COVID-19 business interruption claimants have had few state appellate court decisions upon which to rely. Louisiana produced one such decision in Cajun Conti, LLC v. Certain Underwriters at Lloyd’s, 2022 La. App. LEXIS 939 (La. App. 4 Cir., June 15, 2022). The insurer prevailed in the trial court in a dispute over whether coronavirus constituted “direct physical loss of or damage to” insured property. The insured restaurant appealed. Louisiana’s Fourth Circuit Court of Appeal reversed the trial court. The Court of Appeal’s opinion became widely-cited by other COVID-19 business interruption claimants. The insurer appealed to the Louisiana Supreme Court and Cajun Conti became a widely-followed dispute. As discussed below, the Court of Appeal’s analysis was out of step with the analysis undertaken by courts across the country.
The Louisiana Supreme Court reversed the Court of Appeal in Cajun Conti LLC v. Certain Underwriters at Lloyds, 2023 La. LEXIS 563 (La. Mar. 17, 2023). The Louisiana Supreme Court has now joined a number of other states’ high courts in holding that COVID-19 did not cause the physical damage required by the policy. For example, Oklahoma’s Supreme Court recently published a well-reason opinion previously analyzed in this blog:
The Court of Appeal’s decision was published on June 15, 2022. The Louisiana Supreme Court had not yet spoken regarding COVID-19 business interruption claims. However, by that time, there was already ample case law from federal courts on which the Court of Appeals could have relied, or at least analyzed. See, e.g., Terry Black’s Barbecue, LLC v. State Auto. Mut. Ins. Co., 22 F. 4th 450 (5th Cir. Jan. 5, 2022) (Texas law); Aggie Invs., LLC v. Cont’l Cas. Co., 2022 U.S. App. LEXIS 2411 (5th Cir. January 26, 2022) (Texas law); Louisiana Bone & Joint Clinic, LLC v. Transp. Ins. Co., 2022 U.S. App. LEXIS 8252 (5th Cir. Mar. 29, 2022) (Louisiana law). The Court of Appeals accepted the insured’s arguments that “loss of use” could constitute physical damage. Despite not relying on pandemic-era case law from other jurisdictions, the Court of Appeal cited pre-pandemic case law from other jurisdictions that held asbestos fibers and odors could cause physical damage even though they were invisible. Further, the Court of Appeal held that “direct physical loss of or damage to” insured property was ambiguous and vague.
The Court of Appeal’s opinion was the subject of a dissent by two justices. The dissent conducted a plain language analysis of the operative provision. The dissent also relied upon decisions by Louisiana federal district courts in COVID-19 business interruption cases.
In the Louisiana Supreme Court, the justices weighed testimony from the parties’ scientific experts. The insured restaurant’s expert had testified, “Nobody wants to touch or be near property that is infectious. So that is damage.” The insurers’ experts testified that the virus could be eliminated through cleaning, which would enable normal restaurant operations, and did not cause physical damage to inanimate surfaces. The Supreme Court rejected many arguments that COVID-19 claimants have tried based on the Court of Appeal’s opinion:
We find the plain, ordinary and generally prevailing meaning of “direct physical loss of or damage to property” requires the insured’s property sustain a physical, meaning tangible or corporeal, loss or damage. The loss or damage must also be direct, not indirect. Applying these meanings to the facts and arguments presented, COVID-19 did not cause direct physical loss of or damage to [the insured restaurant’s] property.
[The insured’s expert’s] testimony that the virus infects and damages property actually conflicts with the fact [the insured restaurant] cleaned the property with a disinfectant and continued its use. That fact supports [the insurers’] experts, who opined the virus does not “damage” surfaces and can be cleaned with a disinfectant. While the [insured] restaurant did increase its cleaning practices during the pandemic, the property remained physically intact and functional, needing only to be sanitized.
[The insured restaurant] also claims “direct physical loss” is broader than “damage,” and encompasses the inability to use covered property. The argument derives from [the insured restaurant’s] inability to fully use its dining room during the pandemic. However, loss of use alone is not “physical loss.” Otherwise, the modifier “physical” before “loss” would be superfluous. While government restrictions on dining capacity and public health guidance regarding social distancing reduced [the insured restaurant’s] in-person dining capacity and restricted its use, again, [the insured restaurant’s] property was not physically lost in any tangible or corporeal sense. Even when in-person dining was prohibited, [the insured restaurant’s] kitchen continued to provide take-out and delivery service, and the [insured] restaurant’s physical structure was neither lost nor changed. The appellate court erred by focusing on the loss of use rather than on whether a direct physical loss occurred. We find [the insured restaurant] did not suffer a direct physical loss.
We also find support for our interpretation in the definition of “period of restoration.” The insured [restaurant] can recover lost business income during a “period of restoration.” That period begins 72 hours after a “direct physical loss of or damage to property.” The restoration period ends when the property should be “repaired, rebuilt or replaced with reasonable speed and similar quality” or “business is resumed at a new permanent location.”
[The insured restaurant] never had to repair, rebuild, or replace anything. Social distancing and increased cleaning practices were implemented, but the structure of the property did not physically change.
The Louisiana Supreme Court also rejected the Court of Appeal’s finding regarding ambiguity. The justices focused on the word “repair” in the “period of restoration” definition. The justices opined that “repair” refers to something tangible that must entail fixing a physical defect.
The Louisiana Supreme Court then sought to place itself within the mainstream of other state supreme courts that rejected “loss of use” arguments and strictly require tangible alteration of property. The justices cited opinions from Ohio, South Carolina, Maryland, Washington, Wisconsin, and Massachusetts. They observed: “In fact, to date no state supreme court that has addressed this issue has finally decided that the presence of COVID-19 constitutes a physical loss of or damage to property.”
Finally, the Louisiana Supreme Court observed that the absence of a virus exclusion was irrelevant since the insured restaurant did not demonstrate the trigger of “direct physical loss of or damage to insured property.” The justices reinstated the trial court’s ruling in favor of the insurer.
The Louisiana Supreme Court’s opinion is important because it corrects an anomaly that was being cited in support of COVID-19 business interruption claims around the country. Like the Cherokee Nation decision discussed above, Cajun Conti is a mainstream decision that should be influential on state courts in other cases, such as cases pending in Texas, where the state supreme court has not yet spoken on COVID-19 business interruption claims.