Jun 02, 2020
Will Insurers Be Subsidizing Your Next Meal at the French Laundry? Business Interruption Claims Amid the COVID-19 Pandemic
Jun 02, 2020
By Daniel J. Schneider
Foodies have long known Thomas Keller for his Michelin-starred restaurants, including the French Laundry, at which until recently, for a small fortune, one could be treated to culinary mastery. During the COVID-19 pandemic, with the French Laundry and his other establishments closed, Mr. Keller is becoming known in insurance law circles in California. In French Laundry Partners, LP, et al. v. Hartford Fire Insurance Company, et al., his various business entities recently filed a complaint against their insurance carriers in Napa County Superior Court, demanding business interruption coverage under their policies. The carriers have denied coverage, claiming no events triggering such coverage have occurred.
“Business Interruption Insurance” is defined as, “An agreement to protect against one or more kinds of loss from the interruption of an ongoing business, such as a loss of profits while the business is shut down to repair fire damage.” (Black's Law Dictionary (11th ed. 2019).) It is optional insurance coverage some business owners obtain to protect themselves during work stoppages. In some instances, landlords require such insurance to ensure tenants’ ability to pay rent despite being unable to operate their businesses.
In the case of legally forced closures resulting from COVID-19, the plain meaning of the phrase “business interruption insurance” might lead one to think that business owners would be insured for losses under policies with such coverage: business owners are not permitted to operate, business has been interrupted, therefore coverage. The reality, however, is more nuanced. Carriers have denied claims by invoking creatively crafted policy language even in connection with closures arising out of significant disasters. Businesses have fought back, demanding coverage in several instances and seeking court intervention upon carrier refusal.
Insurance companies’ typical policy language provides for business interruption coverage only if the business is closed due to physical damage to the place of business; the physical place of business is closed by order of “Civil Authority,” or physical damage to a “dependent property” (discussed below) causes the closure of the place of business. Not surprisingly, policies also contain exclusions even if the cause falls into one of these three categories.
The case law in California covering these topics is surprisingly sparse, with courts looking to sister states for authority and guidance. (See, e.g., Buxbaum v. Aetna Life & Cas. Co. (2002) 103 Cal.App.4th 434, 444.) However, the issues raised by French Laundry Partners, are akin to the issues hotly litigated in New York in connection with a prior infamous disaster, Superstorm Sandy.
Sandy brought with it a storm surge that left a not inconsequential portion of Manhattan under water. As a result, an electric transformer shorted, leaving a significantly larger portion of Manhattan without power. A New York City law firm sued its business interruption insurer (who also happens to be a litigant in French Laundry Partners) after it denied coverage. (Borah, Goldstein, Altschuler, Nahins & Goidel, P.C. v Trumbull Ins. Co. (Sup. Ct., New York County, April 6, 2016) [Index No. 652633/2013, Mtn Seq. No. 001](Unpublished).)
In Borah, the court sided with the insurer: It found coverage was not required because there was no actual damage to the firm’s offices. Today, while the widespread forced closures of businesses are due to a global pandemic, the physical plants have been shuttered, in large part, to reduce the spread of the virus, not because of the actual presence of the virus in those places. Even if the presence of a virus definitively constitutes physical damage to a place of business, it is uncertain how many businesses could show actual damage in the form of the presence of the virus in their space.
The same is true with respect to “dependent property” physical damage. Governmental orders have excepted essential services from closure, meaning that utilities and basic services remain open or operable. In order for business interruption coverage to apply, not only would the services at the “dependent property” have to fail—preventing the subject business from operating—but that failure would have to be traceable to physical damage to the “dependent property.”
In Borah, such a nexus could be made between damage to the transformer (the “dependent property”) and the inability of the law firm to operate. However, the court upheld denial of coverage because the damage to the “dependent property,” the transformer, was caused by flood and flood coverage was specifically excluded from the firm’s policy. In the case of COVID-19, while it’s unlikely any policies contain an explicit “pandemic” exclusion, many do contain a “viruses and bacteria” exclusion. Insurers began including this exclusion in the wake of the 2003 SARS outbreak. In Mr. Keller’s case, according to his complaint, his deluxe policy does not contain the viruses and bacteria exclusion, nor any other that might be applicable.
While it is difficult to predict, it will likely be challenging for Mr. Keller or any other insured to succeed under a physical damage theory. That leaves potential coverage to claims under the Civil Authority provision. In Borah, the language of the law firm’s insurance policy (which is also the standard language) reads, “This insurance is extended to apply to the actual loss of Business Income you sustain when access to your [place of business] is specifically prohibited by order of a civil authority.” (Borah, supra, at p. 23 (emphasis added).) The Court denied coverage because the firm’s offices were not squarely within an evacuation zone, and therefore access to the offices had not been “specifically prohibited.” (Id. at pp. 27-28.)
California has a policy of “interpret[ing] the coverage clauses of insurance policies broadly, protecting the objectively reasonable expectations of the insured.” (AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 822.) New York has the same policy (Dean v. Tower Ins. Co. of New York (2012) 19 N.Y.3d 704, 708) and the Borah court still took a narrow view on what would trigger coverage. Has access to the French Laundry been specifically prohibited? Despite shelter-in-place orders, most buildings in California technically remain open. Health officers’ and other governmental orders have not specifically stated that people are not allowed to enter their places of business. It is the business operations themselves which have been ordered closed.
Plaintiffs’ complaint in French Laundry Partners argues that the COVID-19 orders, which require many people to stay home and for non-essential businesses to cease onsite operations (with quite limited exceptions), are tantamount to a specific prohibition of access to their places of business. They contend that though they can physically walk into their restaurants, since they cannot operate, they cannot “access” them for the purposes of the policies.
Arguably, the reasonable expectation of the average insured would favor coverage. (AIU Ins. Co., supra, 51 Cal.3d at p. 822.) Consistent with such an expectation, as in several other states, the Legislature in New York is considering a bill requiring insurers to cover the losses of business owners with business interruption coverage during the COVID-19 state of emergency. [See the author’s companion article addressing these bills and potential Contracts Clause impediments.]
California has not gone that route yet, although its insurance commissioner has issued a warning to insurers to “fairly investigate” coverage for business interruption claims. With an ongoing pandemic causing enormous damage of all kinds throughout the state and the country, California courts may be receptive to Mr. Keller’s arguments. Hopefully, the French Laundry will reopen with or without an influx of cash from its insurers. Other business owners should not wait to find out before making claims under their own business interruption policies.
Daniel J. Schneider is a New York based trial attorney and a Founding Partner at Farber Schneider Ferrari LLP. His practice centers around the real estate arena, representing developers, design professionals, interior designers, contractors and others with a multitude of issues which affect real property and construction projects. This includes, without limitation, property damage, construction defects, personal injury defense, neighbor disputes, corporate disputes, contractual issues and employment issues within the various companies. Mr. Schneider previously practiced in Southern California as General Counsel for an education-based start-up and is on the cusp of expanding his California practice. He opened his firm with his partners and a shared philosophy that good relationships are good business and that efficiency and effective advocacy cultivate a years long attorney-client relationship that spans multiple matters