June 23, 2022 - An insurance policy that covered physical damage to property and losses caused by a suspension of operations did not cover losses caused when a coffee shop closed because of the pandemic, the Wisconsin Supreme Court has ruled.

In Colectivo Coffee Roasters, Inc. v. Society Insurance, 2022 WI 36 (June 1, 2022), the supreme court unanimously held that neither the physical presence of COVID-19 virus particles nor the a state order closing the coffee shop amounted to a tangible harm to the coffee shop’s physical property.

Policy Provisions

Colectivo Coffee Roasters, Inc. (Colectivo), which operates several coffee shops in Wisconsin, purchased an insurance policy from Society Insurance (Society) in February 2020.

The terms of the policy obligated Society to pay “for direct physical loss of or damage to” Colectivo’s buildings, permanently installed equipment, and other “business personal property.”

Under the policy, upon direct physical loss or damage, Society must pay Colectivo 1) the actual business income lost by the company during the “period of restoration,” and 2) expenses that Colectivo would not have incurred but for the direct physical harm, and that are “necessary … to avoid or minimize the suspension of business and to continue operations.”

The policy also obligated Society to pay for lost business income and extra expenses incurred by 1) contamination of Colectivo’s property or 2) an order from a civil authority that prevented Colectivo from accessing its property because of direct physical harm to a surrounding property.

Order Closes Restaurants

In March 2020, Andrea Palm, secretary-designee of the state Department of Health Services, issued several emergency orders prompted by the pandemic. The orders prohibited in-person dining at all bars and restaurants; take-out and delivery services were allowed to continue.

Because of the closures, Colectivo lost substantial business income. Colectivo filed a claim with Society over the lost income; Society denied the claim because Colectivo hadn’t suffered “a direct physical loss.”

After Society denied the claim, Colectivo filed a class action lawsuit against Society, seeking declaratory and injunctive relief and damages for breach of contract.

Motion to Dismiss Denied

Colectivo claimed that Palm’s orders forced it to cease operations at its Wisconsin locations. Additionally, Colectivo claimed that the presence of COVID-19 virus particles made items of personal property inside its Wisconsin locations unsafe, thereby causing “direct physical harm, direct physical damage, and direct physical loss to property.”

Colectivo also claimed that Palm’s orders prohibited the public from patronizing its locations, causing a suspension of operations that triggered the business-income, extra-expense, and civil-authority provisions of the policy.

Society moved to dismiss the lawsuit, arguing that none of the policy provisions applied. The circuit court denied the motion and the Wisconsin Court of Appeals allowed Society to appeal the non-final order from the circuit court.

Society filed a petition to bypass the court of appeals and the supreme court granted the petition.

Definitions from Caselaw

Justice Rebecca Dallet wrote the decision for the unanimous court.

Dallet pointed out that the Society policy contained no definition for “direct physical loss of or damage to” property. However, she explained, Wisconsin Supreme Court precedent interpreting similar policy wording instructs that physical losses and damages mean “different degrees of tangible harm.”

“An insured suffers a physical ‘loss’ of its property when the property is ‘destroyed’ or affected to such an extent that it cannot be repaired,” Justice Dallet wrote.

Physical damage, Dallet explained, “is harm to the tangible characteristics of the insured property that does not rise to the level of physical loss.”

“Thus, for a harm to constitute a physical loss of or damage to the property, it must be one that requires the property to be repaired, rebuilt, or replaced—that is, it must alter the property’s tangible characteristics,” Dallet wrote.

Virus Not a ‘Physical Peril’

Colectivo argued that the presence of COVID-19 virus particles on its property and the closures necessitated by Palm’s orders caused physical loss or damage to its property.

But neither argument, wrote Justice Dallet, “alleges a tangible harm to Colectivo’s physical property.”

Other courts have considered whether the presence of COVID-19 constituted physical loss or damage to property, Dallet pointed out. The vast majority, Justice Dallet noted, have concluded the virus does not cause such harm.

“The virus does not necessitate structural ‘repairs or remediation;’ it can be removed from a surface with a disinfectant,” Dallet wrote.

Furthermore, Justice Dallet wrote, COVID-19 does not make a property uninhabitable because it “is not a ‘physical peril that ma[kes merely] entering a structure hazardous.’”

Loss-of-Use Provision Doesn’t Apply

With regard to the closures ordered by Palm, Dallet explained that, under the Society policy, loss of use is separate from physical loss or damage to property.

“One may think of the business-income provision as an indirect loss-of-use coverage,” Justice Dallet wrote. “But that does not change the fact that a prerequisite for that provision is still a direct physical loss or damage. ‘Loss of use’ is thus distinct from a ‘direct physical loss or damage.’”

Colectivo’s argument was flawed because it conflated “loss of use” and “direct physical loss or damage.”

“So although Colectivo could not use its dining room for in-person dining for a period of time, the dining room was still there, unharmed—it was not physically lost or damaged,” Justice Dallet wrote.

Civil-Authority Provision Doesn’t Apply

The policy’s civil-authority provision didn’t apply, Dallet explained, because it applied only where a civil authority restricted access to the insured’s property due to physical damage to other property.

Colectivo failed to identify any surrounding property that had suffered a physical harm, Justice Dallet noted.

Furthermore, Dallet pointed out, the orders didn’t prohibit access to Colectivo’s properties.

“In fact, the orders explicitly allowed customers to access the property to order, pick up, and pay for Colectivo’s food or drinks, provided that they stay six feet apart from others an did not use Colectivo’s property for in-person dining,” Dallet wrote.