In what appears to be the first Pennsylvania State Court ruling which addresses in detail the “physical loss of or damage to” hurdle for COVID-19 business interruption claims in property policies, the Court of Common Pleas in Allegheny County granted summary judgement in favor of a dental practice which was required to close most of its business due to the governor’s stay at home orders.

Judge Christine Ward rejected CNA Insurance Company’s argument that “direct physical loss of or damage to property” requires some physical alteration of or demonstrable harm to the policyholder’s property.  In so holding, the Court declined to follow the interpretation of most of the state and federal courts that the term “direct physical loss of or damage to property” requires some form of physical altercation and/or harm to property in order for the insured to be entitled to coverage.

Instead, Judge Ward reasoned that “any such interpretation improperly conflates ‘direct physical loss of’ with ‘direct physical…damage to’ and ignores the fact that these two phrases are separated in the policy by the disjunctive ‘or’” which requires the Court to conclude that “direct physical loss of” must mean something different than “direct physical…damage to.”

For similar reasons, the Court also rejected CNA’s objections to coverage under the Civil Authority coverage of the Policy, which provides coverage for business income losses caused by an action of civil authority that prohibits access to the insured property.  The Court held that the orders issued by the state government to mitigate the spread of COVID-19 “effectively prevented…citizens of the Commonwealth from accessing Plaintiff’s business in any meaningful way for normal, non-emergency procedures”, dismissing CNA’s argument that complete prohibition of access to the property would be required for coverage to be triggered.

Lastly, the Court considered CNA’s position that the “contamination” and/or the “fungi, wet rot, dry rot and microbes” exclusions precluded coverage for the Plaintiff’s claim. In rejecting the application of the contamination exclusion, the Court noted that “the cause for the loss of use of property [for Plaintiff] was not the contamination of property” but rather “the risk of person-to-person transmission of COVID-19, which necessitated social distancing measures and fundamentally changed the way businesses utilized physical space” (emphasis in original).

In holding that the “microbes” exclusion did not apply to Plaintiff’s claim, the Court engaged in a fairly lengthy discussion about the similarities and differences between the definition(s) of what constitutes a “microbe” and “virus”, but ultimately concluded that given the ambiguity present in the use of the undefined term “microbes” in the Policy, the Court must find in favor of the Plaintiff. 

The question now becomes, what, if any, impact this decision will have for policyholders in Pennsylvania and beyond.  The Court may have come out differently in the event the Policy in question had a well-defined virus exclusion.  Over the years insurance carriers have used various virus exclusion provisions in their policy forms.  How each exclusion will be interpreted and applied by the courts has yet to be seen.  

One thing is certain, CNA will undoubtedly appeal this decision and advocate for a different outcome in the appellate court(s).  From a statistical perspective, the odds appear to be in CNA’s favor.  According to the University of Pennsylvania School of Law’s COVID Litigation Tracker, over 1,500 cases have been filed in state and federal courts throughout the country, fighting carriers for coverage for business income losses sustained as a result of the global pandemic.  Of those that have been decided by the courts, an overwhelming majority of them have been decided in favor of the insurance carrier by either denying the motion or issuing a full dismissal.  Obtaining coverage for COVID-19 business interruption losses will still be unlikely since most property policies included an explicit virus exclusion.  Your Graham Company Claims Consultant will continue to monitor this case and advocate on your behalf if there is a potential to trigger coverage based on the wording in your property policy.