November 30, 2020Newsletter

The Virus Exclusion for COVID-19 and Insurers: The Importance of Careful Policy Review Before Commencing Litigation

An Arizona federal judge has issued a strong rebuke to a chain of fast-food restaurants seeking business-interruption coverage for its COVID-19-related losses. In Border Chicken AZ LLC v. Nationwide Mutual Insurance Company et al, case number CV-20-00785 (Nov. 20, 2020), the U.S. District Court for the District of Arizona granted Allied Property & Casualty Insurance Co.’s motion to dismiss Border Chicken’s insurance coverage suit, and awarded Allied its attorneys’ fees and costs. Border Chicken owns 15 Church’s Fried Chicken franchises in Arizona and New Mexico and one Little Caesars Pizza franchise. It sought insurance coverage for losses sustained due to the COVID-19 pandemic.

Fatal to Border Chicken’s case was the presence of a Virus Exclusion in its business owner’s insurance policy that the court described as “unambiguous.” Border Chicken argued that the Virus Exclusion did not apply because its restaurants were closed as a direct result of executive orders, requiring non-essential businesses to close (and triggering “Civil Authority” coverage), as opposed to by the presence of any “virus.” The court rejected this argument, pointing out that the “Virus Exclusion bars coverage for ‘loss or damage caused directly or indirectly ‘by a virus and ‘regardless of any other cause or event that contributes concurrently or in any sequence to the loss.’” It then dismissed Boarder Chicken’s case.

The court, however, went a step further. Because Border Chicken failed to raise the existence of the Virus Exclusion in its complaint or amended complaint—and never provided a satisfactory explanation as to why the exclusion should not apply—the court awarded Allied its attorneys’ fees and costs, calling Border Chicken’s litigation position “inexcusable.” 

This decision highlights the importance of carefully reviewing all potentially applicable insurance policies before filing a lawsuit. Depending on the specific nature of the loss or claim at issue, and further depending on the specific language found in a company’s policies, other coverages that might respond to a COVID-19-related loss include: Event Cancellation; Commercial General Liability; Directors & Officers, Management Liability, Errors & Omissions; Professional Liability Insurance; Environmental Insurance; and Workers’ Comp and Unemployment Insurance.

The insurance coverage attorneys in the Banking & Financial Services Industry Group at Michael Best are here to provide guidance and assist clients in their pursuit of insurance recovery to help mitigate losses related to COVID-19.

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