The COVID-19 pandemic forced numerous businesses in Pennsylvania to limit their hours or shut down entirely, resulting in substantial business income losses. These losses triggered a wave of litigation on behalf of business owners seeking recoupment of lost income under the business interruption coverage of their insurance policies. Insurers in Pennsylvania denied claims by virtue of the combination of policy exclusions and a lack of “physical loss” that would trigger coverage.
Two recent decisions, one out of the Allegheny Court of Common Pleas and the other out of the District Court for the Western District of Pennsylvania, illustrate the differences in approaching these largely novel coverage issues.
In Ungarean, DMD d/b/a Smile Savers Dentistry, PC et. al. v. CNA et. al., No. GD-20-006544, (Ct. Com. Pl. Allegheny Ct., March 22, 2021, Ward, J.), a Pennsylvania state trial level court granted summary judgment in favor of a dental office seeking business interruption loss coverage under a business insurance policy. The insurer argued that 1) coverage did not trigger because the business losses did not result from a “direct physical loss of or damage to property”; 2) civil authority coverage does not trigger where complete access to property was not prohibited; and 3) the “contamination of property exclusion” and “fungi, wet rot, dry rot and microbes exclusion” barred coverage.
The Court analyzed the phrase “direct physical loss of or damage to property,” finding that the insurer’s use of the term “or” distinguished “direct physical loss of” and “direct physical damage to” as separate coverage triggers. Unlike “damage,” the Court explained that a reasonable definition of “loss” is the act of losing possession or deprivation of property, with or without actual damage to the property. Likewise, the Court defined “physical” as “of or relating to science . . . having a material existence . . . [and/or] perceptible especially through the senses and subject to the laws of nature.” Taken together, the Court found it “reasonable to conclude that Plaintiff could suffer ‘direct’ and ‘physical’ loss of use of its property absent any harm to property.” The Court likewise found coverage under the civil authority provision of the policy, which required demonstration of direct physical loss and resulting prohibited access. The Court found that the term “prohibit” is defined as “prevent from doing something.” Because the COVID-19 Orders restricted access to potential customers, such prohibition was enough to trigger coverage.
The Court thereafter rejected the application of the “Contamination Exclusion” due to what it found to be an ambiguity. The court reasoned that COVID-19 is transmitted through person-to-person contact, as opposed to actual contamination of the property. Finding that the loss of use of the property was due to the government shutdown orders that were issued to mitigate the viral spread through person-to-person contact, not property contamination, the court concluded the “Contamination Exclusion” did not apply. The Court likewise rejected the “fungi, wet rot, dry rot and microbes exclusion,’ explaining that COVID-19 could not meet the definition of “microbe” because it was not a “micro-organism” or “organism,” and no other definitions applied.
Compare this result to that reached by a federal trial court in the Western District of Pennsylvania, 1 S.A.N.T., Inc. v. Berkshire Hathaway, Inc., No. 2:20-CV-862, 2021 WL 147139 (W.D. Pa. Jan. 15, 2021). There, the Court granted the insurer’s motion to dismiss a suit brought by a restaurant seeking coverage for loss of business income. The Court found that coverage did not trigger because no “direct physical loss or damage to Covered Property” occurred. Applying the same dictionary definitions as the Ungarean Court, the 1 S.A.N.T. Court explained that these definitions must be read in the context of their usage in the policy language. For example, “loss” and “damage” do not stand alone but are modified by the terms “direct physical.” The Court explained that the alleged loss is neither “direct” or “physical” where no immediacy of loss nor physical impact to the covered structure occurred. Instead, the Court found that the coverage trigger language, when read as a whole, may “only be reasonably construed as extending to events that impact the physical premises completely (loss) or partially (damage).” Because the cause of action was limited to economic loss, as opposed to physical impact or damage to the property, the Court declined to find that coverage triggered.
The Federal Court likewise found that coverage did not trigger under the Civil Authority provision of the policy. The Court explained that coverage under this theory may only trigger where 1) a direct physical loss or damage occurred and 2) that loss was a result of an order that prohibited access. The Court explained that it had already found that no physical loss or damage to the property occurred. Further, no prohibition to access the property was imposed where the restaurant remained accessible to employees and customers for takeout and delivery services. After finding that coverage did not trigger, the Court avoided addressing the applicability of the “virus exclusion” as unnecessary.
The Ungarean and 1 S.A.N.T. decisions examined nearly identical policy language and arguments, yet arrived at contrary determinations on the issue. Without appellate authority on the issue to date, such inconsistencies highlight the courts’ struggles with the issue and signal more unpredictability in future rulings unless and until appellate authority on the issue is solidified in Pennsylvania.
For additional questions, please contact Elizabeth Hines, Esq., Glen Shikunov, Esq. and/or Scott Tredwell, Esq.
This article was prepared by McCormick & Priore, P.C. to provide information on recent legal developments of interest to our readers. This publication is in no way intended to provide legal advice or to create an attorney-client relationship. All Rights Reserved. This article may not be reprinted without the express written permission of McCormick & Priore, P.C.