Bachman's, Inc. v. Florists' Mutual Insurance Company

Background

Bachman’s, Inc. operates retail stores selling perishable floral and garden products and also conducts wholesale operations. It purchased a Business Package Policy from Florists’ Mutual Insurance Co. The policy covered business income losses and necessary extra expenses caused by a required suspension of operations, but only when the suspension resulted from direct physical loss of or direct physical damage to covered property caused by a covered cause of loss.

After Minnesota issued government closure orders during the coronavirus pandemic, Bachman’s closed its retail stores and limited its wholesale operations. It submitted a business-interruption claim to Florists on or about April 7, 2020. Florists denied the claim. Bachman’s then sued in Minnesota state court, seeking a declaration that the denial was wrongful and alleging that Florists breached its duties under the policy. Florists removed the case to federal court and moved to dismiss.

Issue and governing law

The issue was whether the policy covered business-income losses resulting from Minnesota’s COVID-19 shutdown orders. Minnesota law governed interpretation of the policy. The court explained that an insured must first establish an initial showing of coverage. Under Minnesota law, direct physical loss can include physical contamination or another tangible injury that is less than structural damage, but mere loss of use or function is not enough.

Court’s reasoning

The court relied on Minnesota cases involving asbestos, pesticides, or smoke contamination, explaining that those cases involved actual physical injury or contamination of the insured property. It also relied on an Eighth Circuit decision holding that a factory’s loss of use after an earthquake disabled a third-party electrical substation was not direct physical loss under Minnesota law.

Bachman’s argued that property unable to perform its intended function could qualify as a covered loss. The court rejected that argument because Bachman’s had not alleged that the coronavirus was present on its premises, and it had not alleged structural damage, contamination, or another physical injury. The court further stated that even the virus’s presence would not establish the required physical loss or damage because routine cleaning could eliminate it from surfaces. The court also noted that most courts addressing similar COVID-19 business-interruption claims had rejected coverage based on loss of use without physical alteration or injury to the property.

Disposition

The court held that the policy did not cover Bachman’s claimed business-interruption losses. Judge Michael J. Davis granted Florists’ Mutual Insurance Co.’s motion to dismiss. The order states that the matter was dismissed with prejudice, and it directed that judgment be entered accordingly.