Recently, the Court of Appeals in the State of Louisiana, in Cajun Conti LLC et al. v. Certain Underwriters at Lloyd’s, London et al., Case No. 2021-CA-0343 (June 15, 2022), held that under an all-risk policy, the continuous presence of COVID-19 particles in the insured’s restaurant constituted “direct physical loss of or damage to the property,” such that the insured was entitled to business income and as extra expense coverage for losses sustained due to the necessary suspensions of the property’s operations during the “period of restoration.” The court based its holding on what it deemed to be ambiguity in the policy language. This holding is a significant departure from what courts in the majority of the country, including California have ruled. See The Inns by the Sea v. California Mutual Ins. Co., California Court of Appeals Opinion No. D079036 (Nov. 15, 2021) (holding that, in the absence of specific direct physical loss of or damage sustained by covered property, there was no coverage for lost business income resulting from a general COVID-19 shutdown order).

Cajun Conti LLC, Cajun Cuisine I LLC, and Cajun Cuisine LLC d/b/a Oceana Grill (hereinafter “Oceana”) were insureds under an all-risk policy (the “Policy”) with Certain Underwriters at Lloyd’s of London (hereinafter “Underwriters”).

Before the COVID-19 pandemic, Oceana Grill, located in New Orleans, Louisiana, employed 200 staff members and could accommodate up to 500 guests at a time. After the COVID-19 pandemic, on March 16, 2020, the mayor of New Orleans limited restaurant operations to take-out and delivery services. Oceana Grill closed its dining room from March 16, 2020 until May 15, 2020.

In keeping with the city’s reopening plan, the May 2020 reopening of Oceana Grill was undertaken with a 75% diminishment of the property’s normal capacity. By October 3, 2020, Oceana operated at 40%–45% under capacity due to the spread of COVID-19 in the city.

The Policy covered losses due to “direct physical loss of or damage to” the insured property. Lost business income and extra expenses are covered for losses sustained due to necessary suspensions of the property’s operations during the “period of restoration.” The “period of restoration” is defined as commencing seventy-two hours after the physical loss or damage occurs and continuing until the date when the property is “repaired, rebuilt, or replaced with reasonable speed and similar quality” or when business is “resumed at a new permanent location.”

Due to a dispute over coverage under the Policy, Oceana filed a declaratory relief action seeking a declaration that the Policy provided coverage for damage caused by “direct physical loss of or damage to” their insured premises as a result of continuous contamination by COVID-19. In the trial court, Underwriters argued that contamination due to COVID-19 did not constitute “direct physical loss or damage,” and filed a motion for summary judgment, which was denied. After a bench trial, the trial court determined that there was no coverage.

Oceana appealed and argued the trial court erred in (1) concluding that their premises did not sustain a direct physical loss or damage under the terms of the contract as a result of continuous contamination by COVID-19 particles; and (2) erred in concluding that the Policy was unambiguous.

The Court of Appeals reversed the trial court’s decision. It ruled that under Louisiana case law, all-risk policies cover all risks unless they are specifically excluded. Further, the Policy did not define “direct physical loss” or “damage.”

The Court explained that one reasonable interpretation of the provision is that suspension of business operations due to “direct physical loss of or damage to the property” meant the loss of the property’s full use, which is what Oceana argued. The Court further explained that another reasonable interpretation of the Policy language is that the suspension of business operations due to “direct physical loss of or damage to the property” required the full loss of the property’s use, which us what Underwriters argued.

Because the Policy language was subject to two equally reasonable interpretations, the Court interpreted the provisions against the drafter and in favor of the insured.

As mentioned above, Cajun Conti LLC et al., is a significant departure from case law around the country, including California. In The Inns by the Sea case, the insured, a hotel, submitted a claim for loss of business income after it closed its doors due to the stay-at-home COVID-19 orders in San Mateo and Monterey counties. The insurer, California Mutual, denied the claim. The Inns then sued for bad faith, and appealed a demurrer by California Mutual that the trial court sustained. The appellate court held that the stay-at-home s revealed directed that The Inns were to be closed because of the increased presence of the COVID-19 virus in San Mateo and Monterey counties, and The Inns would have remained closed regardless of the presence or absence of the virus on the premises.

The importance of Cajun Conti LLC et al. is twofold — insurers, depending on the policy language, may be liable in Louisiana, and potentially in other States, to provide coverage for business interruption claims arising out of COVID-19 closures, and policy language must be carefully drafted to avoid ambiguity. Further, insurers must now be aware that there is a split in authority regarding business income coverage for COVID-19 closures.

It is important to note why the Louisiana Court of Appeals ruled in favor of coverage. The Court relied on an ambiguity in the policy language. The Court relied on the maxim of contract construction — if there is ambiguity in the policy language, it is to be interpreted against the drafter of the policy. This case highlights the importance of clear language in policies, as well as clearly stated definitions and exclusions.