On October 21, 2020, the Southern District of Alabama issued its first opinion addressing a COVID-19-related claim for lost income under the “business interruption” provision of an “all-risk” policy. Hillcrest Optical, Inc. v. Cont’l Cas. Co., No. 1:20-CV-275-JB-B, 2020 WL 6163142 (S.D. Ala. Oct. 21, 2020). After the plaintiff closed its business in compliance with Governor Ivey’s “stay-at-home” order, it filed a claim with its insurer for lost income, alleging a direct physical loss from the loss of use of its office. The plaintiff’s policy contains a provision covering “direct physical loss of or damage to” the plaintiff’s business. It does not, however, define what constitutes “direct physical loss or damage.” The policy also contains a “Business Income and Extra Expense” endorsement providing coverage for lost income from a necessary suspension of operations during a “period of restoration” caused by a covered direct physical loss to property. This provision covers expenses reasonably and necessarily incurred because of direct physical loss or damage but excludes periods of restoration extended by regulations governing the use of the covered property. It expressly contemplates physical repair to or rebuilding of the property.

After its insurer failed to respond, the plaintiff, on behalf of itself and similarly situated parties, filed a complaint for declaratory judgment. The plaintiff seeks a declaration of its rights under the policy and asserts a breach of contract for the insurer’s denial of the claim. Alternatively, the plaintiff requests certification of its questions to the Alabama Supreme Court, citing the lack of precedent regarding whether a COVID-related business interruption constitutes direct physical loss. It argues the governor’s order caused a direct physical loss of use of the property, and its definition of “repair” satisfies the policy’s endorsement. In response, the insurer filed a motion to dismiss for failure to state a claim. It argued the plaintiff did not adequately allege a direct physical loss under the policy, the business closure did not constitute a direct physical loss, and the plaintiff failed to satisfy the policy’s requirements for coverage under the endorsement.

Because the court reviewed the case within the context of the insurer’s motion to dismiss, it needed only to find the plaintiff’s claim facially plausible to deny. Still, the court dismissed the plaintiff’s claims with prejudice.

First, it denied the plaintiff’s request for certification of its question to the Alabama Supreme Court. Despite the lack of case law directly on point, the court found sufficient guiding authority to deem certification unnecessary. Next, the court analyzed whether the plaintiff adequately alleged a direct physical loss. It rejected the plaintiff’s attempts at likening its loss of income to permanent physical dispossession. Instead, the court framed the primary issue as “whether a temporary inability to use property due to governmental intervention constituted a direct physical loss of property.” The court also rejected the plaintiff’s argument that even though there was no “loss to” its property, there was a covered “loss of” the property. It highlighted, while a direct loss does not always require a physical component, in most cases, courts require “some tangible alternation of disturbance” to the covered property. Further, the loss must result immediately.

Ultimately, the court held the plaintiff did not state a plausible claim for direct physical loss of property because the loss was not immediate, did not result in any tangible alteration to the covered property, and a temporary loss of physical possession does not constitute a covered loss of use. The court was persuaded, at least in part, by recent decisions, including three in the Eleventh Circuit, requiring tangible alteration to covered property to trigger coverage for business interruption from COVID-related closures. At least one of the courts so held to avoid the absurdity of a ruling on coverage that potentially exposes insurers to liability for every government-mandated change in operation.

Because the court found no direct physical loss or damage and thus no physical repair to the property, it denied the plaintiff coverage under the Business Income and Extra Expense endorsement. Although the plaintiff argued a “repair” can include restoration of the property to a “sound or healthy state,” the court emphasized the lack of tangible alteration and that plaintiff’s temporary loss of use of the property was not caused by “an unsound or unhealthy condition of the property” requiring physical repair. According to the court, the plaintiff’s interpretation of a repair is not an interpretation a reasonable insured would share.

Because the plaintiff’s underlying claims fail as a matter of law, the court denied the plaintiff’s request for declaratory judgment.

This decision mirrors other district court holdings in the Eleventh Circuit uniformly dismissing with prejudice COVID-related business interruption claims and denying requests for certification to the highest state courts. It appears, at least in the Eleventh Circuit, insureds seeking coverage for lost income resulting from government-mandated business closures must find another avenue to recovery of lost income from COVID-related business closures.