Photos by Emily Blobaum

The owners of several popular Central Iowa restaurants recently filed suit against their insurance companies, claiming that their business interruption insurance claims were wrongfully denied amid the ongoing state-mandated COVID-19 shutdown.  

Gerleman Management Inc., whose restaurant businesses include Splash Seafood Bar & Grill and the Jethro’s barbecue restaurants, claims that its property and casualty insurer, Donegal Insurance Group and its related companies, acted in bad faith in rejecting the restaurant operator’s claim for losses. Gerleman is seeking more than $1 million in damages from the insurer, according to a petition filed April 24 in Polk County District Court. 

Also filing suit against its insurer in a separate lawsuit is Palmer Holdings and Investments Inc., which is seeking a more than $250,000 judgment against Integrity Insurance Co. to recover damages for its business interruption claim being denied. Palmer Holdings does business as Palmer’s Delis and Markets, Breadworks, and Sunset Gold; the case was also filed in Polk County on April 24.  

The lawsuits come as the Iowa Restaurant Association says restaurant owners across the state have lost $310 million in sales in April, with projections that 10% of food and drink establishments would be forced to remain closed permanently if the statewide shutdown extended past May 1. Although Gov. Kim Reynolds eased restrictions in 77 counties to allow operations at 50% capacity as of Friday, all of Polk and Dallas county restaurants remained closed to dine-in service. 

In both lawsuits, Des Moines law firm Carney & Appleby PLC argue that Reynolds’ March 7 order shutting down dining at the plaintiffs’ restaurants did constitute “direct physical loss of or damage to” its properties. They argue there doesn’t have to be physical damage for there to be a physical loss incurred. 

“The closure of Plaintiffs’ restaurants is a direct physical loss, including physical loss of access, customers, use, and utilization for their intended purposes,” the attorneys stated in the petition for Gerleman. “However, it is not due to the presence of Coronavirus/Covid-19 in any of Plaintiffs’ facilities.” 

The lawsuits argue that the governor’s closure order caused direct physical loss of the restaurants’ use of their buildings. In Gerleman’s case, the dine-in closure forced the restaurant group to terminate approximately 650 employees and sustain net losses in excess of $660,000 in March, with ongoing losses racking up at about $300,000 until it can fully reopen. 

James Carney, one of the law firm’s principals, said that while a number of business interruption lawsuits have been filed by restaurant owners in other states, he is not aware of other cases filed yet in Iowa. However, he is anticipating he will be contacted by additional restaurant owners who are now awaiting reviews of their claims by their insurers. 

According to a survey recently conducted by the Iowa Restaurant Association, a majority of Iowa’s restaurants and bars — about 70% — are covered by business interruption insurance policies. However, 99% of those with policies have not yet received any claims benefits. 

Nearly half of those business owners with business interruption policies said they were told by the agents not to file a claim, because it would be denied. Just over one-third of survey respondents with coverage — 36% — said they have filed a claim and that it has been denied. Another 15% are waiting to hear the status of their claim.

From the insurance industry’s perspective, the sheer magnitude of business interruption costs due to COVID-19 closures far outweighs the insurers’ ability to pay.   

The American Property Casualty Insurance Association last week released updated estimates of the total COVID-19 closure cost for small businesses. The monthly loss to small businesses with fewer than 100 employees ranges from $255 billion to $431 billion, the association estimated. 

In comparison, the surplus dollars held by all U.S. home, auto, and business insurers combined to pay all future losses — including all other catastrophe damage — is roughly $800 billion. The combined capital of the top business insurance underwriters represents only a fraction of that surplus amount, according to the APCIA.  

“Insurers understand the urgency of helping businesses and individuals recover from this unprecedented crisis and preventing a larger shut down of the economy,” said David Sampson, president and CEO of the APCIA, in a prepared statement issued last week. 

“Business interruption insurance policies do not typically cover losses related to viruses,” Sampson said. “Only the federal government can be the bridge for a crisis of this proportion. The property casualty industry supports federal assistance programs that are delivering aid directly to vulnerable business communities, particularly affected small businesses.” 

Among those efforts, insurers are voluntarily implementing more than $8 billion in new discounts and refunds for policyholders. Many are also suspending premium billing for small businesses such as restaurants and bars, he said. 

Insurers have also joined a broad business trade coalition calling for the COVID-19 Business and Employee Continuity and Recovery Fund, which would provide immediate financial assistance to impaired businesses to help them survive, reopen, and retain and rehire employees, Sampson said. 

Read a recent column by Dave Elbert on the topic of business interruption coverage