Maryland Court of Special Appeals Holds That Business Losses Caused by COVID-19 Lockdowns Are Not Covered Losses Under a Commercial Property Insurance Policy
June 15, 2022 By Matthew J. Gannett
Many businesses maintain commercial property insurance policies that provide coverage for business income losses caused by physical loss or damage to the covered property. Businesses across Maryland sustained substantial income losses resulting from lockdowns and restrictions imposed by the government. The Maryland Court of Special Appeals, in the case of GPL Enterprise, LLC v. Certain Underwriters at Lloyd’s, et al., No. 302, 2022 Md. App. LEXIS 378 (May 24, 2022), joined the majority of courts across the country in concluding that income losses resulting from lockdowns imposed by governing authorities are not covered losses under a commercial property insurance policy.
GPL Enterprises, LLC (“GPL”) operated a restaurant in Frederick County, which was prohibited from operating at capacity due to Governor Hogan’s emergency order that closed Maryland restaurants and bars. GPL maintained a commercial property insurance policy that provided coverage for “direct physical loss of or damage to Covered Property.” The policy included business interruption coverage, which insured against the loss of business income and the incurrence of expenses due to the suspension of business operations “caused by direct physical loss of or damage to the property.” Unlike many other commercial policies, the policy did not contain an exclusion for losses due to virus or bacteria.
The Court of Special Appeals held that the policy “affords no coverage for the purely economic losses that GPL suffered in this case. The policy provided insurance for “direct physical loss or damage” to the property. “Physical” loss or damage “requires some form of material alteration to the property.” Moreover, the term “physical” requires that “the damage must affect the good itself, rather than the insured’s use of that good.” Thus, the Court concluded that “the Governor’s order ‘did not create a direct physical loss of property or direct physical damage to it.’” Therefore, the business loss resulting from Governor Hogan’s order was not a covered loss under the policy.
However, the Court did not consider whether business income losses resulting from an outbreak of COVID within the business itself would be covered. The Court distinguished a Colorado case in which the Colorado Court found coverage existed when a noxious gas rendered a church building uninhabitable even though the structure itself was undamaged. The Court of Special Appeals distinguished the case on the basis that “unlike the gasoline vapors that contaminated the church [building], the virus itself did not render GPL’s restaurant unsafe and unusable for any and all purposes whatsoever.” Rather, the restaurant was not usable because the Governor entered an order prohibiting in-person dining. Thus, the Court did not directly address the question of whether a business loss resulting from a COVID outbreak within the business itself is a covered loss.