COVID-19 business interruption claims have surged nationally since the beginning of the pandemic. The majority of these claims have been unsuccessful for policyholders. However, in Cajun Conti LLC v. Certain Underwriters at Lloyds, 2023 La. LEXIS 563 (La. Mar. 17, 2023), the Louisiana Fourth Circuit Court of Appeals found that COVID-19 constituted "a direct physical loss of or damage to" the insured's New Orleans restaurant. The insurer appealed the Fourth Circuit’s ruling to the Louisiana Supreme Court, who reversed and affirmed what most courts around the country have held – COVID-19 does not constitute physical loss or damage triggering insurance coverage.

Background Facts

Oceana Grill is a restaurant in the French Quarter of New Orleans. Like many other establishments, Oceana was forced to close to the public when the COVID-19 pandemic hit. Local regulations required complete closure for some time before being allowed to re-open at limited capacity. In addition to a capacity reduction, Oceana undertook cleaning and decontamination efforts in an attempt to clear COVID-19 from its premises.

Oceana initially filed a petition for declaratory judgment in the Civil District Court for Orleans Parish based on an “all-risks” commercial insurance policy it secured with -its insurers, Certain Underwriters at Lloyd’s, London. The petition requested Declaratory Judgment finding that the policy provided insurance coverage during closures and reductions in capacity. Oceana petitioned the trial court to declare that the “all-risks” policy provided coverage for direct physical loss or damage to its restaurant as a result of prolonged exposure to COVID-19. Lloyd's argued that COVID-19 was not a "direct physical loss" as described under the policy and promptly moved for summary judgment.

The trial court denied the motion for summary judgment and the action was assigned for a bench trial. After hearing the case, the trial court denied Oceana's petition for declaratory judgment.

Oceana appealed the trial court’s opinion to the Louisiana Fourth Circuit Court of Appeals. The Fourth Circuit found that the insurance contract contained an element of ambiguity, which required interpretation in the insured’s favor. This interpretation led the Fourth Circuit to overturn the trial court and hold that "direct physical loss" could mean loss of use of the property. Because the insured was unable to fully use the property due to capacity limitation, coverage was triggered. Two judges dissented.

Lloyd’s then appealed the Fourth Circuit’s decision to the Louisiana Supreme Court. The high court reasoned that COVID-19 did not cause damage or loss that was physical in nature. The high court further interpreted the language in the policy requiring "direct physical loss of or damage to property" and found that the policy was clear and must be enforced as written. The high court concluded that they “cannot alter the terms of an insurance contract under the guise of contractual interpretation when the policy uses unambiguous terms.” The Fourth Circuit judgment was reversed, and the trial court’s judgment finding that COVID-19 losses do not constitute physical loss was reinstated.

The Louisiana Supreme Court Follows the Majority: COVID-19 Does Not Constitute Physical Damage

The Louisiana Supreme Court distinguished COVID-19 from the decision in Widder v. Louisiana Citizens Prop. Ins. Corp., 82 So.3d 294 (La. App. 4 Cir. 8/10/11), which the Fourth Circuit relied upon. In Widder, the insured's home was contaminated by lead dust. The lead rendered the home "unusable" and "uninhabitable," which the court of appeal appellate court considered a direct physical loss. The Supreme Court noted that while the loss in Widder was arguably not direct, it may be distinguished from COVID-19 as a physical alteration did occur in Widder.

Similarly, the Supreme Court distinguished the Chinese-drywall cases cited in Widder. In the drywall cases, the drywall required removal and replacement, and thus, a direct physical loss.

The Louisiana Supreme Court considered testimony from various scientific experts retained by the parties. Oceana's expert argued that customers would not want to be in a location knowing they could be exposed to an infectious disease and that the presence of COVID-19, therefore, qualified as damage under the policy. On the other hand, the insurer's experts retorted that the virus could be removed and cleaned through normal cleaning operations that the restaurant was required to perform on a daily basis even during non-pandemic periods. They argued that the meaning of "physical damage or loss" is not ambiguous, but actually quite plain and clear.

The Court agreed and found it prudent to follow the ordinary meaning of “direct physical loss or damage.” In other words. The insured’s property must sustain some physical, tangible loss of insurance coverage to be triggered. Further, the damage must be “direct, not indirect.” Applying these meanings, the Court found that COVID-19 did not cause direct physical loss of or damage to the insured’s property.

Period of Restoration

The Court also examined the meaning of the “period of restoration” as found in the policy, applied to the context of the pandemic. The period of restoration begins "72 hours after a direct physical loss of or damage to the property and ends when the property should be repaired, rebuilt, or replaced with reasonable speed and similar quality" or "business is resumed at a new permanent location." Here the restaurant did not have anything to physically repair, rebuild, or replace. Although they had to focus on sanitizing the establishment and request that guests follow CDC guidelines requiring social distancing, there was no actual physical damage. The Court particularly looked to the word "repair" and found that there was nothing the restaurant had to physically repair.

The Court also found that the term "suspension," was not ambiguous. Rather, it was clearly defined in the policy. While suspension did include both a slowdown and a cessation per the policy definition, the policy required damage that was physical in nature.

The Policy’s Lack of a Virus Exclusion is Irrelevant

Although the Fourth Circuit’s judgment relied on the fact that the policy did not contain a virus exclusion, the Supreme Court found the lack of a virus exclusion irrelevant. They understood that the policy is a contract and must be interpreted “within its ‘four corners’ whenever the words are clear, explicit, and lead to no absurd consequences.” They found the policy was clear, and the consideration of parol evidence relative to a virus exclusion not included in the policy was unnecessary.

Oceana argued for coverage because an available virus exclusion was not included in the policy. The Court noted, “[a]t the time the subject policy was issued and the pandemic occurred, an exclusion for virus and bacteria was available from the Insurance Services Office, who publishes standardized policy forms to the insurance industry.” Despite this fact, the Court found the policy terms to be unambiguous. The Court understood that although additional exclusions which may have eliminated the insurer's liability for loss or damage caused by a virus were available on the market, the policy should be interpreted based on the plain language it contained.

The Court found that "[t]he plain, ordinary and generally prevailing meaning of direct physical loss of or damage to property requires the insured's property sustain a physical, meaning tangible or corporeal, loss or damage. The loss or damage must also be direct, not indirect. Applying these meanings to the facts and arguments presented, COVID-19 did not cause direct physical loss or damage to the insured restaurant's property." The presence of a virus exclusion was, therefore, irrelevant.

The Final Decision

The Court noted sympathy to the immense economic challenges faced in responding to the pandemic. However, it noted that it could not alter the terms of an insurance contract when the policy uses unambiguous terms. The insured never repaired, rebuilt, or replaced any property that was allegedly lost or damaged. As such, the trial court was correct in determining that there was no physical loss or damage to the property, and the judgment denying coverage was proper.

This case has potential implications nationwide where business interruption claims resulting from COVID-19 are pending. insureds and insurers should no longer rely on the Cajun-Conti decision issued by the Louisiana Fourth Circuit now that the Louisiana Supreme Court has ruled. With few other cases ruling that COVID-19 qualifies as a physical loss, policyholders may reconsider litigation for business interruption losses from COVID-19.

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