For going on five months, the United States has been dealing with the difficult impact of the COVID-19 pandemic, which has disrupted daily lives and sometimes devastated businesses. In looking for sources of economic recovery, businesses want to turn to their commercial property policies, but, as this blog has explained, these policies are unlikely to provide the coverage business owners seek because there must first be “direct physical loss of or damage” to the insured property. On Thursday, in Rose’s 1 LLC v. Erie Insurance Exchange, the Superior Court of the District of Columbia weighed in and confirmed the insurer’s position that there is no coverage for COVID-19 losses where the insured cannot demonstrate a direct physical loss.
The plaintiffs in the action own and operate a number of restaurants in the District of Columbia. In response to the COVID-19 pandemic, Mayor Muriel Bowser declared a state of emergency and issued a number of orders due to the “imminent hazard of or actual occurrence of widespread exposure” to COVID-19. The orders placed various restrictions on the operations of the plaintiffs’ restaurants, which were forced to close and suffered significant revenue losses. The plaintiffs sought coverage for their losses under their insurance policies issued by Erie. When their claims were denied, they filed suit, and both sides moved for summary judgment. As the court explained, “[a]t the most basic level, the parties dispute[d] whether the closure of the restaurants due to Mayor Bowser’s orders constituted a ‘direct physical loss’ under the policy.”
The plaintiffs pointed to the dictionary definitions of “direct,” “physical,” and “loss” to support three arguments. First, they argued that “the loss of use of their restaurant properties was ‘direct’ because the closures were the direct result of the mayor’s orders without intervening action.” The court noted, however, that the orders required the businesses to take certain actions. “Standing alone and absent intervening actions by individuals and businesses, the orders did not effect any direct changes to the properties.”
Second, the plaintiffs claimed their losses were “physical” because the COVID-19 virus is “material” and “tangible” and “because the harm they experienced was caused by the mayor’s orders rather than ‘some abstract mental phenomenon such as irrational fear causing diners to refrain from eating out.'” Again, the court was unconvinced. It noted that there was no evidence that the virus was actually present at any of the insured’s properties when they were forced to close. Moreover, “the mayor’s orders did not have any effect on the material or tangible structure of the insured properties.”
Third, the plaintiffs attempted to distinguish between “loss” and “damage,” arguing that they are distinct and loss incorporates “loss of use,” which does not require physical damage. Again, the court did not agree.
[U]nder a natural reading of the term “direct physical loss,” the words “direct” and “physical” modify the word “loss.” As such, pursuant to Plaintiffs’ dictionary definitions, any “loss of use” must be caused, without the intervention of other persons or conditions, by something pertaining to matter – in...
