116 3rd St SE
Cedar Rapids, Iowa 52401
DES MOINES — The Iowa Supreme Court said Friday that two restaurants cannot collect damages from insurance policies for losing business following the governor’s March 2020 order requiring restaurants to temporarily stop in-person dining amid soaring COVID-19 cases.
The case likely serves as a lesson to business owners who believe they've purchased all-risk insurance for their business, thinking it would cover loss of revenue in all instances.
The problem is the insurance polices specified coverage for loss from business interruption due to a direct physical loss or damage of property and there were no physical aspects to the loss, the insurers argued and the court agreed.
“The mere loss of use of property, without more, does not meet the requirement for a direct physical loss of property," the court said in unanimous decisions written by Justice Dana Oxley.
It was the first case in which the court had to consider whether the loss of use of business property constitutes direct physical loss of or damage to property to trigger coverage under the business interruption coverage in an all-risk commercial property insurance policy.
The restaurants, Jesse's Embers and Wakonda Club, operate in Des Moines. Attorneys for the businesses said they didn’t have coronavirus outbreaks and only lost business because the governor ordered restaurants temporarily closed except for carryout, drive-thru and delivery as virus cases increased.
They filed claims on their all-risk commercial property insurance for income lost during the closure. The insurance companies denied payment, and the restaurant owners sued.
The court pointed out the cases are among hundreds from around the country addressing business interruption insurance coverage for businesses impacted by similar government proclamations and orders stemming from the COVID-19 pandemic.
“While our decision today rests upon our interpretation of Iowa law and the specific language of the provisions at issue, we note that every federal appellate court that has addressed the same or very similar language has likewise held that the mere loss of use of property due to government orders made in response to the COVID-19 pandemic does not constitute 'direct physical loss' of the insured’s property,” Oxley wrote.
The restaurant owners also argued they had reasonable expectations that they would be covered under the policies for loss of business and were not told about ambiguities in the policies that would deny them coverage.
Marty Scarpino, the owner of Jesse’s Embers, submitted an affidavit saying his insurance agent did not explain “that if there was a governor’s proclamation closing us down for any reason, that we would not have coverage.” He said he “assumed that the total loss of use of the property or partial loss of the use of the property would consist of a physical loss.”
The court, however, said Scarpino failed to explain what led him to believe he purchased an all-risks business interruption policy rather than an all-risks commercial property policy that included business interruption coverage. The court also said he didn't directly attribute the misunderstanding to the insurance agent who sold him the policy.
Reynolds prohibited in-person dining and drinking in bars and restaurants in Iowa on March 17, 2020. Many restaurants and bars attempted to operate with carryout service to survive the closure. Both restaurants resumed in-person operations in May.