Viewpoint: Rulings on COVID-19 Closure Orders May Impact Business Interruption Claims

Business closure and stay-at-home orders have faced legal challenges based on putative Constitutional claims across several states. Several decisions have now been issued that construe the legal authority of state government to required closure of businesses and/or compel prospective customers to remain in their homes. Even where injunctive relief has been granted, these courts have recognized that non-essential businesses can be required to cease or reorganize their operation not because they have sustained physical damage but because their business invitees may expose other invitees and employees to contagion. These decisions could have significant and unanticipated implications for business interruption coverage claims. WHGrae

District Courts in California, New Mexico, and most recently, Pennsylvania, have denied requests for injunctive relief by individuals and groups who have argued that closure and similar orders infringed rights protected under the First, Second, and Fourteenth Amendments to the U.S. Constitution. The most recent decision, Benner v. Wolf, (M.D. Pa. May 21, 2020), issued by Middle District of Pennsylvania Judge John E. Jones, III, denied a petition by business owners, real estate agents, and a political candidate who sought to suspend Pennsylvania Governor Wolf’s business closure and stay-at-home orders issued in response to COVID-19.

The petitioners in Benner challenged the constitutionality of executive orders that temporarily closed non-life sustaining (i.e., non-essential) businesses and ordered individuals to remain at home when not engaging in essential tasks. Petitioners argued that the orders infringed their due process and first amendment rights.

In emphatically rejecting petitioners’ arguments, Judge Jones noted that “[a]t the time the Orders were issued, it is beyond dispute that COVID-19 was rapidly spreading across the globe. The virus was known to be highly contagious, and public health experts the world over proclaimed that social distancing was the only effective way to combat its deadly effects. Quick action in the face of such facts was not only justified but required.”

The court further held that the orders “were instituted for the express purpose of protecting the public, and while we acknowledge that petitioners have important financial equities at play, in this case, they have failed to adduce evidence to prove that their losses outweigh the grave harms that could result to all Pennsylvanians from a widespread COVID-19 outbreak.”

Thus, Judge Jones concluded that the purpose of the executive orders was to confront the state’s compelling need to protect the public, mitigate the spread of COVID-19 and deter grave harms to Pennsylvanians. The court recognized that these orders suspended the petitioners’ right to engage in ordinarily protected activities and potentially caused petitioners economic loss. However, the court concluded that a paramount temporary need to prevent the spread of COVID-19 authorized the governor’s exercise of executive authority.

Consequently, Judge Jones accepted that disruption of petitioner’s business was an inevitable consequence of a strategic response to the pandemic. The cause of this disruption, however, lacked any connection with physical loss of use, damage, or harm to business premises, but rather was tied to the need to prevent people visiting such premises from becoming vectors of contagion. Accordingly, as construed by the Brenner court, economic losses due to the business-closure and stay-at-home orders clearly would be insufficient to trigger business interruption coverage under policies that require physical loss or damage to property.

Judge Jones’ analysis echoed an earlier decision from across the country. By Order dated May 8, 2020, in Givens v. Newsom, Eastern District of California Judge John A. Mendez noted:

[I]t is uncontroverted that the State’s stay at home order bears a real and substantial relation to public health. . . . The virus that causes COVID-19 is known to quickly spread from person to person. Unchecked, it can spread exponentially and can endure over ten transmission cycles, causing one person to be responsible for 1,024 other infections. Many who are infected show no symptoms but still contribute to COVID-19’s spread. The State’s order, and the Department of Public Health directives it incorporates, seek to slow down the rate of transmission by drastically reducing the number and size of all gatherings. The “goal is simple, [the State] want[s] to bend the curve, and disrupt the spread of the virus.”

Givens v. Newsom, 2020 BL 174086, 5 (E.D. Cal. May 08, 2020).

Based on this analysis, the Court concluded that the State’s orders were reasonable time, place, and manner restrictions intended to serve a manifestly compelling state interest. Once again, the court’s focus was on the need to prevent gathering places, such as businesses, from becoming conduits for the spread of COVID-19. Closure prevented contamination rather than being a response to it. In these instances, business interruption occurred without any physical change in the premises.

Identical reasoning was relied upon in Legacy Church v. Kunkel by New Mexico District Court Judge James O. Browning in denying a challenge brought by a self-described “mega-church” to an executive order that barred mass gatherings. An initial order had exempted places of worship. The day before Easter weekend, an amended order and new regulations were issued that eliminated this exemption. In denying petitioner’s request for injunctive relief, the court acknowledged that the scale of the public health emergency created a compelling need for responsive action and accepted New Mexico’s assertion that “the most potent weapon that the State and local communities can wield against this significant health threat is through individuals choosing to stay in their homes as much as possible and avoiding physical proximity to other people and to public spaces.”

By contrast, Kansas District Court Judge Broomes in First Baptist Church v. Governor Laura Kelly granted a temporary restraining order and enjoined enforcement of a prohibition that limited the number of individuals permitted to attend religious gatherings. The court based its holding, in part, on the executive order’s apparent application of less strict standards to certain secular activities than to religious gatherings. However, the court conditioned its grant of injunctive relief on compliance by attendees with social distancing and other safety protocols. Thus, even in sustaining a legal challenge, the Kansas District Court focused on prospective activities and use of premises rather than the condition of the premises themselves.

In Friends of DeVito v. Wolf, which also challenged Pennsylvania Governor Wolf’s executive orders, challengers, who included a Pittsburgh-area state legislative candidate and a Lehigh Valley real estate agent, argued that Governor Wolf’s executive orders violated their due process and freedom of assembly rights. The challengers further requested that the Pennsylvania Supreme Court find that the order was an improper use of the governor’s emergency powers. These requests were denied, and the Court instead determined that COVID-19 qualifies as a “natural disaster” under the Emergency Management Services Code vesting the governor with emergency management powers. Thus, the Court concluded that the exigent circumstances permitted the governor’s exercise of legal authority, and the resulting economic losses lacked any connection with “direct physical loss of or damage to property.”

The circumstances and ultimate outcome of these legal challenges and pending matters vary from jurisdiction to jurisdiction. However, each decision has acknowledged that the legal authority to issue executive orders in response to COVID-19 has been and remains rooted in the potential consequences of use and occupation. In no instance has the physical condition of affected business premises merited any discussion aside from recognition that certain floorplans make social distancing a logistical impossibility.

These decisions consequently clarify that business interruption during the pandemic – whether due to outright closure or elimination of customer base due to shelter-at-home orders – lacks any connection with the physical condition of the business premises themselves. Rather, the executive orders in Pennsylvania, New Mexico, and California, similar to orders issued in New York and many other states, have general application based on broad authority to safeguard the health of the public overall, as contrasted with protecting the safety of visitors due to a specific condition at any particular place of business. Each decision has implicitly recognized that these safeguards apply without consideration of any new change in the physical condition or character of the business premises itself.

The undamaged physical structure of these business premises is similarly implicit in each decision. It is the individuals entering and using the buildings, rather than the buildings themselves, that pose a danger because of the risk that contagion is being brought into the premises irrespective of the condition of the buildings themselves.

The Benner decision has not yet resolved disputes regarding the scope of Pennsylvania’s Governor Wolf’s authority. In County of Butler et al. v. Wolf et al., (W.D. Pa. 20-677), pending in the Western District of Pennsylvania District Court, challengers argue that their First, Fifth and Fourteenth Amendment rights are being violated by the orders that have shuttered “non-life sustaining” businesses. In seeking a preliminary injunction, plaintiffs contend that the executive order that remains in place randomly differentiates between categories of business and that Governor Wolf accordingly exceeded the permissible scope of his authority. In making this argument, however, petitioners, acknowledge that the goal of the business classification system was “to attempt to lessen the contact between individuals in an effort to slow the spread of the Covid-19 [sic] virus.”

Petitioners argue that some businesses required to shut down could easily accommodate the need for social-distancing and implement other necessary safeguards. No decision has yet been rendered on plaintiff’s request for emergency temporary relief. However, in advancing this argument, petitioners may have tacitly acknowledged that the business interruptions they experienced lacked any connection to physical damage to their offices or other business premises. Whether or not they prevail, plaintiffs may find that the arguments they advanced will have significant implications in the event they later seek indemnity for their losses under their business interruption policies.

As states start to lift business closure and stay-at-home orders and implement plans to phase re-openings, there will be more constitutional challenges to the substance and pace of such changes. The decisions issued with respect to Constitutional challenges to business closure and stay-at-home orders are likely to have lingering consequences on the insurance industry and coverage claims for COVID-19 losses.11