Loss of Use and Physical Damage from Business Interruption and Covid (USA)

This Pennsylvanian Supreme Court judgement overturned all of the lower court judgments and found that the insured was not entitled to insurance coverage under the plain and unambiguous language of the policy because his business properties covered did not sustain any physical loss or damage.

The insured had claimed under his commercial property insurance policy for financial losses sustained due to the Covid-19 pandemic and Pennsylvania’s non-essential business shutdown. Except for emergency dental proceedings, the insured had closed his dental practice. 

The relevant policy terms provided:

“1.        Business Income

            …

b.         We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration.”  The “suspension” must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss.

…

 2.        Extra Expense

a.         Extra Expense means reasonable and necessary expenses you incur during the “period of restoration” that you would not have incurred if there had been no direct physical loss of or damage to property caused by or resulting from a Covered Cause of Loss.

b.         We will pay Extra Expense … to:

(1)        Avoid or minimize the “suspension” of business and to continue “operations” at the described premises or at replacement premises or temporary locations, including relocation expenses and costs to equip and operate the replacement premises or temporary locations; or

(2)        Minimize the “suspension” of business if you cannot continue “operations.””

The Supreme Court had to consider the following:

“(1)       Did the Superior Court err in its decision affirming the trial court’s opinion concluding that … Ungarean … is entitled to Business Income, Extra Expense and Civil Authority coverage under the policy issued by [CNA] as a result of the Covid-19 pandemic and associated orders issued by Governor Wolf, where the policy provides such coverage only following “direct physical loss of or damage to” property and neither the relevant government orders nor the Covid-19 pandemic caused a physical alteration to property?

 (2)       Did the Superior Court err in its decision affirming the trial court’s opinion concluding that … Ungarean … is entitled to Civil Authority coverage under the policy issued by [CNA] as a result of the Covid-19 pandemic and associated orders issued by Governor Wolf, where the policy provides such coverage only following an action by a civil authority that was issued “due to” physical loss of or damage to property and “prohibit[s] access” to a policyholder’s premises?

 (3)       Did the Superior Court err in its decision affirming the trial court’s opinion concluding that the Contamination; Consequential Loss; … Microbes; Acts or Decisions; and Ordinance or Law [E]xclusions in the [CNA] [P]olicy … did not bar coverage for … Ungarean[‘s] … alleged losses related to the Covid-19 pandemic and associated orders issued by Governor Wolf?”

The Supreme Court held:

“As explained, for coverage to apply under the Business Income and Extra Expense Endorsements of the CNA Policy, there must be a “direct physical loss of or damage to” the subject property. The terms “physical,” “loss,” and “Damage” are not defined in the CNA Policy. Relevant dictionary definitions of “physical” include: “Of, relating to, or involving material things; pertaining to real, tangible objects;” and “having material existence: perceptible especially through the senses and subject to the laws of nature.”

Relevant dictionary definitions of “loss” include: “An undesirable outcome of a risk; the disappearance or diminution of value, usu[ally] in an unexpected or relatively unpredictable way;” and “the partial or complete deterioration or absence of a physical capability or function”. And relevant dictionary definitions of “damage” include: “Of, relating to, or involving monetary compensation for loss or injury to … property;” and “[l]oss or injury to … property; esp[ecially], physical harm that is done to something … ” 

With those definitions, the only reasonable interpretation of the operative phrase

“direct physical loss of or damage to property in the CNA Policy becomes clear: There must be either (1) a physical disappearance, partial or complete deterioration, or absence of a physical capability or function of the property (loss), or (2) a physical harm or injury to the property (damage).  In other words, a physical alteration to the subject property is a threshold requirement for coverage to apply under the CNA Policy. This interpretation is further supported by the “period of restoration” language in the Business Income and Extra Expense Endorsement.”

That court said that for cover to apply there had to be a suspension of operations due to a direct physical loss of or damage to the subject property and the loss of income during a “period of restoration”.

The “period of restoration” was not simply a time limit on available coverage which ends whenever such measures, if undertaken, would have been completed with reasonable speed and quality. For the “period of restoration” language to have any effect there had to have been some physical alteration to the subject property necessitating repair, rebuilding or entirely replacing the property either at the same location or a new one. To permit coverage under the policy where a business had sustained solely economic losses unrelated to any physical alteration to the property would render the “period of restoration” language superfluous.

There were no facts on record suggesting that the properties required repairs, rebuilding or replacing.  The insured did not lose access to the covered properties during the government ordered shutdown. He could enter the covered properties at will and the business remained opened for emergency dental procedures. The only loss the insured has sustained was pure economic loss because the government-ordered shutdown prevented the insured from operating his covered properties at their full potential.  The partial closure however had nothing to do with the physical attributes of the covered properties as required by the policy for insurance coverage. The courts held for similar reasons, that to the extent that in narrow circumstances “loss of use” might constitute a “physical loss”, the “loss of use” must still be physical for coverage to apply under the policy.

There was no allegation that the virus was on the covered properties, or caused any physical damage to the properties at any time during the government ordered shutdown that might trigger coverage.

The court was satisfied that the sole reason that the insured’s business suffered financial losses during the period in question was due to the government-ordered shutdown not any alleged physical condition to the covered properties.

This judgment accords a long line in judgments across the United States of America including in the high courts of Delaware, Connecticut, Iowa, Louisiana, Massachusetts, Nevada, New Hampshire, Ohio, Oklahoma, South Carolina, Washington, Wisconsin, New Jersey, New York, California, Maryland and Columbia where the courts have all found in favour of the insurers on this issue.

As a matter of law and principle the outcome would be no different in South African courts, and is consistent with South African arbitral awards on these type of disputes where there is no contingent cover of deemed damage.

Timothy A Ungarean and others v CNA and Valley Forge Insurance Company