Sixth Circuit Finds No Coverage For COVID-19 Interruptions When Not Due To Infectious Disease At Insured Premises


In Wild Eggs Holdings, Inc., et al. v. State Auto Property and Casualty Insurance Company, --- F.3d --- (6th Circuit 2022), BatesCarey attorneys Adam H. FleischerMichael H. Passman, and Joanna Gau Swartout obtained a ruling that insurer, State Auto Property and Casualty Ins. Co., owed no coverage for business income loss arising from COVID-19 restrictions on the insured’s restaurants in Kentucky, Indiana, and Ohio. The United States Court of Appeals held that, under Kentucky law, COVID-19 restrictions on restaurant operations did not constitute “direct physical loss” or “direct physical damage” of property, as was required to trigger commercial property coverage. The Sixth Circuit further held that there was no coverage available under a Restaurant Extension Endorsement, which only would have extended coverage if the insured premises suffered from alleged exposure of an infectious disease that then caused the government to suspend operations at that premises.

Wild Eggs and its affiliates operate 11 restaurants in Kentucky, Indiana, and Ohio. Wild Eggs sued State Auto Property under a commercial property policy which covered Wild Eggs’ COVID-19 business income losses when caused by a direct physical loss of property that was in need of repair, rebuilding or replacement. After the Western District of Kentucky found no coverage for the claim, Wild Eggs appealed to the Sixth Circuit. On June 9, 2022, BatesCarey partner Adam Fleischer argued this matter before a Sixth Circuit appellate panel in Cincinnati, Ohio.

The court accepted BatesCarey’s argument that the insurance prerequisite of a “direct physical loss” or “direct physical damage” to property, must be interpreted to require a tangible change to the physical condition of property that requires some type of restoration to bring it back to its original quality. There were no such allegations of changed quality of any property, BatesCarey argued, and the Sixth Circuit agreed.

The court also determined that the Restaurant Extension Endorsement requires first that there must be alleged exposure of an infectious disease at an insured premises, which then causes a government to respond with an order suspending operations at that premises. The court determined that the order of causation that Wild Eggs alleged was the reverse of what was required to trigger coverage. Instead of the alleged COVID exposure at a defined insured premises causing a government to issue a responsive suspension order, Wild Eggs alleged that the states ordered restaurants to close to preventexposure at the insured premises. The suspension orders were therefore prophylactic measures intended to curb the spread of COVID, not issued as a result of an exposure of Wild Eggs’ restaurants. The causation requirement in the Restaurant Extension Endorsement was not satisfied and accordingly the Endorsement did not provide coverage.

This decision falls in line with BatesCarey’s precedent-setting wins defending clients against COVID-19 business interruption claims in the wake of the multi-year pandemic and ensuing impact facing the insurance industry at large.