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By: Shawn Bingham
South Carolina’s Supreme Court became the latest high court to side with an insurer in a Covid-19 business interruption case, adopting the majority approach to interpreting “physical loss or damage” in the typical commercial property policy. On the heels of the South Carolina Supreme Court’s decision, the Fourth Circuit Court of Appeals, applying North Carolina law, followed suit, releasing an unpublished opinion in favor of the insurer.
In Sullivan Management., LLC v. Fireman’s Fund Ins. Co., the operator of the restaurant chain Carolina Ale House sued its insurer, Fireman’s Fund, to recover income lost because of COVID-related closures. The restaurant argued that the policy’s language requiring the insured to show “direct physical loss or damage” to property was ambiguous and could be construed to contemplate the mere physical presence of a virus. The restaurant further argued that the policy’s communicable disease endorsement, which extended coverage to direct physical loss or damage caused by microorganisms, supported a broad interpretation of “direct physical loss or damage.”
The South Carolina district court certified to South Carolina’s Supreme Court the question of whether “direct physical loss or damage” requires “some permanent dispossession or physical alteration of the property.”
South Carolina’s high court answered the question in the affirmative, finding that “loss” means total destruction of the property while “damage” means a tangible or material change to property that is less than a total loss. The court pointed to the policy’s restoration period as further support for its narrow reading of “physical loss or damage,” noting that the policy’s time limitation for loss of income benefits—until the property is “repaired, rebuilt, or replaced”—did not contemplate mere cleaning of contaminated property.
Similarly, the Fourth Circuit Court of Appeals in Golden Corral Corporation v. Illinois Union Insurance Company followed its own precedent in affirming a North Carolina district court’s ruling that restaurant chain Golden Corral was not entitled to benefits for loss of income due to COVID-related shutdowns. The court found that “direct physical loss or damage” required “material destruction or material harm to its covered premises,” which required more than the physical presence of a virus.
These Carolina decisions interpreting “physical loss or damage” contrast sharply with a recent decision from the California Court of Appeals, Second District1 in Marina Pacific Hotel & Suites, LLC v. Fireman’s Fund Insurance Company, dealing with similar facts and a policy that, like Sullivan, contained a communicable disease endorsement. Contrary to the Carolina holdings, the California court found that a hotel and restaurant operator sufficiently pleaded “direct physical loss or damage” where it alleged physical presence of the virus on the property. With the recent Sullivan Management and Golden Corral decisions, Marina Pacific remains an outlier among appellate court decisions on COVID-19 business interruption claims as commercial property insurers continue to prevail in most courts, even where the policy at issue does not contain a specific exclusion for contamination by a virus.
For more information on this topic, contact Shawn Bingham.