirus won the first policyholder victory in a state or federal appellate court that interpreted the meaning of “direct physical loss or damage.”

The Louisiana 4th Circuit Court of Appeals on Wednesday reversed a trial court decision that dismissed a lawsuit filed by Cajun Conti, the owner of a 500-seat restaurant in the New Orleans French Quarter.

All 77 federal and 44 state court appellate decisions so far have held that the coronavirus did not cause tangible damage to property that was covered under standard-form commercial property policies. But the Louisiana appeals court ruled in a 3-2 decision that a Lloyd’s of London syndicate owed coverage to Cajun Conti because its policy was ambiguous, so must be interpreted in favor of the policyholder.
John Houghtaling

Plaintiff’s attorney John W. Houghtaling II said none of the cases decided so far went to trial. He said he won because he was able to present “smoking gun” evidence at trial that the Insurance Service Office was aware that a virus contamination can trigger coverage under “all risk” commercial property policies. The ISO admitted that when its representatives met with the Louisiana insurance commissioner and other insurance regulators around the country in 2006 to seek approval of a standard-form virus exclusion, Houghtaling said.

“I didn’t make that up,” he said during a telephone interview on Thursday. “That was out of the mouths of the insurance industry.”

Mark Friedlander, communications director for the Insurance Information Institute, said the Louisiana decision is an outlier.

“We respect the appellate panel’s ruling but disagree with the decision,” Friedlander said in email. “We are confident courts across the country will continue to rule in favor of insurers in business interruption cases because there is ‘no physical loss present.’ Insurers have been prevailing in these cases because the policy language is very clear. Consequently, insurers cannot be held responsible for coronavirus-related losses.”

The attorney who represented Lloyd’s, Allen C. Miller of Phelps Dunbar in New Orleans, said in an email that the dissenting opinion in the case reflects the opinion of every federal and state appellate court that has ruled on the question of whether insurance coverage is owed for COVID-19 business-interruption losses. He noted that the 5th Circuit Court of Appeal, interpreting Louisiana law, had also rejected property insurance coverage in a lawsuit filed by Q Clothier and Louisiana Bone.

“The decisions have been unanimous, without a single dissent,” he said. We will pursue all options to address what we believe to be an outlier decision.”
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Only one appellate court so far has ruled in favor of a policyholder seeking coverage for income lost because of a COVID shutdown. The New York Appellate Division, 1st Department found that coverage was owed under pollution legal liability policy purchased by the New York Botanical Garden. That policy did not include the usual language that requires a “direct physical loss or damage.”

Cajun Conti owns the Oceana Grille, a restaurant in the heart of the touristy French Quarter that seats 500 and employed 200 before Gov. John Bel Edwards issued a March 16, 2020 executive order that forced restaurants throughout the state to close their dining rooms. Oceana reopened at 25% capacity two months later and continued to operate at less than 50% capacity for the next year.

The company had paid $91,000 to purchase a commercial property policy without the usual virus exclusion. The general manager testified that he would not have bought a policy with that exclusion because the restaurant serves raw oysters.

Cajun Conti filed a lawsuit against Lloyd’s on the same day it shut down, seeking a declaratory judgment that the insurer owed coverage for its losses because of the contamination to the premises. Orleans Parish Judge Paulette R. Irons ruled against a motion to dismiss filed by Lloyds, but after a trial ruled that no coverage was owed without making any written findings.

The 4th Circuit wrote three opinions; two for the majority and one for the dissent.

Writing for the majority, Chief Judge Terri F. Love, cited testimony from Dr. Lemuel Moye that supported the argument that the coronavirus had physically altered the property.

“The physical presence of COVID-19 substantially diminished the usable space of the property, as tables needed to be pushed farther apart, and resulted in economic losses due to the slowdown of the appellants’ business,” the opinion says. “Stated differently, the physical presence of infectious viral particles decreased the habitable portion of the insured property and caused a slowdown of business activities.”

Judge Joy Cossich Lobrano concurred, but wrote separately to say coverage was owed under a 2011 appellate court decision, Widder v. Louisiana Citizens Property Insurance Corp., that held lead contamination to a home had caused a direct physical loss because it had rendered the property unusable.

The two dissenters, in an opinion written by Judge Roland L. Belsome, said the trial court’s ruling in favor of Lloyds should have been upheld because there was no physical alteration to Cajun Conti’s property.
Rhonda Orin

Rhonda D. Orin, an insurance recovery attorney for the Anderson Kill law firm in Washington, D.C., said the fact that five appellate court judges wrote three opinions to explain their reasoning demonstrates the ambiguity that Cajun Conti was trying to prove. She said business owners who buy all-risk policies with no virus exclusions expect to be covered in circumstances where they are not allowed to use their property for the intended purpose.

Both Houghtaling and Orin pointed out that most of the decisions so far were decided in federal court at the summary judgment stage, meaning federal judges are interpreting state laws. Houghtaling said he would not have been able to present evidence that ISO considered viral contaminations to be compensable if his case had not gone to trial.

Attorneys for Marc Fisher LLC, a designer shoe distributor, also attempted to submit evidence about ISO’s statements to insurance regulators in a lawsuit that sought more than $100 million in damages. A state court judge dismissed the case after finding no coverage was owed because of a virus exclusion.

Nevertheless, Orin said the ISO’s comments to insurance regulators about the need for a virus exclusion in 2006 make for compelling evidence.

“Companies don’t go through the process of drafting exclusions and getting them approved by all 50 state insurance departments if they don’t need them,” she said.

Orin said she’s been practicing law long enough to see how tort liability in environmental law developed. Insurers that excluded coverage for pollution won early rounds, but then started losing cases.

She said the tide may be turning for COVID-19 business-interruption claims as well.

“I think this thing can turn on a dime and I think insurance companies think it can too and are worried about it,” she said.

James Sullivan, a policyholder attorney with the Calfee law firm in Cleveland, Ohio, said the decision demonstrates that business-interruption coverage is a matter of state law and should be decided by state courts rather than federal courts.

“Although it relies on Louisiana law, which sometimes differs from other states’ laws, this case shares at least two things in common with many other U.S. states,” Sullivan said in an email. “First, it relies largely upon the principle that ambiguous insurance policy language gets construed in the policyholder’s favor as a matter of law, and this same principle exists in most US states. Second, this case shares the same key question as most cases in U.S. state courts, which is how to interpret the phrase “direct physical loss or damage.”

He said it stands to reason that other state high courts may find insurance policy language to be ambiguous.

“Here in Ohio, where ambiguities are construed in favor of policyholders, we continue to wait and see how our Ohio Supreme Court will rule on this topic in a pending case,” he said.