Law360 (December 15, 2021, 9:16 PM EST) — A restaurant operator urged a Michigan appeals court Wednesday to consider a layman’s understanding of “direct physical loss or damage” when determining whether its insurance should cover losses from pandemic-related shutdowns, comparing the phrase’s meaning to temporarily taking a toy away from a child.

Policyholders have sought to try their luck with state courts in arguing that the COVID-19 pandemic and related shutdown orders caused physical damage that would warrant insurance coverage. (AP Photo/Jae C. Hong)

Arguing for restaurant operator Gavrilides Management Co. LLC, Timothy Burns of Burns Bowen Bair LLP told the appeals panel that, under a layman’s reading, “direct physical loss or damage” can include the temporary loss of use of a property. The meaning of that five-word phrase is at the crux of Gavrilides’ coverage dispute with Michigan Insurance Co., as it has been in hundreds of similar COVID-19 business interruption cases nationwide.

“I’ve actually known the meaning of that term, and that term included the temporary deprivation of property by civil authority, since I was 5 years old,” Burns said, likening the situation to his mother temporarily taking away his toys as a child.

“Now, my mom didn’t mean she was going to take a sledgehammer and structurally alter my toys. She didn’t mean that she was going to permanently dispossess me of my toys,” he continued, arguing that loss of income due to state government shutdown orders constitutes a direct physical loss in Gavrilides’ policy with Michigan Insurance.

The three-judge panel should read the insurance policy like an ordinary person would and mandate coverage, Burns said.

Gavrilides appealed a lower trial court’s July 2020 decision holding that there had to be tangible, physical damage to its properties to trigger coverage. The pro-insurer decision marked the first time any court had decided a COVID-19 coverage dispute on the merits. Gavrilides has now asked the state court of appeals to vacate the trial court’s ruling and remand the case, allowing the operator to amend its original complaint.

If permitted to amend, Gavrilides would also plead direct physical loss due to separated tables and other mitigation measures for in-person dining, along with the likelihood of the novel coronavirus in the air, Burns said. Gavrilides had only originally pleaded loss of income due to the state closure orders.

A large part of the three-judge panel’s attention Wednesday focused on a separate virus exclusion in the policy, which bars coverage for “loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease,” according to policy language included in the appellate briefs.

Because “loss or damage” only refers to physical loss or damage to the property and does not extend to Gavrilides’ loss of income, the exclusion is thus inapplicable to the case, Burns argued. If Michigan wanted to totally exclude coverage for viruses, it should have broadened its language like it did with other exclusions, he said.

Regardless of the virus exclusion, Burns stressed it was “absolutely critical” that the panel issue a ruling on the direct physical loss or damage provision.

Michigan Insurance, for its part, reiterated that Gavrilides had to show tangible damage to the property in order to trigger coverage, adding that the court cannot hold the insurer liable for a risk that it did not assume to begin with.

Butzel Long attorney Kurtis Wilder, representing Michigan Insurance, further pointed to a separate “loss of use” exclusion that he said should bar coverage, beyond the “unambiguous” virus exclusion. But, Burns rebutted, the “loss of use” exclusion is only designed to bar coverage for loss of use of the restaurants’ physical space and not loss of income due to the shutdown orders.

“Every hospital in the country has COVID-19 in it. And every hospital is being used to its purposes,” Wilder continued. Just because the restaurants were specifically barred from indoor dining, it doesn’t mean they couldn’t have been put to other uses, he said.

“The idea that there’s some physical loss of or damage to the property because of this virus is just untenable,” he added, arguing that it would be futile for Gavrilides to amend its complaint.

Counsel for Michigan Insurance did not immediately respond to Law360’s request for comment.

“I thought the court was well-prepared, thoughtful, and polite, and recognized the importance of the case. I was very impressed by the amount of time they allowed for argument and the patience of the judges,” Burns said of Wednesday’s oral arguments in a statement to Law360. “They let me say my piece and had penetrating questions. A lawyer can’t ask for much more.”

Since the trial court’s ruling in July 2020, policyholders have sought to try their luck with state courts in arguing that the pandemic and related shutdown orders caused physical damage that would warrant coverage.

According to Law360’s COVID Insurance Case Tracker, federal courts have permanently thrown out approximately 41% of the 1,304 cases policyholders have lodged against their insurers seeking COVID related coverage as of Dec. 7, while 17% were voluntarily dismissed and 40% remain ongoing.

Gavrilides Management Co. LLC is represented by Matthew J. Heos of The Nichols Law Firm PLLC, Timothy W. Burns and Freya K. Bowen of Burns Bowen Bair LLP, Adam J. Levitt, Mark Hamill and Kenneth P. Abbarno of DiCello Levitt Gutzler LLC, Mark Lanier of The Lanier Law Firm PC, and Douglas Daniels of Daniels & Tredennick.

Michigan Insurance Co. is represented by Drew W. Broaddus of Secrest Wardle, Kurtis T. Wilder of Butzel Long, and Robert M. Runyon of Horst Krekstein & Runyon LLC.

The case is Gavrilides Management Co. LLC et al., v. Michigan Insurance Co., case number 354418, in the Michigan Court of Appeals.

–Additional reporting by Jeff Sistrunk and Ben Zigterman. Editing by Haylee Pearl.