South Carolina Supreme Court Embraces Majority on COVID-19 Business Interruption Claims

Today, in Sullivan Management, LLC v. Fireman’s Fund Insurance Co., the South Carolina Supreme Court embraced the overwhelming weight of authority and unanimously held that neither the presence of COVID-19 nor corresponding government orders prohibiting indoor dining fall within the policy’s trigger language of “direct physical loss or damage.”

A restaurant operator had sued its insurers for business interruption and income losses it allegedly suffered during the COVID-19 pandemic, claiming property coverage existed as a result of the alleged presence of the virus on its premises and the government prohibitions on indoor dining. The South Carolina Supreme Court had accepted five certified questions from the federal district court, but addressed only one of the questions, finding it dispositive:

Does the presence of COVID-19 in or near Sullivan’s properties, and/or related governmental orders, which allegedly hinder or destroy the fitness, habitability or functionality of property, constitute ‘direct physical loss or damage’ or does ‘direct physical loss or damage’ require some permanent dispossession of the property or physical alteration to the property?

Recognizing that direct physical loss or damage constitutes the “North Star” of property insurance policies, id. at 5 (citing Santo’s Italian Café LLC v. Acuity Ins. Co., 15 F. 4th 398, 402 (6th Cir. 2021)), the Court held that “mere loss of access to a business is not the same as direct physical loss or damage. Although the government orders affected business operations, these restrictions did not cause any direct physical loss or damage.” Id. The Court further held that the “contention that a government shut-down order caused direct physical loss or damage is meritless,” it said. Id.

Further, recognizing that “Sullivan contends it asserted more by also pleading that the presence of virus particles in its facilities constituted physical loss or damage,” the Court squarely rejected the argument that Covid on the premises somehow constitutes damage to property. The requirement of “‘direct physical loss or damage’ contemplates a tangible or material component to loss or damage,” the Court said.  Id. at 6. The Court also said the period of restoration provision bolstered its reading of “direct physical loss or damage” and that cleaning and installing plexiglass “are different than restoring damaged or lost property.” Id. 

Crowell & Moring LLP represented amici curiae American Property Casualty Insurance Company, National Association of Mutual Insurers, and South Carolina Insurance Association in this case.