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By: Joseph Gonnella
Policyholders utilize a variety of wordings to describe their insurance coverage claims arising during the SARS-CoV-2 (“COVID-19”) pandemic. Under the insuring clauses of common commercial property policies, one of the relevant inquiries is whether COVID-19 causes “direct physical loss of or damage to” property. Distinct from the application of virus exclusions, this question asks whether such losses are within the coverage grant in the first instance. Many COVID-19 coverage questions remain to be litigated but clear judicial trends have emerged.
The threshold issue and barrier to coverage in the most commonly litigated commercial property policies remains the absence of a “direct physical loss.” As medical and scientific understanding of the virus has evolved, policyholders and insurers have had additional types and sources of evidence to consider the question. A finding of coverage remains the exception, and not the rule.
In one early and high-profile case, Travelers Cas. Ins. Co. of Am. v. Geragos & Geragos, 495 F. Supp. 3d 848, 854 (C.D. Cal., Oct. 19, 2020), the court interpreted a business interruption policy covering losses “due to direct physical loss of or damage to property.” The court granted the insurer’s motion to dismiss without leave to amend, holding physical loss or damage occurs only when the property undergoes “distinct, demonstrable, physical alteration.”
One year later, the result is largely the same as summarized in a recent decision by a federal district court sitting in San Diego. See Health v. Am. Guar. & Liab. Ins. Co., 2021 U.S. Dist. LEXIS 167978, at *2 (S.D. Cal. Sep. 3, 2021). In that case, a healthcare provider claimed business losses from the inability to perform elective surgeries and other non-essential services as a result of state and local COVID-19 related orders. The healthcare provider argued such losses constituted “direct physical loss of and/or damage to its property, its interest in personal property, and its interest in buildings,” attempting to mirror policy language triggering coverage. The court granted the insurer’s motion to dismiss, acknowledging that the legal issue was no longer novel and the policyholder’s attempt to plead a physical loss was “previously rejected almost universally by California courts.”
Demonstrating that this interpretation of business interruption coverage is not limited to California, but gaining favor in conservative and liberal jurisdictions alike, a recent decision from the United States Court of Appeal for the 11th Circuit, applying Georgia law, reached the same conclusion interpreting similar policy language. See Gilreath Family & Cosmetic Dentistry, Inc. v. Cincinnati Ins. Co., 2021 U.S. App. LEXIS 26196, at *2 (11th Cir. Aug. 31, 2021). The case involved a claim by a family dental practice under business income and “civil authority” coverages for lost revenue from elective dental procedures attributable to Georgia’s “shelter in place” and related federal orders restricting non-essential services. Addressing the same threshold issue of direct physical loss or damage, the court held such physical loss or damage must be “an actual change in the insured property.” Finding no such damage could be plausibly alleged, the court affirmed the lower court’s order dismissing the policyholder’s claim.
While every case warrants a fact-specific analysis, the majority of jurisdictions recognize that COVID-19 or related restrictions do not constitute direct physical loss of or damage to property.