Loss of income due to government mandated COVID restrictions on businesses is not covered by insurance

Turns out, loss of income due to government mandated COVID restrictions on businesses is not covered by insurance the same way radiation or asbestos contamination might be.

The 7th U.S. Circuit Court of Appeals is the latest to join the state appellate courts in Ohio and California in issuing concurring decisions that business-income-interruption-insurance coverage does not cover loss-of-use due to COVID-related restrictions.

The three-judge panel from the 7th Circuit joined the 6th, 8th, 9th and 11th Circuits in ruling that the restrictions on the use of property, “unaccompanied by any physical alteration,” does not trigger coverage under the defendants’ policies.

The 7th Circuit’s ruling, involving six separate cases, was issued by federal judges in Illinois however, U.S. District Judge Edmond Chang, in Chicago, reached the opposite conclusion back in February in the multidistrict litigation (MDL) he was overseeing. Forty of the MDL’s 53 cases were filed in federal court in Illinois, according to court records, and Judge Chang allowed the suits to proceed, saying “a reasonable jury” could conclude that loss of use was covered.

However, the 7th Circuit’s decision highlighted that while the restrictions implemented to curb the spread of the virus diminished, and in some ways prohibited, use of the covered equipment, specifically in the hospitality and service industries, “loss-of-use” did not constitute “lost or damaged equipment,” which is what the coverage is for.

“Our review is de novo, but we find little to criticize in the district courts’ resolutions of these cases, and so we affirm the judgments of dismissal,” the decision read. “In doing so, we join the four circuits that so far have addressed the central question before us: whether loss of use, unaccompanied by any physical alteration to property, may constitute direct physical loss under the relevant insurance policies.”

In the six cases decided by the 7th Circuit, the businesses all had to close or dramatically scale back operations as a result of executive orders issued in March 2020 to curb the spread of the virus.

According to the ruling, neither the virus nor the resulting closures caused any physical damage to the covered property and further stating that “loss-of-us” is not the same as “loss,” as far as the coverage was concerned.

“In other words, incorporating the stated definition of ‘loss,’ the Businesses were covered for income losses resulting from direct physical loss or direct physical damage to property. Thus, … they needed to allege that either the virus or the resulting closure orders caused direct physical loss or direct physical damage to covered property,” the decision read, stating clearly that “loss-of-use” does not constitute “damage,” in insurance-speak.

The 7th Circuit also highlighted that the precedent established for interpreting “direct physical loss,” such as with radiation exposure and asbestos, requires a physical alteration to the property covered and “loss-of-use” alone, without any physical alteration to the property, was not covered.