Indiana Court of Appeals Holds That COVID-19 Shutdown Orders Did Not Satisfy “Direct Physical Loss or Damage” Requirement for Business Income Coverage

Michael R. Giordano

Indiana Repertory Theatre v. The Cincinnati Cas. Co. 2022 WL 30123 (Ind. Ct. App. 2022)

After governments across the country issued shutdown orders in response to the COVID-19 pandemic in March 2020, insurers were flooded with claims from businesses seeking coverage for lost income. Insurers routinely denied the claims because the businesses had not sustained direct physical loss or damage to their property, as needed to trigger property coverage or business income coverage under their policies. In January, the Indiana Court of Appeals joined the majority of courts1 that have reviewed those claim denials and held that COVID-19 shutdown orders did not constitute “direct physical loss” or “direct physical damage” to insured property.

In Indiana Repertory Theatre v. Cincinnati Ins. Co., a nonprofit theater, closed for the remainder of the 2019-20 season after the City of Indianapolis issued an order on March 16, 2020, temporarily barring all live performances because of the COVID-19 pandemic. Four days later, the theater sought insurance coverage for its loss of business income. The insurer asked the theater for more information, including identifying “any direct physical loss or damage to your premises or property at your premises by the Coronavirus,” and “any property other than your own, that suffered direct physical loss or direct physical damage, thereby causing the civil authority to issue [an order closing or restricting access to the property].” The theater did not respond to the insurer’s request or provide any more information. A few days later, the insurer denied the theater’s claim, stating that the policy provided no coverage because “the fact of the pandemic, without more, is not direct physical loss or damage to property at the premises,” as required for coverage under the theater’s policy.

The theater sued the insurer for breach of contract, and both parties filed motions for summary judgment. The trial court granted the insurer’s motion and held that none of the theater’s property had to be repaired, replaced, or rebuilt because of COVID-19, and thus there had been no “direct physical loss” to the theater’s property. The theater sought and received permission to bring an interlocutory appeal.

The Court of Appeals affirmed the trial court’s decision for the insurer and held that the theater was not entitled to business income coverage because of the COVID-19 pandemic. In doing so, the Court of Appeals rejected the theater’s argument that the policy’s requirement of “physical loss or physical damage” was ambiguous and did not require an observable change in the condition of the property. According to the theater, it could not physically use its property to host live performances “because doing so would expose patrons to a lethal disease.” Although the theater cited cases to support its argument, the Court of Appeals found that those cases were distinguishable because they involved policies that protected against the “risk of” loss.

Instead, the Court of Appeals found instructive a case in which a New York court held that an insurer owed no business income coverage for a theater company’s monthlong closure because the closure was not caused by “direct physical loss or damage” to the company’s property but a street closure resulting from a nearby construction accident. See Roundabout Theatre Co. v. Cont’l Cas. Co., 302 A.D.2d 1, 6-7 (N.Y. App. Div. 2002).  The Court of Appeals also noted that the Eighth Circuit Court of Appeals reached a similar conclusion in a dispute over business income coverage for COVID-19 in Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2 F.4th 1141, 1144 (8th Cir. 2021), holding that to trigger business interruption and extra expense coverage, “there must be some physicality to the loss of damage of property – e.g., a physical alteration, physical contamination, or physical destruction”.

In closing, the Court of Appeals found that the theater’s interpretation of the phrase “physical loss or damage” was unreasonable because it conflicted with the policy’s “period of restoration” provision, which outlined the time coverage began and ended based on when the insured property is “repaired, rebuilt, or replaced” or the “business is resumed at a new permanent location.” Without physical alteration or impact to the theater’s property, the Court of Appeals explained, “there can be no period of restoration, and thus [the theater’s] interpretation of ‘physical loss or damage’ does not take into account the language of the Policy as a whole.” Because the theater was not physically damaged or altered in a way that required restoration or relocation, the theater did not suffer physical loss or physical damage under the policy. Thus, the Court of Appeals held that the trial court did not err in granting summary judgment for the insurer.

The decision in Indiana Repertory Theatre is well-reasoned and highlights the fundamentals of contract interpretation in a situation that is familiar to all.


1In December 2021, the Southern District of Indiana issued a similar decision in Café Patachou at Clay Terrace, LLC v. Citizens Ins. Co. of America, No. 1:20-cv-01462-SEB-DLP, 2021 WL 6062958, at *7 (S.D. Ind. Dec. 22, 2021) (holding that restaurant not entitled to property coverage or business income coverage because it sustained no direct physical loss to its property as a result of COVID-19 shutdown orders).