Direct Physical Loss Bars Coverage for COVID-19

In yet another COVID-19 decision finding in favor of the insurance company, a Washington, D.C. Superior Court has denied summary judgment to a policyholder and granted summary judgment to the insurer on the issue of direct physical loss.

In Rose’s I, LLC v. Erie Insurance Exchange, No. 2020 CA 002424B (Super Ct. Dist. of Co.) (Aug. 6, 2020), a restaurant group sought coverage under its commercial property coverage insurance for losses sustained because of civil orders issued by the Mayor of Washington, D.C. as part of the novel coronavirus pandemic. The insurer denied coverage and the policyholder brought one of the over 700 declaratory judgment actions against insurers stemming from claim denials over COVID-19 closures.

According to the court, the policy provided coverage for direct physical loss and included coverage for partial or total interruption of business resulting directly from loss or damage to the property insured. The court described the basic legal issue as “whether the closure of the restaurants due to [the mayor’s] orders constituted a ‘direct physical loss’ under the policy.”

In denying the policyholder’s summary judgment motion and granting the insurer’s motion, the court rejected the policyholder’s argument that the civil orders effected direct changes to the insured properties. Standing alone, said the court, and absent intervening actions by individuals and businesses, the orders did not affect the properties. The court also rejected the argument that the losses were physical because the policyholder offered no evidence that COVID-19 was actually present on their properties at the time they were forced to close. Moreover, the court held that “the mayor’s orders did not have any effect on the material or tangible structure of the insured properties.”

In rejecting the policyholder’s loss of use argument, the court noted that the words “direct” and “physical” modify the word “loss.” The court said that the policyholder’s loss had to be caused by a direct physical intrusion onto the insured property. Importantly, the court distinguished the cases often cited by policyholders and held that none stood for the proposition that a governmental edict, standing alone, constitutes direct physical loss under an insurance policy.

Finally, the court rejected the policyholder’s argument that coverage should exist because the policy did not have a specific exclusion for pandemic-related losses. As the court held, “even in the absence of such an exclusion, [the policyholder] would still be required to show ‘direct physical loss.'” Because it could not do so, the court granted the insurer’s motion for summary judgment.

So far these logical arguments based on the plain reading of the unambiguous terms of property insurance policies have prevailed in COVID-19 actions. Litigation clearly is not the solution to the manifest issues facing restaurants and other businesses throughout the country.

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