Does your PA business insurance cover COVID-19 Losses?
On March 22, 2021, Judge Christina Ward issued a Memorandum and Order of Court, which may throw a lifeline to businesses that are struggling to recover from the losses caused by Governor Wolf’s COVID-19 shutdown orders.
In this case, Timothy A Ungarean, DMD d/b/a Smile Savers Dentistry, PC, et al. v. CNA and Valley Forge Insurance Co., GD20-006544, a dentist, who owned and operated a dental practice, filed a declaratory judgment action on behalf of himself and similarly situated individuals, seeking a determination with respect to whether he was entitled to coverage under his business insurance policy for the losses sustained during the shutdowns resulting from COVID-19 and Governor Wolf’s Closure Orders. As was to be expected, the insurance companies/defendants vehemently opposed the lawsuit, filing a motion for summary judgment, contending that the policy did not provide coverage for losses resulting from the COVID-19 shutdowns.
Defense #1: No Direct Physical Loss of or Damage to Property
As part of their defense/argument, the insurers first argued that the policy did not provide coverage because the Business Income and Extra Expense provisions in the policy required a direct physical loss of or damage to the insured’s property in order to assert a claim or recover.
The Court, however, after an in-depth, extensive and painstaking analysis of the contractual language, rejected this defense, finding that the policy’s use of the disjunctive “or” between the terms “physical loss of” and “damage to property” in the policy definition means that drafters intended for the terms to be considered differently. More importantly, the Court further found that although the common definition of “damage” included a requirement of physical injury (i.e., by defining damage as a “loss or harm resulting from an injury to person or property”) that the common definition of “loss,” which included “the act of losing possession and/or deprivation…” contained no such requirement. The Court therefore found that based on this definition that it was reasonable to conclude that term “loss” “[r]easonably encompasses the act of losing possession [and/or]the deprivation, which includes the loss of use of property absent any harm to property.” As a result, the Court concluded that Plaintiff had established a right to coverage under the Business Income and Extra Expense provisions in the policy.
Defense #2: Business Remained Open and Access Wasn’t Prohibited
The insurers argued that the Governor’s Closure Orders did not entitle the Plaintiff to coverage under the provision in his policy that provided for coverage for loss of business income and extra expenses due to the acts of a civil authority that prohibit access to a covered property. The defendant/insurers’ argument that the fact that the premises remained open in a limited capacity to treat emergencies precluded coverage.
The Court rejected this defense. The Court justified its decision by noting that the intent of this provision was to provide coverage for lost business income in the event the insured’s business operations are suspended. The Court therefore noted that its primary focus when interpreting the phrase “prohibits access” should be the extent to which the action of the civil authority prevented the insured from accessing its premises in a manner that would normally produce actual and regular business income. With this principle in mind, the Court found that the fact that the Plaintiff’s business remained open for emergencies did not preclude coverage, because this “[d]id not change the fact that an action of a civil authority effectively prevented, or forbade by authority, citizens of the Commonwealth from accessing Plaintiff’s business in any meaningful way for normal, non-emergency procedures; procedures that likely yield a significant portion of Plaintiff’s business income.”
Defense #3: Contamination of Property Exclusion
The Court also rejected the Defendants/Insurers’ attempts to argue that the losses resulted from Governor Wolf’s Closure Orders were barred by the policy’s common exclusion for loss of use caused by contamination of the property.
Although the Court recognized that term contamination is typically defined broadly, the Court cautioned that its ruling was necessarily guided by the principle that “[t]he ambiguity (or lack therefor) is to be determined by a reference to a particular set of facts.” Applying the facts relating to the claim for losses resulting from COVID-19 pandemic and the Governor’s Closure Orders to the exclusion led the Court to conclude that the exclusion did not bar those claims. Specifically, the Court recognized the primary means by which COVID-19 is transmitted (i.e., through person-to-person contact) and concluded that the loss of use of the property was not due to the contamination of the property, Instead, the Court found that it resulted from the Governor’s separate and distinct desire to mitigate the spread of COVID-19 through person-to-person contact by enforcing social distancing requirements, which eliminated or reduced the possibility for person-to-person transmission. Thus, the Court found that the contamination exclusion did not unambiguously bar the claim for losses resulting from the COVID-19 pandemic and corresponding Closure Orders.
Defense #4: Presence of Fungi, Wet Rot, Dry Rot and Microbes Exclusion
The Court also rejected the Defendant/Insurers attempt to rely upon the common policy exclusion, which excludes coverage for losses that result from the presence of fungi, wet rot, dry rot and microbes. The Defendants/Insurers contended that the policies definition of “Microbes,” which were defined as “[a]ny non-fungal micro-organism or non-fungal colony-form organism that causes infection or disease,” excludes any losses resulting from the COVID-19 pandemic.
The Court, however, was not convinced, finding that the exclusion, which depended upon the definition of “Microbe,” did not clearly and unambiguously bar the claims arising from COVID-19, because them “Microbe” exclusion required the loss-causing substance to be either an organism or micro-organism\. The Court further found that COVID-19 could not satisfy that requirement, because the ordinary or common meaning of the terms “micro-organism” or “organism” could not include the viruses, like COVID-19 since the common or accepted definition of both organisms or microorganism includes “[t]hings that are alive, while viruses are generally regarded as something that is non-living and is capable of growth and multiplication only when it attaches to, or gets inside of, other living host cell.” As a result, the Court found that “[g]iven the insurance policies specific definition of the term ‘Microbe,’ it is reasonable to conclude that the “microbe” exclusion does not actually encompass viruses.”
It is also important to note that the Court expressly recognized that the Defendants/Insurers could have easily excluded coverage for any losses caused by viruses … but chose not to do so. This is important as it suggests that the Court may have reached a different conclusion had such a blanket virus exclusion been included in the policy.
The Importance of this Ruling
This ruling opens the door for the filing of claims for loss of business and added expense due to the COVID-19 pandemic and Governor Wolf’s closure orders. Over the past year, insurers have continued to deny these types, relying on several federal cases, which have predicted that the Pennsylvania Supreme Court would require physical losses or actual damage to property to assert a claim for business interruption. Due to the significance of this ruling on a large number of pending cases and claims and its potential to affect or lead to significant additional claims that have not yet been filed/asserted, it is expected that the Defendant Insurers will immediately appeal this decision. Although it is difficult to predict how the Pennsylvania appellate courts will rule, for the time being, the Ungarean decision should give insurers pause or at cause them to reconsider their prior practice of issuing blanket denials of these types of claims at least until such time as the Pennsylvania Supreme Court hears an appeal on this case or otherwise decides this issue. It is also important to note that Judge Ward’s decision in Ungarean will justify the filing of a lawsuit if an insurer denies these types of claims and provide a basis/precedent to oppose the expected motions that are filed by insurers that seek to dismiss the lawsuits on the basis of a lack of physical damage or due to contamination or microbial exclusions that are found in most policies.
It is important, however, to remember these claims must be handled on their own merits, and that coverage determination is always predicated on the specific language of an insured’s policy and unique facts and circumstances underlying the insured’s claim. We therefore recommend that you carefully review your policy and consult with counsel before making a final determination with respect to whether to submit a claim or initiate litigation.
Does your PA business insurance cover COVID-19 Losses?
If you would like us to review your policy or have any questions concerning coverage for coronavirus-related business interruption claims, appropriate claim-handling procedures, or potential litigation claims that may be raised against your insurer, please do not hesitate to contact Steven P. Engel or Lawrence J. Maiello to discuss the significant and complex issues these claims pose.
 Some insurance companies attempted to add these types of specific virus exclusions following the 2002-2003 SARS outbreak. It is therefore important for business owners to carefully review their policies to determine if coverage has been expressly excluded for claims arising from viruses like COVID-19.
 See Port Auth. v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir. 2002)(Finding that the presence of asbestos fibers at an insured property did not constitute physical damage to property, which allow insured to recover damage under its commercial insurance coverage); Motorists Mut. Ins. Co. v. Hardinger, 131 F. App’x 823, 826 (3d Cir. 2005)(Predicting that the Pennsylvania Supreme Court would require a finding that the functionality of the property was nearly eliminated or destroyed by an contamination from E. Coli to constitute the type of physical damage necessary to trigger coverage); see also, Universal Image Prods., Inc. v. Fed. Ins. Co., 475 F. App’x 569, 575 (6th Cir. 2012)(Denying plaintiff’s claim despite finding that [plaintiff] certainly suffered a large inconvenience as a result of the mold and bacterial contamination of the its building, because the plaintiff “[d]id not suffer any tangible damage to physical property, nor were the [plaintiff’s] premises rendered uninhabitable or substantially unusable.”).