Businesses in nearly every United States industry suffered significant damage from the COVID-19 economic shutdown. This reality has led to the inevitable dispute between business owners and insurance providers over whether insurers should pay the financial losses sustained by the closures and how much, if any, is recoverable. As a result, the American legal system has been flooded with litigation against defendant insurers for recovery of COVID?19 business interruption losses. As insurance defense litigation will be overwhelmed with these cases for the next several years, it is necessary that defendant insurers understand which business interruption lawsuits are viable, their strongest defenses, and how to calculate business losses from government-ordered shutdowns.
A. Civil authority orders of natural disasters.
Civil authority orders are common provisions found within the business interruption coverage of a commercial property insurance policy. These provisions commonly apply when access to the insured’s property is prohibited due to a governmental order issued as a result of direct physical loss or damage to the business owner’s property or to the property adjacent to the business. This coverage is most often triggered after a natural disaster scenario which leaves the land and business structures damaged or destroyed. Hurricanes, tornados and wildfires are all types of natural disasters which may cause federal, state or local governments to shut down access to certain areas of community due to hazardous conditions left in the wake of a catastrophe. Business losses during the government-ordered prohibition from access to the employer’s property may be recoverable under these provisions.
Some of the most contentious areas of COVID-19 litigation center around debating the validity of business interruption claims and the calculation of business losses during the pandemic shutdown. While the courts have historically never had an opportunity to interpret a virus in the context of inclusionary losses, that precedent is forthcoming. At least six (6) major insurance providers are now named defendants in civil class action lawsuits by business owners seeking recovery of COVID-19 business interruption losses.
B. COVID-19 business interruption defenses.
When an insurance company is sued for the recovery of business interruption losses resulting from the COVID-19 economic shutdown, there are several defenses it must raise in order to successfully litigate the exclusion. Plaintiffs have a difficult burden showing COVID-19 civil authority orders are within the subject policy’s intended inclusionary losses. The first argument a defendant must raise is the element of direct physical loss or damage to property. As civil authority orders require physical loss or damage to the business owner’s property or to the property adjacent to the business, defendant insurers must litigate on the grounds that the virus does not satisfy this element of the claim. Plaintiffs’ attorneys have gone on the attack with creative arguments in an attempt to satisfy the property damage requirement. Plaintiffs argue that the coronavirus constitutes property damage because it “physically infests and stays on surfaces of objects or materials” and the virus contamination causes “a direct physical loss needing remediation to clean the surfaces of the establishment.” At best, this argument is weak and lacks primary authority and context.
Historically, courts have held that the “physical loss or damage” burden is met when “an item of tangible property has been physically altered by perils such as fire or water.” Albeit, a virus may cause physical harm to a human being, but it cannot visibly alter the tangible structure of a business. Insurance defendants must argue longstanding law that “physical damage” by its ordinary meaning excludes damage that does not physically disturb the building structure or is incorporeal.
However, even if courts find the virus satisfies the property damage or loss requirement, defendant insurers may successfully develop a litigation strategy based on the rationale for the shutdown. Every state across the country has experienced its own unique set of quarantine orders. State governors and local lawmakers each developed their own rules and enforcement for non-essential business shutdowns. An insurance defendant may succeed in litigation by arguing that the business did not close due to property damage by the virus, but that the shutdown orders came as a result of a public health crisis. As civil authority orders require the government’s interference with a business to be the direct result of physical damage or loss of the insured’s property or the property adjacent to it, then all shutdowns made from fear of the outbreak or as precautionary measures do not satisfy the requirement.
This distinction was emphasized by the Court in Jones Walker when Plaintiffs filed suit for business income losses as a result of shutdown orders over Hurricane Gustav. The Mayor of New Orleans, Louisiana, ordered a mandatory evacuation and “cited anticipated high tides and the possibility of hurricane-force winds and widespread severe flooding among other factors” which made the shutdown necessary. The Jones Walker court held that the Plaintiff could not establish the required nexus between the civil authority order and the actual property damage or loss from the hurricane because the prohibition was issued in anticipation of a possible catastrophic occurrence. Consequently, Defendants’ motion for summary judgment was granted and business interruption losses were denied by the court.
In United Air Lines, Inc. v. Ins. Co. of State of Pennsylvania, Plaintiff United Air Lines, Inc. (“United”) sued Insurance Company of the State of Pennsylvania (“ISOP”) seeking indemnity for losses suffered as a result of the September 11, 2001, terrorist attacks on the New York City World Trade Center and the Pentagon in Arlington, Virginia. United had a ticket office in the World Trade Center which was destroyed during the September 11, 2001, terrorist attacks. It was not disputed that United could recover for lost earnings attributable to the ticket office’s physical damage. However, United’s Arlington facilities suffered no significant physical damage as a result of the attack on the Pentagon.
The Court determined that, for United to recover business losses, it would be “required to demonstrate that the business interruption at issue resulted from either 1) physical damage to property at the insured location in question, i.e., the Airport, or 2) an order of civil authority as a direct result of physical damage to property adjacent to the insured location in question.”
In granting the Defendant’s motion for summary judgment, the court held it was factually impossible for United to show that its facilities closed as a direct result of damage to the Pentagon; the airport’s shutdown occurred prior to the attack on the Pentagon. The court explained that the government’s decision to halt air travel was based on fears of future attacks and not the result of destruction to the Pentagon. COVID-19 government shutdown orders are generally a comparable scenario. Several U.S. states and local governments closed non-essential businesses as a preventative public health control measure during the early stages of the pandemic.
For example, Governor Gina Raimondo of Rhode Island went to great lengths to attempt to protect the state from outsiders fleeing to Rhode Island seeking refuge from neighboring states with high infection rates. With the largest pandemic crisis centered around New York City, Governor Raimondo conceded that a surge in Rhode Island cases was inevitable and that the state must prepare for a state-wide public health crisis. Accordingly, insurance defendants litigating in states such as Rhode Island have a strong defense that the civil authority orders were responsive to the anticipation of a catastrophic COVID-19 occurrence and not due to an actual outbreak of high magnitude.
Next, a defendant insurer may prevail on the plain language within the government’s civil authority order. Plaintiffs seeking compensation for business interruption losses must show a complete prohibition to access their property during the government-ordered shutdown. For now, this requirement is somewhat of an overlooked caveat in COVID-19 business interruption litigation. The majority of non-essential business shutdowns do not completely prohibit the owner from accessing their property. For example, the majority of states followed the White House and Center for Disease Control and Prevention guidelines which directed citizens to avoid eating and drinking in bars, restaurants and food courts. State and local government shutdowns prohibited in-person dining at these establishments but allowed the non-essential businesses to remain open for drive-through, delivery and takeout orders. Essentially, business owners were not completely prohibited from access to their property. The courts commonly rule in line with this argument in circumstances of natural disasters.
In Southern Hospitality, Inc. v. Zurich Am. Ins. Co., an Oklahoma hotel owner (“Southern Hospitality”) sought business losses resulting from canceled reservations after U.S. air travel was halted by government order during the September 11, 2001, terrorist attacks. The dispute between the parties centered on what constituted prohibited access to the hotel’s property. The hotel’s business interruption coverage contained a civil authority order provision which read:
Civil Authority. We will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss. This coverage will apply for a period of up to two consecutive weeks from the date of that action.
Southern Hospitality argued that the airport closures completely prohibited out-of-state customers from accessing the hotel which resulted in substantial businesses losses and that the court should interpret this prohibition as an inclusionary business interruption. In its motion for summary judgment, Defendant insurer contended the order did not actually prohibit hotel access but only frustrated it to some extent. Further, the hotel’s insurance policy was a contract under Oklahoma law and must be enforced by its plain and ordinary meaning.
The Southern Hospitality court found that, while it was factually undisputed the hotel indeed remained open during the shutdown, the issue was whether the civil authority order constituted prohibited access to the property. The court reasoned that “the plain and ordinary meaning of ‘prohibit’ is to ‘formally forbid, especially by authority’ or ‘prevent’” and “[a]ccess means ‘a way of approaching or reaching entering.’” While the hotel’s business was frustrated by the shutdown, it did not completely deny access to the property.
When the law is applied to COVID-19 cases, defendant insurers will likely prevail on summary judgment in a large percentage of business interruption claims by restaurant and other non-essential business owners where their operations were frustrated but not completely prohibited during the economic shutdown.
C. How to calculate COVID-19 business losses.
There are two widely-accepted methods to calculate business interruption losses in natural disaster scenarios: the Post-Catastrophe Economy Ignored Approach and Post-Catastrophe Economy Considered Approach. The majority of federal and state courts follow one of these two methods to calculate natural disaster business interruption losses. In the Post-Catastrophe Ignored Approach, business losses are calculated in a scenario as if the catastrophe never occurred. In other words, the value of the business interruption is determined solely on historical sales data. In the Post-Catastrophe Economy Considered Approach, business interruption losses consider a business’s profitability during a hypothetical scenario that the catastrophe occurred but the business was not damaged and remained open. In this approach, the actual profits after the business reopens are critical to the calculation.
In cases where defendant insurers are responsible for COVID-19 business losses, it is necessary they understand lost profits analyses for business interruption claims. As previous litigation has shown, how business losses should be calculated is a heavily litigated area of the law; and the outcome may mean the difference of millions of dollars.
This risk is exemplified in the Fifth Circuit case, Catlin Syndicate Ltd. v. Imperial Palace of Mississippi, Inc., when Hurricane Katrina damaged the Imperial Palace casino forcing a government-ordered shutdown. Once Imperial Palace reopened, its revenue spiked dramatically more than its pre-hurricane revenue. The main issue before the Imperial Palace court was how to compute the casino’s business losses. The parties’ disagreement on how the business interruption should be calculated was the difference of over $70 million.
The insurance company argued the Post-Catastrophe Ignored Approach should be used and that the business losses should be based on Imperial Palace’s profits as if Hurricane Katrina had never hit. In other words, the court should only look at pre-hurricane profits. In contrast, Imperial Palace argued that “the correct hypothetical was not one in which Hurricane Katrina did not strike at all; it was one in which Hurricane Katrina struck but did not damage Imperial Palace’s facilities.” Imperial Palace pushed for the Post-Catastrophe Considered Approach which included consideration of profits earned when it reopened after Katrina. The Imperial Palace court held it was a jurisdiction utilizing the Post-Catastrophe Economy Ignored Approach and that it would not "look prospectively to what occurred after the loss." Thus, Imperial Palace was unable to benefit from its inflated revenue stream resulting from the natural disaster.
 It should be noted that some policies are written to cover losses resulting only from direct physical loss or damage to property adjacent to the business, and not damage to the owner’s property itself. See generally U. Air Lines v. Ins. Co. State Pa., 439 F.3d 128 (2nd Cir. 2006); Kelaher, Connell & Conner, P.C. v. Auto-Owners Ins. Co., 2020 U.S. Dist. LEXIS 31081, 2020 WL 886120 (D.S.C. Feb. 24, 2020).
 See, e.g., Kelaher, Connell & Conner, P.C. v. Auto-Owners Ins. Co., 2020 U.S. Dist. LEXIS 31081, 2020 WL 886120 (D.C.V. Feb. 24, 2020); Assurance Co. Am. v. BBB Serv. Co., 265 Ga. App. 35 (Ga. Ct. App. 2003).
 See, e.g., Id.
 Kelaher, Connell & Conner, P.C., 2020 U.S. Dist. LEXIS 31081, 2020 WL 886120.
 See, e.g., Bethan Moorcraft, Chubb sued by human rights non-profit over COVID-19 business interruption coverage, Ins. Bus. Am. (Apr. 29, 2020), https://www.insurancebusinessmag.com/us/news/breaking-news/chubb-sued-by-human-rights-nonprofit-over-covid19-business-interruption-coverage-221072.aspx; Lyle Adriano, Six insurers face federal class action lawsuits for denying business interruption claims, Ins. Bus. Am. (Apr. 20, 2020), https://www.insurancebusinessmag.com/us/news/breaking-news/six-insurers-face-federal-class-action-lawsuits-for-denying-business-interruption-claims-220062.aspx.
 See, e.g., Id.
 The insurance company defendants are Aspen American Insurance, Auto-Owners Insurance, Lloyd’s of London, Society Insurance, Oregon Mutual Insurance, and Topa Insurance Company. Lyle Adriano, Six insurers face federal class action lawsuits for denying business interruption claims, Ins. Bus. Am. (Apr. 20, 2020), https://www.insurancebusinessmag.com/us/news/breaking-news/six-insurers-face-federal-class-action-lawsuits-for-denying-business-interruption-claims-220062.aspx.
 See generally U. Air Lines v. Ins. Co. State Pa., 439 F.3d 128 (2nd Cir. 2006); Kelaher, Connell & Conner, P.C. v. Auto-Owners Ins. Co., 2020 U.S. Dist. LEXIS 31081, 2020 WL 886120 (D.S.C. Feb. 24, 2020); MRI Healthcare Ctr. Glendale, Inc. v. State Farm Gen. Ins. Co., 115 Cal. Rptr. 3d 27 (Cal Ct. App. 2010).
 See generally Id.; Complaint, French Laundry Partners, LP, et al. v. Hartford Fire Ins., et al. (Cal. Super. Ct. Mar. 25, 2020).
 See, e.g., Press Release, Off. Tex. Governor Greg Abbott, Governor Abbot Issues Executive Order, Implements Statewide Essential Services And Activities Protocols (Mar. 31, 2020) (on file with author). Okla. Exec. Order No. 2020-04 (Mar. 28, 2020), https://www.cityoftulsa.org/media/12617/2020-04.pdf; J. Clay Jenkins, Safer At Home Order, Dallas Cnty. (Apr. 18, 2020), https://www.dallascounty.org/Assets/uploads/docs/covid-19/orders-media/041820-DallasCountyOrder.pdf.
 Id. at 4 (emphasis added).
 Id. at 14.
 U. Air Lines, Inc., 439 F.3d 128.
 U. Air Lines, Inc., 439 F.3d at 134.
See, e.g., Georgia Governor Brian Kemp announced that he made the decision to initiate a civil authority order shutdown after learning that COVID-19 may be transmitted by non-symptomatic carriers. Greg Bluestein, Georgia governor to order shelter in place to curb coronavirus, AJC (Apr. 1, 2020), https://www.ajc.com/blog/politics/breaking-georgia-governor-orders-shelter-place-curb-coronavirus/vdAoWkjq39W2usr9e8W8BL/. Missouri Governor Mike Parson announced the state’s need to “stay ahead of the battle” with the enforcement of his stay-at-home order. @GovParsonMO, Twitter (Apr. 3, 2020, 5:04 PM), https://twitter.com/GovParsonMO/status/1246196795107160064?s=20 .
 R.I. Exec. Order No. 20-13 (Mar. 28, 2020), https://governor.ri.gov/documents/orders/Executive-Order-20-13.pdf.
 See Id.; G. Wayne Miller, R.I. tightens restrictions after 2 virus deaths, Providence J (Mar. 28, 2020), https://www.providencejournal.com/news/20200328/ri-tightens-restrictions-after-2-virus-deaths.
 See S. Hospitality, Inc. v. Zurich Am. Ins. Co., 393 F.3d 1137, 139 (10th Cir. 2004).
 See generally Id.
 For example, Alabama, Louisiana, Illinois and Texas are among many states that have limited non-essential businesses such as restaurants to drive-through and takeout orders only. Scott Harris, State Health Officer, Order of the state health officer suspending certain public gatherings due to risk of infection by COVID-19 (Apr. 2, 2020), https://governor.alabama.gov/assets/2020/04/Final-Statewide-Order-4.3.2020.pdf; Ill. COVID-19 Exec. Order No. 8 (Mar. 20, 2020), https://www2.illinois.gov/Pages/Executive-Orders/ExecutiveOrder2020-10.aspx; Tex. Exec Order No. GA 14 (Mar. 31, 2020), https://gov.texas.gov/uploads/files/press/EO-GA-14_Statewide_Essential_Service_and_Activity_COVID-19_IMAGE_03-31-2020.pdf.
 CDC, Interim Guidance for Event Planners subsection to Coronavirus Disease 2019 (Mar. 15, 2020), https://www.cdc.gov/coronavirus/2019-ncov/community/large-events/mass-gatherings-ready-for-covid-19.html.
 See, e.g., Scott Harris, State Health Officer, Order of the state health officer suspending certain public gatherings due to risk of infection by COVID-19 (Apr. 2, 2020), https://governor.alabama.gov/assets/2020/04/Final-Statewide-Order-4.3.2020.pdf; Ill. COVID-19 Exec. Order No. 8 (Mar. 20, 2020), https://www2.illinois.gov/Pages/Executive-Orders/ExecutiveOrder2020-10.aspx; Tex. Exec Order No. GA 14 (Mar. 31, 2020), https://gov.texas.gov/uploads/files/press/EO-GA-14_Statewide_Essential_Service_and_Activity_COVID-19_IMAGE_03-31-2020.pdf.
 See, e.g., S. Hospitality, Inc., 393 F.3d 1137.
 See Id.
 S. Hospitality, Inc., 393 F.3d 1137.
 See generally Id.
 See Chris French, The Aftermath of Catastrophes: Valuing Business Interruption Insurance Losses, 30 Ga. L.J. 461 (2014); Berk-Cohen Assocs., LLC v. Landmark Am. Ins. Co., 433 Fed. Appx. 268 (5th Cir. 2011); Compare Am. Auto. Ins. Co. v. Fisherman’s Paradise Boats Inc., 1994 U.S. Dist. LEXIS 21068 (S.D. Fla. Oct. 1, 1994).
 See Id.
 See Id.
 See Chris French, The Aftermath of Catastrophes: Valuing Business Interruption Insurance Losses, 30 Ga. L.J. 461 (2014); Berk-Cohen Assocs., LLC v., 433 Fed. Appx. 268; Compare Am. Auto. Ins. Co., 1994 U.S. Dist. LEXIS 21068 (court held taking advantage of economic opportunities such as an increase in demand after Hurricane Andrew were not within the scope of the policy).
 See Id.
 Catlin Syndicate Ltd., 600 F.3d at 513.
 Id. at 516. The Court previously used the Post-Catastrophe Ignored Approach in Finger Furniture. Finger Furniture Co. v. Commonwealth Ins. Co., 404 F.3d 312, 314 (5th Cir. 2005).
 Catlin Syndicate Ltd., 600 F.3d 511.