Shortly after the outbreak of COVID-19, South Carolina restaurant chain operator Sullivan Management sought reimbursement from its property insurers for losses it suffered from state-ordered closures and other disruptions to its core seating business.
The carriers rejected the complaint.
Enter the SC Supreme Court, which was asked to consider and rule on an important, if awkwardly worded, question that got to the heart of the dispute: “Is the presence of COVID-19 on or near Sullivan’s properties and/ or related governmental orders that allegedly impair or destroy the fitness, habitability or functionality of any property, constitute “immediate physical loss or damage”, or “immediate physical loss or damage” requires permanent dispossession of the property or physical alteration of the property property?
The Supreme Court came back with its unified response to that bite last week.
It didn’t help Sullivan Management’s cause.
The Columbia-based company was operating eight Carolina Ale House restaurants and sports bars in South Carolina and another across the state line in Augusta under a deal with the chain’s Raleigh-based owner as the pandemic swept the U.S. in early 2020, locking down large swathes of the nation’s stationary service economy.
On or about March 10 this year, Sullivan Management said it contacted its insurance agent “about the government-ordered dining room closures to guests” and asked if part of its policy covered pandemic-related “business interruption losses.”
The company was told the “only potential coverage” fell under a communicable disease section and was capped at $250,000. It said it promptly filed a lawsuit with Allianz Global Risks US Insurance Co. and its affiliate Fireman’s Fund Insurance Co.
About a month later, they returned a denial letter, saying “there was no coverage for a dime of the losses under the policy,” according to a court filing.
The operator of the Carolina Ale House responded by suing the Richland County carriers in May 2020, alleging breach of contract, seeking either monetary damages or an order declaring that his claims were settled. The case quickly moved from state court to federal court in Columbia, so named because the insurance companies are headquartered outside of South Carolina.
Among other things, Sullivan Management said that the likely “continuous presence” of the virus in and around its restaurants “has made the premises unsafe and unsuitable for their intended use and therefore caused property damage or loss under the policy.”
Allianz and Fireman’s Fund disagreed with this interpretation. They moved to have the lawsuit dismissed.
The back-and-forth reached an impasse in mid-2021 when attorneys on both sides debated and challenged “the proper legal definition of certain terms” in the policy, according to US District Court Judge Mary Geiger Lewis. The problem was that they couldn’t point to any previous precedent from South Carolina to support their arguments. Lewis ruled “it would be appropriate” to let the state Supreme Court make the call.
Judges in Colombia eventually focused on just one of the five issues they agreed to review.
In preparing their Aug. 10 decision, they noted that “many courts across the country have been asked … whether losses due to the coronavirus and/or resulting government shutdown orders are covered by commercial property insurance policies. While it is helpful for the court to be aware of the tidal wave of litigation, we are relying on South Carolina law to answer that question.”
In this case, the insurance carriers prevailed.
The Supreme Court agreed with their assertion that “neither the presence of the coronavirus nor the government shutdown orders constitute ‘direct physical loss or damage,’ since that phrase requires ‘actual’ or ‘identifiable’ physical damage.” In other words, in order to trigger coverage, the loss or damage must be more than mere loss of use or economic loss; instead there must be ‘physical alteration, destruction or permanent expropriation of property’.”
Sullivan Management is mostly back in business, helping with $312,000 it received in 2020 and 2021 from a forgivable federal emergency loan program for companies hurt by the pandemic.
One COVID casualty was the company’s Lady Street restaurant in the Vista neighborhood of downtown Columbia. It closed at the end of 2020. The downtown Charleston location on King Street had also previously closed its doors.
Mount Pleasant attorney Justin O’Toole Lucey, representing Sullivan Management, said he was disappointed with the Supreme Court’s interpretation of the directive, but also commended his “opposing attorney for the good job they did on the matter.” to have”.
The dispute is not over yet. Sullivan management plans to request a review of last week’s decision. And it will be pursuing its federal lawsuit before Lewis, dealing with “several of the most hotly contested political conditions” that Lucey said the Supreme Court declined to review.
“These issues have been remanded to the district court for decision,” he said.
Contact John McDermott at 843-937-5572 or follow him on Twitter at @byjohnmcdermott