Nationwide, restaurants and bars felt financial strain over the past two years. With measures in place to prevent the spread of COVID-19, many food and beverage businesses were subject to restrictions on the use of their in-person dining rooms. In a recent case, the Wisconsin Supreme Court found that COVID-19 related business interruption losses were not recoverable under the insured’s property insurance policies. The Court found that COVID-19 restrictions were not direct physical losses, triggering a claim under a business’s physical loss insurance, nor does a closure due to COVID-19 exposure entitle a business to a claim coverage under contamination provisions. Colectivo Coffee Roasters, Inc. v. Society Ins., 2022 WI 36, 974 N.W.2d 442.

In February 2020, Colectivo Coffee Roasters, Inc. (“Colectivo”) purchased an insurance policy from Society Insurance (“Society”). The policy covered certain loses caused by physical loss or damage to the business’s buildings, equipment, and “other personal property.” One such coverage was for business income loss or business interruption losses. Another coverage, if triggered, would have entitled Colectivo to expenses related to cleaning and sanitization.

In March 2020, the Wisconsin Department of Health Services issued emergency orders to address COVID-19. Two of the orders prohibited in-person dining at all bars and restaurants but did not prohibit takeout and delivery options. Colectivo lost profits during this change in their business operation. Colectivo filed a claim with Society to recover lost profits, but Society denied on the basis that the business had not suffered a “direct physical loss.” Food and beverage establishments compliant with COVID-19 restrictions did not face lost or stolen property; rather, they simply changed their daily uses of the property.

Colectivo, along with several other plaintiffs holding the same policies, filed suit to challenge Society’s rejection of their claims. The Milwaukee County Circuit Court originally found in favor of the food and beverage plaintiffs, denying the insurer’s motion to dismiss basis that the presence of COVID-19 particles led to physical loss or damage. The Wisconsin Supreme Court granted a petition to bypass the Court of Appeals, and subsequently reversed the Circuit Court.

The Supreme Court found that the lost profits were not caused by tangible harms to Colectivo’s physical property, which would be necessary to trigger coverage. The Supreme Court held: “As the overwhelming majority of the other courts that have addressed the same issue have concluded, the presence of COVID-19 does not constitute a physical loss of or damage to property because it does not alter the appearance, shape, color, structure, or other material dimension of the property.” (internal quotations omitted)

The Colectivo decision is important for businesses seeking options to recover from business profit disruptions due to COVID-19. Colectivo appears to be part of a larger trend; just last month the Seventh Circuit also issued an opinion finding that a group of childcare centers were not insured for COVID-related losses, applying similar reasoning to Colectivo. See Paradigm Care & Enrichment Ctr., LLC v. W. Bend Mut. Ins. Co., 33 F.4th 417, 419 (7th Cir. 2022). Still, policies vary greatly, and the language of each policy controls.

Law Clerk Jacob Gardner assisted with researching and writing this post.

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