Insurance claims arising out of COVID-19-related commercial losses have been hotly contested, and lawsuits have been filed across the country by policyholders seeking coverage for lost business income. These claims typically raise similar coverage questions – whether the spread of a virus could constitute “direct physical loss,” whether civil authority coverage is triggered, and whether virus exclusions preclude coverage. In Harvest Moon Distributors, LLC v. Southern-Owners Insurance Company, Case no. 6:20-cv-1026-Orl-40DCI, Judge Paul Byron of the U.S. District Court for the Middle District of Florida recently granted an insurer’s motion to dismiss in a different type of COVID-19 claim, relating to spoliation of product after a contract fell through.
The insured, Harvest Moon Distributors, LLC (“Harvest Moon”), is a wine and beer distributor. Harvest Moon entered into a contract with Disney to provide beer for sale in Disney parks. After obtaining the beer to distribute to Disney, and before the product was shipped, Disney voluntarily closed its parks due to the COVID-19 pandemic. As a result, Disney refused to accept the beer or compensate Harvest Moon. The beer subsequently spoiled while Disney remained closed.
Harvest Moon submitted a claim to Southern-Owners Insurance Company (“Southern-Owners”), seeking coverage for loss of business income, extra expense, inventory, and accounts receivable. After Southern-Owners denied the claim, Harvest Moon filed suit.
The policy issued by Southern-Owners (“Policy”) provided coverage for “direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.” The court agreed with Harvest Moon that its beer constituted “stock,” which was included in the Policy’s definition of “Covered Property.” While Southern-Owners disputed that spoliation of the beer constituted “direct physical loss,” the court assumed for purposes of the motion that spoliation of the beer sufficiently raised a plausible claim that direct physical loss or damage occurred.
However, the court nonetheless found that the “direct physical loss or damage” was not caused by a “Covered Cause of Loss.” Harvest Moon argued that COVID-19 was the cause of its losses. While the court acknowledged that the policy does not explicitly exclude pandemic-related losses, it held that Plaintiff’s loss nonetheless arose from Disney’s act of refusing the beer, and that the coronavirus itself did not damage Plaintiff’s beer. The court also found that exclusions for “delay, loss of use or loss of market” and “acts or decisions of any person, group, organization or governmental body” precluded coverage for the loss.
The Policy’s Business Income and Extra Expense endorsement provided coverage for “actual loss of Business Income you sustain due to the necessary suspension of your ‘operations’ during the ‘period of restoration.’” The policy defined “operations” as “business activities occurring at the described premises . . . .” and “period of restoration” as “beginning on the date of the direct physical loss or damage and ending on the date when the property should be repaired, rebuilt or replaced with reasonable speed and similar quality.”
Harvest Moon alleged that it sustained “a loss of business income and extra expenses incurred to minimize the suspension of business and continue its operations when its product spoiled due to Disney’s voluntary closure.” Specifically, it argued that its inability to sell its product was a suspension of its business operations. The court disagreed. It held that Harvest Moon “merely states that Disney suspended operations.” Conversely, there was no indication in the Complaint that Harvest Moon was unable to purchase beer from its suppliers, sell beer to willing buyers, or deliver beer to such buyers, or that Disney’s refusal to purchase the beer terminated all of Harvest Moon’s business activities. The court also found that Harvest Moon never explicitly alleged that it underwent any “period of restoration.”
Harvest Moon also sought coverage under the Accounts Receivable Endorsement, which provided coverage resulting from “direct physical loss of or damage to your records of accounts receivable … caused by or resulting from any Covered Cause of Loss.” The court rejected Harvest Moon’s argument that this provision provided coverage for loss of its stock and agreed with Southern-Owners that the provision provided coverage only for the loss of the records themselves.
As Judge Byron noted in the order, “[t]he pandemic does not change the terms of the Policy, which the parties bargained for and agreed to.”