Affirmation that COVID-19 Closure Orders Do Not Constitute Physical Loss Under Commercial Property Insurance Policies

Affirmation that COVID-19 Closure Orders Do Not Constitute Physical Loss Under Commercial Property Insurance Policies

Introduction

In the landmark case of Rhonda H. Wilson; The Law Offices of Rhonda Hill Wilson, P.C., Appellants v. USI Insurance Service LLC; Hartford Casualty Insurance Company Toppers Salon & Health Spa, Inc., Appellant, the United States Court of Appeals for the Third Circuit addressed a critical issue for businesses impacted by the COVID-19 pandemic. The central question revolved around whether government-mandated closure orders due to the pandemic constituted a "physical loss of or damage to" property under commercial property insurance policies, thereby triggering coverage for lost business income and extra expenses.

Summary of the Judgment

The plaintiffs, comprising various businesses across Pennsylvania, New Jersey, New York, Maryland, and Delaware, sought to claim losses incurred due to mandatory closure orders issued to curb the spread of COVID-19. These businesses filed claims under their commercial property insurance policies, specifically invoking business income, extra expense, and civil authority provisions. However, insurers denied these claims, alleging that the plaintiffs did not experience a "physical loss of or damage to" their property, and citing "virus exclusions" within the policies.

The District Courts sided with the insurers, dismissing the plaintiffs' claims on the grounds that the loss of use due to closure orders did not amount to physical loss or damage. Upon appeal, the Third Circuit affirmed these dismissals, concluding that the loss of use caused by government mandates did not meet the threshold for physical loss under the insurance policies in question. Consequently, the courts ruled that no coverage was provided for the businesses' losses.

Analysis

Precedents Cited

The court heavily relied on the precedent set by Port Authority of New York and New Jersey v. Affiliated FM Insurance Company, 311 F.3d 226 (3d Cir. 2002). In this case, the Third Circuit held that physical loss or damage to property required a tangible, concrete alteration of the structure itself, not merely a loss of use due to external mandates.

Additionally, the court referenced numerous decisions across various jurisdictions that unified in holding that COVID-19-related closure orders do not constitute physical loss or damage. These include:

  • Legal Sea Foods, LLC v. Strathmore Insurance Co., 36 F.4th 29 (1st Cir. 2022)
  • Uncork & Create LLC v. Cincinnati Insurance Co., 27 F.4th 926 (4th Cir. 2022)
  • Santo's Italian Cafe LLC v. Acuity Insurance Co., 15 F.4th 398 (6th Cir. 2021)
  • And several others across the 2nd to 10th Circuits.

These precedents collectively strengthen the court’s stance that government closure mandates, absent physical damage, do not fulfill the requirements for triggering insurance coverage under business income and extra expense provisions.

Legal Reasoning

The court's reasoning centered on a strict interpretation of the insurance policies' language. Key points include:

  • Definition of Physical Loss: The policies required a "direct physical loss of or damage to" property. The court interpreted this to mean tangible, concrete damage to the structure itself, not merely an inability to operate as intended.
  • Loss of Use vs. Physical Damage: The inability to use property due to closure orders was deemed a loss of use, not a physical loss. The structures remained intact and functional, merely restricted in their operational use.
  • Period of Restoration: Coverage was tied to the "period of restoration," which begins with physical loss or damage. Since no physical damage occurred, the period of restoration was not triggered.
  • Virus Exclusions: Even though virus exclusions were present, the court did not need to address them as it was determined that no physical loss occurred under the policies.
  • Policy Interpretation: Following both Pennsylvania and New Jersey law, the court adhered to the plain and ordinary meaning of the policy terms, construing any ambiguities in favor of the insured but finding none in this case.

The court emphasized that reading the policy as a whole is essential, and any interpretation should avoid rendering policy terms meaningless. The loss of operational use without physical damage did not satisfy the policy's requirements for coverage.

Impact

This judgment has significant implications for businesses holding similar commercial property insurance policies. Key impacts include:

  • Insurance Claims Post-Pandemic: Businesses cannot rely on insurance claims for losses solely due to government-mandated closures unless accompanied by physical damage to property.
  • Policy Clarity: Insurers may seek to clarify policy language to more explicitly exclude losses from pandemic-related closures, though existing virus exclusions already provide substantial coverage limitations.
  • Future Litigation: This ruling sets a strong precedent, discouraging similar claims and guiding lower courts to interpret insurance policies consistently regarding pandemic-related losses.
  • Policyholder Awareness: Businesses may need to reassess their insurance coverage, seeking policies that might offer broader protection against operational losses not tied to physical damage.

Overall, the judgment underscores the limitations of standard commercial property insurance in addressing non-physical operational disruptions.

Complex Concepts Simplified

1. Physical Loss or Damage

In insurance terms, "physical loss or damage" refers to tangible harm to property, such as destruction, destruction of structure, or substantial impairment. It does not include scenarios where the property remains intact but cannot be used as intended due to external factors like government orders.

2. Business Income and Extra Expense Provisions

These provisions are parts of commercial insurance policies that cover loss of income and additional expenses a business may incur when operations are suspended due to insured events. However, they typically require a direct physical loss or damage to the insured property.

3. Virus Exclusion

A virus exclusion is a clause in insurance policies that specifically excludes coverage for losses related to viral outbreaks or pandemics. Even if physical damage occurred due to a virus, this exclusion could bar coverage.

4. Period of Restoration

This term refers to the timeframe during which an insured business can claim loss of income or extra expenses due to an insured event. It starts when physical loss or damage occurs and ends when the property is repaired or the business relocates.

Conclusion

The Third Circuit's affirmation in Wilson v. USI Insurance Service LLC solidifies the legal understanding that government-mandated closure orders, such as those implemented during the COVID-19 pandemic, do not constitute a "physical loss of or damage to" property under standard commercial property insurance policies. This decision emphasizes the necessity for businesses to recognize the limitations of their insurance coverage in scenarios where operational disruptions are caused by external regulatory actions rather than tangible property damage. It also serves as a crucial precedent guiding future interpretations of insurance policies in similar contexts, ensuring consistency and clarity in the application of coverage clauses.

Case Details

Year: 2023
Court: United States Court of Appeals, Third Circuit

Judge(s)

CHAGARES, CHIEF JUDGE

Attorney(S)

Rhonda H. Wilson 8 Penn Center 1628 John F. Kennedy Boulevard Counsel for Appellants Daniel J. Dugan [ARGUED] Neal R. Troum Spector Gadon Rosen & Vinci 1635 Market Counsel for Appellant Robert A. Freedberg Christian M. Perrucci [ARGUED] Florio Perrucci Steinhardt Cappelli Tipton & Taylor Counsel for Appellant Walter J. Andrews [ARGUED] Hunton Andrews Kurth, Scott P. DeVries Hunton Andrews Kurth, Michael S. Levine Hunton Andrews Kurth, Elbert Lin Hunton Andrews Kurth, John R. Sawyer Stark & Stark Kevin V. Small Hunton Andrews Kurth Counsel for Appellant Laurence S. Berman Arnold Levin Daniel C. Levin Frederick S. Longer Levin Sedran & Berman Counsel for Appellants Kenneth J. Grunfeld Golomb Spirt Grunfeld Counsel for Appellants Richard M. Golomb Golomb Spirt Grunfeld Counsel for Appellants Wilson D. Miles, III Rachel N. Minder Beasley Allen Crow Methvin Portis & Miles Counsel for Appellant Paul W. Evans Beasley Allen Crow Methvin Portis & Miles Counsel for Appellant R. Bruce Carlson Carlson Brown Ted A. Hages Matthew Louik James C. Martin [ARGUED] Devin M. Misour George L. Stewart, II Colin E. Wrabley Reed Smith, Kelly K. Iverson Gary F. Lynch Lynch Carpenter Counsel for Appellant Alan M. Feldman Edward S. Goldis Daniel J. Mann Andrew K. Mitnick Bethany R. Nikitenko Feldman Shepherd Wohlgelernter Tanner Weinstock & Dodig James A. Francis David A. Searles John Soumilas Francis Mailman Soumilas Counsel for Appellant Alan C. Milstein Sherman Silverstein Kohl Rose & Podolsky Counsel for Appellants James E. Cecchi Brian F. O'Toole [ARGUED] Lindsey H. Taylor Carella Byrne Cecchi Olstein Brody & Agnello, Christopher A. Seeger Seeger Weiss Counsel for Appellants Paul J. Geller Robbins Geller Rudman & Dowd Samuel H. Rudman Robbins Geller Rudman & Dowd Counsel for Appellant Bethany Barrese Saxe Doernberger & Vita Brian J. Clifford Janie A. Eddy Saxe Doernberger & Vita Gregory D. Podolak Saxe Doernberger & Vita Counsel for Amicus Appellant Saxe Doernberger & Vita PC Gabriel K. Gillett Jenner & Block Counsel for Amici Appellants Pennsylvania Restaurant & Lodging Association and Restaurant Law Center Lisa M. Campisi Blank Rome Charles A. Fitzpatrick, IV Blank Rome Counsel for Amicus Appellant United Policyholders Nicholas M. Insua Reed Smith Counsel for Amicus Appellant United Policyholders Christopher P. Leise White & Williams Marc L. Penchansky White & Williams Counsel for Appellee USI Insurance Services LLC Wystan M. Ackerman J. Tyler Butts Gregory P. Varga Robinson & Cole Counsel for Appellee Richard D. Gable, Jr. Butler Weihmuller Katz Craig Counsel for Appellee & Appellee Hartford Casualty Insurance Company Jonathan M. Freiman David R. Roth [ARGUED] Wiggin & Dana One Century Tower Counsel for Appellee Appellee Hartford Casualty Insurance Company Sarah D. Gordon Steptoe & Johnson Counsel for Appellee Appellee Hartford Casualty Insurance Company James L. Brochin Steptoe & Johnson Ryan M. Chabot Alan E. Schoenfeld Wilmer Cutler Pickering Hale & Dorr Counsel for Appellee John J. Kavanagh Steptoe & Johnson Counsel for Appellee & Appellee Hartford Casualty Insurance Company Caitlin R. Tharp Steptoe & Johnson Counsel for Appellee Alan I. Becker Daniel G. Litchfield Laurence J. W. Tooth Litchfield Cavo Counsel for Appellees Eric A. Fitzgerald Hillary Ladov McAngus Goudelock & Courie Antonia B. Ianniello John F. O'Connor, Jr. Steptoe & Johnson Counsel for Appellees Michael D. Hynes DLA Piper Brett D. Solberg Counsel for Appellee Robert L. Byer Julie S. Greenberg Duane Morris Damon Vocke Duane Morris Counsel for Appellee Fred L. Alvarez David E. Walker Walker Wilcox Matousek One North Franklin Street, Suite Paul L. Fields, Jr. Fields Howell, Marc R. Kamin Michael J. Smith Stewart Smith Gregory L. Mast Fields Howell Counsel for Appellee Michael E. DiFebbo, Jr. Elizabeth A. Sutton Kennedys CMK Kristin V. Gallagher Kennedys CMK Francis X. Simpson, III Fowler Hirtzel McNulty & Spaulding Counsel for Appellee Laura A. Brady William T. Corbett, Jr. Coughlin Midlige & Garland Kenneth J. Brown Amy M. Saharia Williams & Connolly Counsel for Appellees Laura A. Foggan Crowell & Moring Counsel for Amici Appellees American Property Casualty Insurance Association and National Association of Mutual Insurance Companies

Comments