Ohio Federal Courts Confirm COVID-19 Insurance Coverage, Certify Unsettled Questions to State High Court

Ohio federal judges recently ruled on two separate COVID-19 coverage cases on the same day. In the first, the court delivered a victory for an Ohio restaurant group, ruling that COVID-19 government shutdown orders triggered coverage for restaurants that were forced to close. To date, this is the fourth decision finding that coverage exists for a COVID-19 loss, part of a string of recent policyholder victories (discussed previously on the Hunton Insurance Recovery Blog). In the other Ohio case, the district court certified coverage questions to the Supreme Court of Ohio to seek clarity on unresolved issues of Ohio law and attempt to achieve uniformity in the application of state law to the hundreds of COVID-19 insurance claims pending in the Ohio federal and state court systems.

Government Orders Triggered Coverage for Restaurant Group

Henderson Road Restaurant System, which operates 16 restaurants in Ohio, Michigan, Florida, Indiana, and Pennsylvania, sought coverage from Zurich for lost business income resulting from various state and local shutdown orders that temporarily prohibited the restaurants from providing in-person dining, which comprised nearly all of the restaurants’ pre-pandemic business.

Henderson argued that it was entitled to coverage under the policy’s business income coverage, which insured against a suspension of operations due to a fortuitous event causing “direct physical loss of or damage to” property. Because the insurer did not contest that the restaurants had suffered a loss of business income, the court needed only to decide whether the suspension resulted from a fortuitous “direct physical loss of or damage to” property—a phrase undefined in the policy.

Relying on a number of bedrock policy interpretation principles, the court agreed with Henderson, finding that the shutdown orders triggered the policy’s business income coverage. The court first concluded that the policy’s key phrase “direct physical loss of or damage to” property was ambiguous because it was reasonably susceptible to more than one interpretation. Specifically, the court recognized Henderson’s “valid argument” that physical loss of real property “means something different” from damage to that property. Otherwise, the court reasoned, “why would both phrases appear side-by-side separated by the disjunctive conjunction ‘or’?”

Because the policy was reasonably susceptible to Henderson’s interpretation, the policy was ambiguous even if the insurer’s interpretation of the policy it drafted was also reasonable. The court also distinguished prior Ohio precedent cited by Zurich in support of its refusal to provide coverage, finding that the decisions did not analyze business interruption coverage or involved different policy language or facts.

The court rejected Zurich’s arguments that the state shutdown orders did not preclude Henderson from using its property because the restaurants were still permitted to provide take-out orders, emphasizing that the properties were used “almost exclusively for in person dining” prior to the pandemic and noting that Zurich had failed to demonstrate that the restaurants would have been able to realistically transition to take-out-only or that they could have still use the dine-in-centric properties for take-out orders.

Again, the policy’s use of physical loss of property, as opposed to only damage to such property, undermined the insurer’s argument that Henderson needed to show adverse effects to the “structural integrity” of the covered property to trigger coverage. This distinction meant that the restaurants were covered because they were deprived of the primary use of their real property, even if they could still use the property for take-out services. To hold that a permanent loss was necessary when the policy failed to make such a requirement clear would be to construe an ambiguity in favor of the insurer, which the court recognized was inconsistent with Ohio law. Because Henderson had shown that no one could have anticipated the shutdown orders closing or greatly restricting the restaurants (i.e., an “occurrence of chance”), the court concluded that the loss was “fortuitous,” which was sufficient to trigger the policy’s business income coverage.

In evaluating Zurich’s reliance on “microorganism” and “loss of use” exclusions to deny coverage, the court rejected both exclusions as inapplicable to the restaurant’s COVID-19-related losses. Because the insurer had conceded that none of the properties were closed as a result of the known presence of the virus on the properties, the loss of use of the properties were caused by the government closures, which are not excluded, so the microorganism exclusion did not apply.

In rejecting Zurich’s broad view of that exclusion, the court noted that the insurers are the parties that select the language in the contract, which must be “clear and exact” to be given effect. The court further explained that Zurich could have but chose not to include an exclusion for government closures and that the burden was Zurich’s to clearly identify “the unusual and unforeseeable events that led to the closings” of Henderson’s properties. This was especially true, given that by at least as early as 2006, insurers had sought approval for a “broad” exclusion barring coverage for “viral and bacterial contamination” of properties, showing that insurers, like Zurich, could have evidenced a clear intent to exclude losses like those at issue in Henderson’s claim but failed to do so.

The court also quickly dispatched a “loss of use” exclusion, agreeing with Henderson that Zurich’s broad interpretation of that exclusion could “void business income coverage in its entirety,” which was another area of confusion in the policy that the court was required to construe against the insurer and in favor of the policyholder.

Although the parties must still litigate the issue of damages, the court certified for interlocutory appeal the legal holding that coverage was triggered. Assuming the insurer appeals, this case will provide one of the earliest opportunities for a federal appellate court to weigh in on COVID-19 coverage cases.

Federal Court Requests Opinion of State Supreme Court on COVID-19 Coverage Issue

On the same day as the Henderson decision, another Ohio federal court in Neuro-Communication Services v. Cincinnati Insurance Co. requested state appellate review of the legal questions involved before ruling completely on the merits.

After closing its operations as a result of the COVID-19 pandemic and related civil authority orders, the policyholder sought coverage from Cincinnati under an “all-risk” policy, asserting that it had suffered significant business income losses.

The insurer denied coverage on the grounds that the claim did not involve direct physical loss to property at the premises caused by a covered cause of loss, and the policyholder filed suit seeking to certify a nationwide class of insureds holding similar policies that had also been denied coverage for COVID-19 losses.

Citing a lack of controlling precedent from the Ohio Supreme Court and the “dozens, if not hundreds of cases” seeking coverage for COVID-19-related losses in the Ohio state and federal court system, the court certified the questions of whether:

• The general presence in the community, or on surfaces at a premises, of the novel coronavirus known as SARS-CoV-2, constitutes direct physical loss or damage to property; and
• The presence on a premises of a person infected with COVID-19 constitutes direct physical loss or damage to property at that premises.

The Neuro-Communication Services court’s certification will be closely watched, as it may provide further clarity on unresolved questions of Ohio law and bring uniformity to the application of state law to the insurance policies at issue.

Takeaways

The Henderson decision applies settled insurance principles (in Ohio and elsewhere) that insurers face a heavy burden to draft policies clearly and unambiguously, which should hold true regardless of how the Ohio Supreme Court responds to the questions certified in Neuro-Communication Services.

Policyholders need only show that their preferred interpretation is reasonable, not that it is the most reasonable or even more reasonable than that of the insurer.¹  When drafting policies, insurers seeking to limit coverage must be “specific,” and any exclusions must “clear and exact” to apply to a given claim.²  Moreover, where insurers have evidenced an ability to issue exclusions explicitly targeting contamination by viruses, as the Henderson court recognized occurred in Ohio with the 2006 ISO “virus” exclusion, courts correctly take a narrow view of other exclusions that the insurers rely on in hindsight to have a similar effect without clearly stating so.

Zurich is expected to appeal the Henderson opinion, which, combined with the pending Neuro-Communication Services questions certified to the Ohio Supreme Court, should place these issues before several state and federal appellate courts in the near future. The issues presented in both cases touch on the key disagreements common to many coverage disputes, and an answer to these questions may be instructive on how those other cases are likely to resolve.

¹ See Sauer v. Crews, 18 N.E.3d 410, 413 (Ohio 2014) (“[I]f provisions are susceptible of more than one interpretation, they will be construed strictly against the insurer and liberally in favor of the insured.”).

² Lane v. Grange Mut. Cos., 543 N.E.2d 488, 490 (Ohio 1989).