The novel coronavirus 2019 (COVID-19) has disrupted events, supply chains, sales, and entire industries. As a result, businesses will likely look to their property insurers to recuperate lost business income, as well as expenses related to cleaning, sanitizing, and decontamination. This Alert discusses how courts have analyzed and applied first-party property policies for these types of non-physical losses, potential coverage under a civil authority provision, and pollution/contamination exclusions.
Physical Loss or DamageAlmost all property policies require direct, physical loss or damage to property to trigger coverage. It is simple to prove there is physical loss where there is obvious, visible physical damage; it is more difficult in a situation like COVID-19 where the damage is an intangible, financial loss in the form of business interruption or cleaning/decontamination. Unfortunately, the case law is basically non-existent with regard to the interpretation of physical loss as it relates to a virus like COVID-19.
However, there is guidance from courts with regard to claims where there has not been a physical change to property. Some courts interpret “direct physical loss” narrowly to only mean damage causing physical alteration to the property, such as flooding or fire. Other courts take a broader approach finding coverage to be triggered with the loss of use or habitability of insured property. Each of these approaches is discussed below, and we should also be mindful of the fact that the insured has the burden of proof to show that the claimed loss falls within the coverage provided by the policy’s insuring clause
Courts Narrowly Interpreting Physical LossMany courts interpret “physical loss” narrowly to mean damage causing apparent and discernable damage to the property. For example, in Universal Image Prods. v. Chubb Corp., 703 F. Supp. 2d 705 (E.D. Mich. 2010), the insured’s property developed mold in the ventilation systems rendering the property unusable. The insured sought coverage for cleaning and moving expenses, as well as lost business income, which were caused by vacating the property, which was functioning as its headquarters. Id. at 710. The court found there was no structural or other tangible damage to the insured property, and thus, no physical loss. Id. at 705. It noted the stench caused by the mold did not render the entire property uninhabitable, even where one employee was infected by bacterial pneumonia. Id. at 710.
Likewise, in Mama Jo’s, Inc. v. Sparta Ins. Co., 17-CV-23362-KMM, 2018 WL 3412974, at *9 (S.D. Fla. June 11, 2018), the Southern District of Florida addressed whether there was a direct physical loss when construction debris and dust from road work required the insured to clean its floors, walls, tables, chairs, and countertops. The court held that “cleaning is not considered direct physical loss.” Id. The court stated: “A direct physical loss ‘contemplates an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory...
