An American court has confirmed that government shutdown orders did not constitute ‘direct physical loss’ that would trigger an indemnity under the commercial insurance held by a group of restaurants (in Rose’s 1 LLC et al v Erie Insurance Exchange).

The court said that:

  • insurance policies are to be enforced in accordance with the real intent of the parties as expressed in the language employed in the policy;
  • the court should give the words used in insurance contracts the common, ordinary and popular meaning; and
  • the court should interpret the contract as a whole, giving reasonable, lawful and effective meaning to all its terms in ascertaining the meaning, in light of all the surrounding circumstances at the time the contract was made.

The court held that a government order alone does not constitute direct physical loss under an insurance policy. Even if loss of use was covered (it was not) the claimants would still have to show the loss of use was a direct physical loss. There was none.

The claim failed because the claimants could not show that there was a direct physical loss as required by the policy wording. Similar facts would have resulted in the same outcome in South Africa.