Insurance Coverage; COVID-19 Business Interruption Claims; Interpretation and Application of the “Virus Exclusion”

By Joseph F. Nicholas, Jr.

Throughout the country and due to the impacts of the current COVID-19 pandemic, business owners are presenting business interruption claims to their commercial insurance carriers. With fair regularity, insurers are denying these claims based upon a “Virus Exclusion” within the insured’s policy.

These claim denials then are being made the subject of declaratory actions, with the courts being asked to determine the issue of coverage.

Confronted with such situations, jurists in two separate cases pending in the Federal District Court, Northern District of Ohio, recently arrived at conflicting conclusions with regard to whether the state’s COVID-19 shutdowns of restaurants created valid claims for business interruption insurance coverage. Weighing fundamentally identical facts and policy language, one court found for the insurer, upholding a denial of coverage, while the other found for the insured restaurant, holding that coverage existed under the particular policy. The disparity in these decisions will certainly result in further appellate activity in Ohio with significant implications as the consequences of the COVID-19 pandemic continue to be revealed.

The question has now been certified to the Ohio Supreme Court.

Santo’s Italian Café, LLC v. Acuity Ins. Co., (Dec. 20, 2020), N.D. Ohio No. 1:20-CV-01192

In Santo’s, Judge Pamela Barker relied upon two separate basis when finding in favor of the insurer, and dismissing Santo’s claims for business interruption coverage. First and foremost, the Court concluded that the insured had failed to demonstrate any “tangible” or “structural” damage beyond mere “economic losses” that would establish “direct physical loss of or damage to” the insured premises. This is not an uncommon basis for denial of coverage in such situations; i.e., a very strict interpretation and application of the language of a typical Virus Exclusion. Specifically, the Court noted the language of the Property Coverage Form which read, “We will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.” Further, the form included the following in “additional coverages”:

g. Business Income and Extra Expense

(1) We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your operations during the period of restoration. The suspension must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss.

Acuity asserted there had been no “direct physical loss of or damage to property,” because there were no allegations of “demonstrable, physical alteration” or “tangible alteration” of the property. To the contrary, Santo’s argued the policy was subject to interpretation in that “physical loss” can include a “loss of functionality,” “lost operations or inability to use the business.”

Relying upon Mastellone v. Lightning Rod Mut. Ins. Co., 175 Ohio App. 3d 23, 40 (Ohio 8th Dist. Ct. App. 2008) (denying coverage for mold stains) and Universal Image Prods., Inc. v. Federal Ins. Co., 475 Fed. App’x 569, 573 (6th Cir. 2012) (denying coverage for an odor caused by mold or bacteria) the Court concluded that under Ohio law, the terms of the policy required Santo’s to allege and prove a “distinct, demonstrable physical alteration” of its property, beyond “mere economic effects.”

Alternatively, the Court determined that even if Santo’s had alleged a viable claim, coverage was further precluded by the “virus exclusion” in the coverage forms, which states:

1. We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss…

i. Virus or Bacteria

(1) Any virus, bacterium, or other microorganisms that induces or is capable of inducing physical distress, illness or disease.

To this point, Santo’s argued that it was not the COVID-19 virus, but the Ohio Closure Orders that caused the loss, and that the exclusion is ambiguous because it does not specifically reference the term “pandemic.” The Court was not persuaded by these arguments since in its Complaint Santo’s acknowledged that the Closure Orders were issued due to the spread of the COVID-19 virus and the pandemic arose from the virus. It also relied upon the anti-concurrent causation language, which excludes damage caused “direct or indirectly” by the cited causes “regardless of any other cause or event that contributes” to it.

For these several reasons, the Santo’s Court held that no coverage existed under the particular policy.

Henderson Road Restaurant Systems, Inc., v. Zurich Am. Ins. Co., (Jan. 19, 2021), N.D. Ohio No. 1:20-CV-1239

In contrast, in Henderson, Judge Dan Polster granted the insured’s motion for summary judgment, finding that business interruption insurance coverage was available under virtually identical policy language and on the basis of the same arguments that Judge Barker had rejected in Santo’s. Specifically, the pertinent portion of the policy in Henderson reads:

Business Income Coverage Form


We will pay for the actual loss of ‘business income’ you sustain due to the necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration.’ The ‘suspension’ must be caused by direct physical loss of or damage to property at a ‘premises.’ … The loss or damage must be directly caused by a ‘Covered cause of loss.’”

The Henderson Court was receptive to the insured’s argument that ambiguity existed with regard to the phrase “direct physical loss of or damage to” property. Construing these ambiguities in favor of the insured, the Court agreed that the phrase could mean something other than “damage to” the real property because, otherwise, why would “physical loss of” and “damage to” appear side-by-side separated by the disjunctive conjunction “or”? Accordingly, the Court agreed that the insured could have “lost their real property” under the terms of the policy “when the state governments ordered that the properties could no longer be used for their intended purpose.”

Zurich, the insurer, argued  that coverage was otherwise barred by operation of the following “microorganisms” exclusion in the policy:

12. Microorganisms

We will not pay for loss or damage consisting of, directly or indirectly caused by, contributed to, or aggravated by the presence, growth, proliferation, spread, or any activity of ‘microorganisms,’ unless resulting from fire or lightning. Such loss or damage is excluded regardless of any other cause or event, including a ‘mistake’ or ‘malfunction,’ or weather condition, that contributes concurrently or in any sequence to the loss, even if such other cause or event would otherwise be covered.

However, the Henderson Court rejected this argument, stating: “Plaintiffs’ restaurants were not closed because there was an outbreak of COVID-19 at their properties; they were closed as a result of governmental orders.” The Court further noted the stipulation that none of Plaintiffs’ Insured Premises had been closed as a result of a known or confirmed presence of COVID-19 at any of the Insured Premises, and that the microorganisms exclusion “did not clearly exclude loss of property caused by a government closure.”

Future Appellate Activity in Ohio

The Santo’s and Henderson decisions addressing the question of the availability of business interruption insurance coverage for COVID-19 business shutdowns were each issued by the Ohio Northern District within a month of one another, but arrive at differing conclusions. Santo’s determined that business interruption coverage requires “structural” or “tangible” damage beyond “economic loss.” Henderson found that a “physical loss” occurs when a property cannot be used for its intended purposes during a pandemic-related shutdown. By the same token, one decided that government closure orders are sufficiently related to COVID-19 to fall under a virus exclusion, while the other found that an exclusion for microorganisms is inapplicable because the losses were caused by the government closure orders, as opposed to the virus itself.

Aware of this dichotomy, the Henderson court provided for interlocutory appeal of its coverage ruling.

Similarly, in Neuro-Communication Services Inc., etc., v. The Cincinnati Insurance Co., N.D. Ohio No. 4:20-CV-1275, yet a third case from the Ohio Northern District, Judge Benita Pearson issued the following certified questions of law to the Ohio Supreme Court:

Does the general presence in the community, or on surfaces at a premises, of the novel coronavirus known as SARS-CoV-2, constitute direct physical loss or damage to property; or does the presence on a premises of a person infected with COVID-19 constitute direct physical loss or damage to property at that premises?

Within the Order of Certification, Judge Pearson states that “Dozens, if not hundreds, of cases seeking coverage for losses related to the pandemic under policies similar or identical to that at issue in this case have been filed in both federal and state courts in Ohio,” and that “The certification procedure invoked here will allow the Supreme Court of Ohio to decide these questions and bring uniformity to the application of state law to these policies…”

In the meantime, insurers and insureds in Ohio must anxiously await the interpretation and resolution of these issues by the Sixth Circuit or the Ohio Supreme Court and the potentially far reaching implications they will have.

If you have questions related to this topic or need legal advice, please contact Joe Nicholas (Cleveland, OH) at the law offices of Mazanec, Raskin & Ryder Co., L.P.A.