Wade Clark Mulcahy LLP

<p style="text-align: justify;">In a short, terse opinion, a federal judge in New Jersey ruled this week that owners of Wendy’s, T.G.I. Friday’s, Marriott, and Hilton franchises cannot recover for losses caused by Covid-19-related shutdowns. The decision adds to the growing amount of case law on this issue which has significantly favored insurers over policyholders.</p>
<p style="text-align: justify;">In <em>Manhattan Partners, LLC v. American Guarantee &amp; Liability Ins. Co</em>., the franchisors sought coverage under their insurance policies which provided coverage for: 1) “direct physical loss of or damage caused by a Covered Cause of Loss to Covered Property”; 2) losses resulting from “the necessary Suspension of the Insured’s business activities at an Insured Location” where the Suspension is “due to direct physical loss of or damage to Property”; 3) business expenses incurred “due to direct physical loss of or damage caused . . . to Property”; and 4) losses sustained as a result of “the necessary Suspension of the Insured’s business activities at an Insured Location if the Suspension is caused by order of civil or military authority that prohibits access to the Location” where that order results “from a civil authority’s response to direct physical loss of or damage . . . to property not owned, occupied, leased or rented by the Insured.” In other words, under any theory of coverage, some direct physical loss was required. The Policies also contained a “Contamination” exclusion which barred coverage for “[a]ny condition of property due to the actual presence of … virus.”</p>
<p style="text-align: justify;">The insureds alleged that Covid-19 “led to physical loss and damage both within and within the vicinity of the various insured locations” and that “existed both on surfaces found within the insureds’ and surrounding premises as well as the breathable air circulating within” those premises. Judge Susan Wigenton, while stating that she was “sympathetic to the very real losses businesses have suffered during this pandemic,” rejected this argument. The Court held that the insureds’ “general statements that the COVID-19 virus was on surfaces and in the air at their properties is insufficient to show property loss or damage.” Accordingly, there was no coverage under any provision of the policy.</p>
<p style="text-align: justify;">This decision is one of many reaching the same conclusion based on a similar analysis. Thus, based on the recent case law, it seems unlikely, at this point, that insureds are going to succeed arguing that the Covid-19 virus resulted in “physical damage” to property.</p>
<p style="text-align: justify;">Thanks to Doug Giombarrese for his contribution to this post. If you have any questions or comments, please contact <a href="mailto:chayes@wcmlaw.com">Colleen Hayes</a>.</p>