The Law Review Forum

In a Cloud of Dust: How Small Businesses Seeking Insurance Coverage for Pandemic Losses Are Being Thwarted

James Ganas

May 11, 2022

James Ganas is a 3L at New York University School of Law.

The COVID-19 pandemic has hit small business—particularly restaurants—hard. In 2020 alone, over 110,000 restaurants closed, eliminating 2.5 million jobs. New variants and episodic surges have further exacerbated the problem. As restaurants search for lifelines to the pandemic’s elusive end, many have been curiously stifled by litigation originating long before the COVID era.

The employees at Berries in the Grove, a Miami restaurant, spent every shift for over a year washing dust and debris off windows and an outdoor dining space. The source of the dust and debris? Nearby road construction. According to Berries, the construction had a dramatic effect on revenue—unsurprisingly, outdoor diners prefer not to eat in close proximity to excessive dust and the din of heavy machinery.

In December 2014, Berries filed a claim with its property insurance provider seeking to have the financial hit from the construction debris covered. The insurer refused. The resulting dispute wound through the courts until, in August 2020, Berries finally lost its appeal in the Eleventh Circuit after six years of legal battles. Berries suffered its final blow in March 2021 when the Supreme Court declined to grant cert. (The case’s official name is Mama Jo’s Inc. v. Sparta Insurance Co.—“Mama Jo’s Inc.” referring to the name of the company which owns Berries in the Grove.) Though the COVID-19 pandemic didn’t exist when the lawsuit began, Berries’s claim has unexpectedly become a touchpoint for the roiling national debate over who should foot the bill for COVID-19-related business losses: insurers or business owners.

Since March 2020, hundreds of property insurance disputes have spilled into state and federal courts, and insurers have won the vast majority of them. Dozens of decisions from around the country—at trial and appellate levels, in state and federal courts—have cited Mama Jo’s as a leading example of how COVID-19 disputes should be resolved. But what does a case about construction dust have to do with the pandemic?

Three factors make the Berries case apposite to the resolution of COVID-19 business-loss disputes. The first factor is simply timing; the Eleventh Circuit’s final decision came down as the first wave of pandemic insurance cases were hitting the courts. As insurers prepared for arguments about a once-in-a-century pandemic, they were gifted with a case with strong precedential value.

The second factor is that the effects of construction dust and of pandemics are less distinct than one may think—they both involve less tangible damage than traditional property damage. Businesses typically file a property insurance claim for permanent damage: Insurance coverage often helps make a company whole after structural damage—maybe a hurricane caused windows to break, or a tornado destroyed a home’s foundation. Mama Jo’s is different; it dealt with non-permanent dust. The building involved still stands. This distinction is important because when judges encounter an unprecedented situation like the COVID-19 pandemic, they analogize to situations they’ve seen before. The key question in COVID cases is: Will judges view the pandemic as more similar to a hurricane claim, or a construction dust claim?

Third and most importantly, Mama Jo’s’ strong precedential value derived from the fact that property insurance contract language is incredibly similar among insurer contracts. The damage to Berries’s storefront went uncovered under the very same contract language, explored below, that lied at the heart of hundreds of COVID-era insurance disputes.

At issue in almost all COVID-19 cases, as in the Mama Jo’s case, is the meaning of a common insurance contract phrase: “direct physical loss of or damage to covered property.” Insured businesses claim they have suffered “direct physical loss” or “damage,” while insurers claim they have not. The phrase may seem simple; one might assume that “direct physical loss” or “damage” could easily apply to the effects stemming from dust or virus particles. Interpreting the contract terms, however, is deceptively complex.

COVID-19 is spread by particles, which are obviously physical. And while we now know that COVID-19 is not spread primarily by sticking to surfaces, not all courts understood this at the time many cases were litigated. They imagined COVID-19 to stick on surfaces, like dust on a restaurant window. Thus, the physicality of virus particles sticking to surfaces was an important argument for plaintiffs, whose strategy centered on proving a nexus between tangible, physical structures and COVID-19.

The primary problem under the contract language for small businesses, however, has been that courts don’t see dust as “damage.” Berries ultimately lost for a straightforward reason: they could wash the windows and tables. Whatever “damage” the construction caused wasn’t permanent—getting rid of the “damage” was as simple as ten minutes of elbow grease and a rag and soapy water.

Courts have used the same reasoning with COVID; they say that the particles can be washed away with disinfectant. Of course, this illustrates a limitation of judicial analogy: Are viruses, which one can’t see with the naked eye, comparable to dust and debris? For one thing, while both dust and virus particles can physically attach to a surface, the naked eye can detect how dusty something is, but cannot ascertain when the presence of particles passes a dangerous threshold. Secondly, getting rid of germs and virus implies disinfecting, not just cleaning, and disinfectant does not work instantaneously.

While arguing that virus particles constitute “damage” hasn’t worked, businesses have been more likely to succeed under the other part of the contract language quoted above: “direct physical loss . . . of covered property.” When small businesses prevail, it’s usually with the following argument: COVID-19 caused a loss of use of property. One Alabama court explicitly distinguished Berries’s construction woes from COVID-19 business closures by stating that Mama Jo’s was irrelevant because Berries never lost the “use” of its property—it stayed open and served customers. On the other hand, most restaurants were in a much different position during the early days of the COVID-19 pandemic. They arguably lost the “use” of their property, and these restaurants couldn’t be utilized for any business purpose. Customers were not merely annoyed by construction dust; they could not be served in the restaurant. But this argument loses more often than it wins. The courts’ rationale when rejecting such arguments rests on one central issue: Courts say that the “loss of use” argument inserts a word into the insurance policy, because loss of “use” is nowhere to be found in common insurance contracts. The losses contemplated by the contracts aren’t the loss of use, but full-scale losses, such as when a building is demolished—not just damaged in part.

Small businesses also ran into trouble over the meaning of “suspension.” While insurance policies usually say that the insurer will pay for qualifying losses caused by a “suspension” of business, courts often say that suspensions only count if business is completely suspended. Thus, one reason that Berries’s loss of use claim failed is because it remained open despite its business suffering. Similarly, in the COVID era, restaurants have been hurt by their decision to remain open even if only for takeout and delivery orders. This creates a risky incentive for business owners and restaurant owners alike: Their legal claims were more likely to succeed if they opted to forgo revenue. Should another pandemic occur, small business owners may now think that a full business shutdown puts their company on stronger legal footing in litigation concerning insurance recovery.

Another element of property insurance contracts is even worse for small businesses than the “direct physical loss or damage” contract language explored in this piece. Many property insurance contracts include a “Virus Exclusion” provision that specifically disclaims insurance coverage for business losses caused by pandemics. Insurers pressed state regulatory agencies to allow them to include such language following the SARS outbreak. They feared that a pandemic like SARS could cause widespread damage to businesses and that they would be on the hook for insurance payments. So, many insurance companies and state regulators shifted the risk to small businesses. In effect, this means that small business claims are usually defeated by the “Virus Exclusion” before even disputes around the other contract language explored in this piece can be made. The Exclusion therefore acts as an insurance policy for the insurers: They often do not have to worry about a judge contemplating a different interpretation of “direct physical loss or damage.” State insurance agencies or the federal government should limit insurers’ ability to offer policies with Virus Exclusions. (The Pandemic Risk Insurance Act—discussed below—would do just that.) Virus Exclusions are incompatible with our nation’s fundamental commitment to small businesses.

It is fundamentally unfair that struggling businesses may not be able to use insurance to recover from a pandemic. For example, an analysis by the Washington State Insurance Commissioner of eighty-four insurers’ contract language found that only two provided full pandemic coverage (and fifteen provided limited coverage). This is a global problem. In the United Kingdom, between one and four percent of service industry businesses seeking coverage for pandemic losses received coverage from their insurer. When insurance contracts are so similar between providers, they function essentially as contracts of adhesion.

As the world now knows, the fallout from pandemics must be planned for. When this cannot be done, measures should be taken to help businesses recoup these losses ex-post. We can start by giving small businesses the ability to buy pandemic insurance. In November 2021, Representative Carolyn Maloney introduced the Pandemic Risk Insurance Act (PRIA), which would create a shared public-private scheme for compensating pandemic-related business losses. The Bill has stalled since introduction; the House should move swiftly to pass it.

A public-private scheme to mitigate risk is necessary largely because of the downside risk to insurers if another pandemic were to occur—at the beginning of the COVID-19 pandemic, before it was clear how courts would resolve the insurance language, there was real fear that the insurance industry could go bankrupt. The Pandemic Risk Insurance Act is modeled on the Terrorism Risk Insurance Act (TRIA). After the events of 9/11 caused an estimated $40 billion in insured losses, the federal government sought to create a “backstop,” so that unlikely but extraordinarily damaging events would not result in wide-scale harm to the insurance industry. As TRIA did with coverage for terrorism, PRIA would force insurers to provide pandemic coverage. Under PRIA, should a pandemic occur, the government would pay for 95% of claims. PRIA also addresses the Virus Exclusion problem by specifically providing that existing Virus Exclusion provisions would be preempted by PRIA’s guarantee of coverage in the event of a qualifying pandemic. PRIA is a useful solution to the problem of pandemic insurance because a purely private market cannot adequately service both small businesses and large insurers on this issue—insurers have little incentive to provide coverage that could theoretically bankrupt them, and small businesses have little power to go elsewhere for that coverage.

As we assess the lessons that we have learned from the COVID-19 pandemic, we should not forget the plight of small businesses in insurance litigation. By passing PRIA, or similar legislation, and limiting Virus Exclusions, federal and state governments can tackle the unfairness of a system in which small businesses cannot realistically limit their exposure to risk. Doing so would also communicate to business owners and citizens alike that the government recognizes that pandemics are far worse than dust on a restaurant window.