No Direct Physical Loss or Damage, No Coverage: All-Risk Policy Does Not Cover Lost Profits Due to COVID-19 Government Restrictions

The Eleventh Circuit held that an insured’s policy did not cover the lost profits it suffered as a result of government restrictions implemented in response to the COVID-19 pandemic because the policy only covered “direct physical loss or damage.” Ascent Hospitality Management Co. v. Employers Insurance Co. of Wasau, 2022 U.S. App. LEXIS 1161 (11th Cir. Jan. 14, 2022), follows just a few months after the court handed down its first insurer victory in a pandemic coverage appeal in Gilreath Family & Cosmetic Dentistry, Inc. v. Cincinnati Insurance Co., 2021 U.S. App. LEXIS 26196 (11th Cir. Aug. 31, 2021), in which the court held there was no coverage under Georgia law for lack of physical loss or damage, and adds another case to the growing list of decisions in which federal courts across the country have ruled in favor of insurance companies in pandemic loss disputes.

The appellant, Ascent Hospitality Management Company, manages and operates hotels and restaurants in five states. It obtained an “all-risks” insurance policy that covered Ascent’s property “against all risks of direct physical loss or damage.” At the outbreak of the COVID-19 pandemic, all of the states in which Ascent operated restricted business and travel, causing Ascent to lose an estimated $40 million. Ascent submitted a claim to its insurers, which was denied. It sued its insurers, alleging that they wrongly denied its claim and sought a declaratory judgment that its losses were covered and damages for breach of contract, bad faith, fraudulent misrepresentation, and fraudulent suppression. The district court granted the insurers’ motions to dismiss in part and ultimately dismissed the remaining claims by judgment on the pleadings.

In an unpublished opinion, Judges Jordan, Newsom, and Grant affirmed. The parties agreed that New York law controlled the interpretation of the insurance policy. The court observed that New York courts have held that when an insurance policy covers “direct physical loss or damge,” coverage is “limited to instances where the insured’s property suffered direct physical damage.” Roundabout Theatre Co. v. Cont’l Cas. Co., 751 N.Y.S.2d 4, 8 (App. Div. 2002). And New York courts have consistently interpreted Roundabout Theatre to require rejection of claims for pandemic-related lost profits under similar insurance provisions, reasoning that “‘direct physical loss or damage’ unambiguously requires some form of actual, physical damage to the insured” property in order to “trigger loss of business income and extra expense coverage.” Tappo of Buffalo, LLC v. Erie Ins. Co., 2020 U.S. Dist. LEXIS 245436 (W.D.N.Y. Dec. 29, 2020). The court rejected Ascent’s attempt to rely on non-binding authority that did not interpret New York law, finding the reasoning of those cases unpersuasive. See, e.g., Kingray Inc. v. Farmers Grp. Inc., 523 F. Supp. 3d 1163 (C.D. Cal. 2021); Studio 417, Inc. v. Cincinnati Ins. Co., 478 F. Supp. 3d 794 (W.D. Mo. 2020).

The court also rejected Ascent’s counterarguments. First, because the plain language of the provision limited coverage to physical loss or damage directly to the property, the language could not be read to cover “deprivation” of Ascent’s property as a result of government responses to the COVID-19 pandemic. Second, Ascent’s argument that “physical loss or damage” must include more than actual physical damage because a more narrow reading would make the term “loss” meaningless was without merit. Such an argument was rejected in Roundabout Theatre, where the court reasoned that the terms “direct” and “physical” modified the term “loss” and narrowed the scope of coverage. Finally, Ascent argued that Roundabout Theatre was distinguishable because it did not involve a virus. According to Ascent, the virus particles constituted the necessary direct and physical element required to trigger coverage. But the Eleventh Circuit disagreed, siding with the district court’s conclusion that COVID-19 particles cannot cause the required physical change to property because a contaminated location can be immediately restored by cleaning, without repair or replacement. Plus, there was no proof of actual contamination.

Because there was no coverage under the policy, the court affirmed the district court’s dismissal of Ascent’s declaratory judgment, breach of contract, and bad faith claims. It also affirmed dismissal of Ascent’s fraudulent representation and suppression claims. It was undisputed that Georgia law applied to Ascent’s tort claims. The fraudulent representation claim could not survive because under Georgia law, Ascent was required to show that the defendant made a false representation, which it could not do since coverage was properly denied. The suppression claim was due to be dismissed because the insurers did not have an “obligation to communicate,” a necessary element of a fraudulent suppression claim. In Georgia, the court explained, no fiduciary or confidential relationship exists between an insured and the insurer. Although Ascent argued the insurers had an obligation to communicate because the insurers secretly intended to issue blanket denials to all claims like Ascent’s without examining them, Ascent failed to provide any on point case law to support its argument.

Posted by Kamryn Deegan.

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