To the extent a Virus Exclusion is not contained in a business interruption policy via endorsement such that the virus may arguably constitute a Covered Cause of Loss (that is, a fortuitous cause or event that is not otherwise excluded under the policy), it is likely that the primary focus of any coverage dispute arising out of claims for coronavirus-related business interruption will turn on: (1) whether the loss of use of the insured location because of contamination or threatened contamination by COVID-19 constitutes “physical loss or damage;” (2) if so, whether the suspension of the insured’s business operations were caused by “direct” physical loss of or damage to the property at the insured location; and (3) whether the loss or damage was “caused by or resulted from” a Covered Cause of Loss (i.e., the virus contamination). In this respect, the standard ISO Business Income (And Extra Expense) Coverage Form, providing coverage for actual loss of business income due to the necessary suspension of the insured’s operations during a specific time period, contains the following critical language:
The “suspension” must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit Of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss.
Loss of Use As “Physical Loss or Damage” Under Pennsylvania Law
Insofar as policyholders argue that the contamination or threatened contamination of property at the insured location rendered the insured business location unusable, the threshold question is whether such loss of use arising out the contamination constitutes “physical loss or damage.” An additional consideration as it relates to COVID-19 is that the source of the loss of use is “unnoticeable to the naked eye,” begging the question as to whether the same can produce “physical loss or damage.”
Pennsylvania state law is scant relative to the issue of whether the loss of use of an insured location occasioned by contamination of insured property by “sources unnoticeable to the naked eye” constitutes “physical loss” for the purposes of property policies. The Pennsylvania Court of Common Pleas decision of Hetrick v. Valley Mut. Ins. Co., 15 Pa. D. & C.4th 271 (Pa. Com. Pl. 1992) (Cumberland Cty.) ruled that contamination rendering an insured structure uninhabitable constitutes “physical loss.” Id. In so ruling, the Hetrick court noted that the conclusion that loss of use of insured property due to contamination constitutes “physical loss” has its origins in the 1968 Colorado decision of Western Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52 (Colo. 1968), wherein the insured closed its church building because of the infiltration of gasoline in the soil under and around the insured building. Id. The insured in Western Fire sought coverage from its insurer for direct physical loss to the building. Id. The Colorado Supreme Court found that when the gasoline under and around the church built up to the point that there was such infiltration and contamination as to make the building uninhabitable and highly dangerous to use, there was physical loss to the building. Id. Based on this reasoning, the Pennsylvania trial court in Hetrick ruled that an oil spill that polluted ground water in the vicinity of an insured building “may make a building uninhabitable,” and that if the building is uninhabitable, the building has sustained a physical loss for the purposes of insurance coverage. Id.
The Third Circuit Court of Appeals has undertaken a more detailed examination of the issue, finding that while the mere presence of a contaminant does not in and of itself qualify as “physical loss or damage,” contamination rendering the insured location useless or uninhabitable may constitute “physical loss or damage.”
In Port Auth. of New York and New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir. 2002), the Third Circuit considered whether the insureds’ costs incurred in connection with the abatement of asbestos constituted “physical loss or damage” to property. Id. Although the question before the court was not whether the abatement expenses constituted a loss of business income, the Third Circuit focused on the business interruption coverage provisions of the policies at issue. Id. In so doing, the Third Circuit ruled that under both New Jersey and New York law, “unless asbestos in a building was of such quantity and condition as to make the structure unusable, the expense of correcting the situation was not within the scope of a first party insurance policy covering ‘physical loss or damage.’” Id.
The insured port authorities of both New York and New Jersey owned numerous facilities that incorporated asbestos products in their construction, which ultimately required remediation. Id. In an effort to satisfy the “physical loss or damage” requirement under the policies, the insureds contended that physical damage occurred within the insured structures as a result of the “presence of asbestos,” the “threat of release and reintrainment of asbestos fibers,” and the “actual release and reintrainment of asbestos fibers.” Id. To support these assertions, the insureds pointed to the existence of friable asbestos in some of the insured buildings, explaining that once an asbestos product reaches the friability stage, it may be crumbled by vibrations or hand pressure and it continues to deteriorate into separate fibers. Id. The insureds argued that in this condition, the asbestos becomes more susceptible to dispersion in the air and poses an increased risk to human health. Id.
The district court ruled that “physical loss or damage” could be found only if an imminent threat of asbestos release existed, or actual release of asbestos resulted in contamination of the property so as to nearly eliminate or destroy its function, or render it uninhabitable. The mere presence of asbestos, on the other hand, was not enough to trigger coverage. Id. In affirming the district court’s conclusion, the Third Circuit noted that alleged physical damage to a structure “by sources unnoticeable to the naked eye must meet a higher threshold” and accordingly stated as follows:
In ordinary parlance and widely accepted definition, physical damage to property means “a distinct, demonstrable, and physical alteration” of its structure. 10 Couch on Insurance § 148:46 (3d ed.1998). Fire, water, smoke and impact from another object are typical examples of physical damage from an outside source that may demonstrably alter the components of a building and trigger coverage. Physical damage to a building as an entity by sources unnoticeable to the naked eye must meet a higher threshold. The Colorado Supreme Court in Western Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 437 P.2d 52 (Co.1968), concluded that coverage was triggered when authorities ordered a building closed after gasoline fumes seeped into a building’s structure and made its use unsafe. Although neither the building nor its elements were demonstrably altered, its function was eliminated.
In the case before us, the policies cover “physical loss,” as well as damage. When the presence of large quantities of asbestos in the air of a building is such as to make the structure uninhabitable and unusable, then there has been a distinct loss to its owner. However, if asbestos is present in components of a structure, but is not in such form or quantity as to make the building unusable, the owner has not suffered a loss. The structure continues to function-it has not lost its utility. The fact that the owner may choose to seal the asbestos or replace it with some other substance as part of routine maintenance does not bring the expense within first-party coverage.
Id., 311 F.3d at 235-36.
Following Port Authority, the Third Circuit had occasion to consider whether the presence of e-coli bacteria in the insureds’ well constituted “direct physical loss or risk of direct physical loss” to property under a homeowners’ policy under Pennsylvania law. Motorists Mut. Ins. Co. v. Hardinger, 131 Fed. App’x. 823 (3d Cir. 2005). Soon after the insureds in Hardninger moved into their home, Mrs. Hardinger and the Hardinger children became ill, experiencing infections as well as respiratory, viral and skin conditions. Id. The insureds moved out of the home and notified their insurer that they were pursuing a property damage claim under their homeowners policy. Id. Testing of water samples confirmed that the property’s well was contaminated with e-coli bacteria. Id.
In granting summary judgment for the insurer, the district court found no genuine issue of fact regarding the absence of a “physical loss.” Id. The district court reasoned that while the bacteria allegedly made the house uninhabitable, the same constituted a “constructive loss” that was insufficient to satisfy the policy’s requirement of “physical loss.” Id. The Third Circuit reversed the grant of summary judgment, finding a genuine issue of fact in this regard. Id.
In so doing, the Third Circuit noted that “[n]o Pennsylvania Supreme Court case….directly addresses whether loss of use may constitute a physical loss.” Id. Accordingly, the Third Circuit turned to its prior decision in Port Authority, where it declared that the proper standard for determining whether a structure has sustained “physical loss or damage” through contamination includes consideration of whether “its function in nearly eliminated or destroyed, or the structure is made useless or uninhabitable.” Id. The Third Circuit in Hardinger stated that while asbestos was at issue in Port Authority-and that asbestos presents unique concerns-“we find Port Authority instructive in a case where sources unnoticeable to the naked eye have allegedly reduced the use of the property to a substantial degree.” Id. Accordingly, the Third Circuit stated as follows:
We predict that the Pennsylvania Supreme Court would adopt a similar principle as we did in Port Authority. Applying Port Authority’s standard here, we believe there is a genuine issue of fact whether the functionality of the Hardingers’ property was nearly eliminated or destroyed, or whether their property was made useless or uninhabitable.
Id., 131 F. App’x at 826-27.
“Direct” Physical Loss Under Pennsylvania Law
The United States District Court for the Eastern District of Pennsylvania decision of Cher-D, Inc. v. Great Am. Alliance Ins. Co., 2009 WL 943530 (E.D. Pa. Apr. 7, 2009) may provide some insight as to how Pennsylvania courts may approach the interpretation of the phrase “direct physical loss” in connection with determining the availability of coverage for claims of coronavirus-related business interruption losses.
In Cher-D, an electrical fire damaged an inn located in the Poconos region of northeastern Pennsylvania. Id. The insured submitted a claim under its Innkeeper’s Property Policy, which provided that the insurer would pay for “direct physical loss” of or damage to the covered property caused by or resulting from a covered cause of loss. Id. While the repairs were being effectuated in relation to the electrical fire, the structure experienced a second fire as a result of vandalism. Id. The insurer denied coverage with respect to the second fire on the basis that the second fire took place outside of the policy period and was not the same occurrence as the first fire. Id.
Within the context of examining the coverage dispute, the United States District Court for the Eastern District of Pennsylvania considered the meaning of “direct physical loss” under Pennsylvania law, explaining that Pennsylvania courts have interpreted “direct physical loss” for the purposes of insurance policies as a loss that results “immediately and proximately from an event” such that in order for insurance coverage to attach, the loss must have a “close logical, causal, or consequential relationship with an earlier event.” Specifically, the court in Cher-D stated as follows:
The word “direct” in “direct physical loss” means “free from extraneous influence; immediate.” Black’s Law Dictionary 471 (7th ed.1999); see also Merriam-Webster Collegiate Dictionary 327 (10th ed.2000) (defining “direct” as “stemming immediately from a source,” “having no compromising or impairing element,” and “proceeding from one point to another in time or space without deviation,” and “characterized by close logical, causal, or consequential relationship”). A “direct loss” is “[a] loss that results immediately and proximately from an event.” Black’s Law Dictionary 957 (7th ed.1999). By using “direct” in the “Innkeepers Property” provision, the parties make explicit the common sense inference drawn from the “Commercial Property” provision that coverage for any loss or damage recognized outside the coverage period must have “close logical, causal, or consequential relationship” to an origin within the coverage period.
Courts applying Pennsylvania law have defined “direct physical loss” under an insurance contract as a loss that results “immediately and proximately from an event.” See Easy Sportswear, Inc., v. Am. Economy Ins. Co., No. 05-1183, 2007 WL 4190767, at *6 (W.D.Pa. Nov.21, 2007) (applying Pennsylvania law). In Easy Sportswear, the plaintiff brought claims against its insurer for breach of an insurance contract and bad faith after the plaintiff’s property was damaged by rainfall from Hurricane Ivan. Id. at *2. Under the policy, the insurer agreed to “pay for direct physical loss of or damage to Covered Property … caused by or resulting from any Covered Cause of Loss.” Id. at *5. Since the policy did not define “direct physical loss,” the court used the plain and ordinary meaning of the words in order to interpret the provision. Id. at *6 (citing McMahon v. State Farm Fire & Cas. Co., No. 06-3408, 2007 WL 1377670, at *3 (E.D.Pa. May 8, 2007)). The court turned to the dictionary meaning of “direct” as “free from extraneous influence; immediate.” Id. (citing Black’s Law Dictionary (8th ed.2004) (page number omitted)). The court turned to the dictionary meaning of “direct loss” as “[a] loss that results immediately and proximately from an event.” Id. (citing Black’s Law Dictionary (2d ed.2001) (page number omitted)). The court concluded that insurance coverage for a “direct physical loss” means that the loss must have “close logical, causal, or consequential relationship” with an earlier event. See also DiFabio v. Centaur Ins. Co., 366 Pa.Super. 590, 531 A.2d 1141, 1143-44 (Pa.Super.Ct.1987) (noting that “direct” means “stemming immediately from a source” and “characterized by close logical, causal or consequential relationship”).
Cher-D, 2009 WL 943530, at *6.
“Caused By or Resulting From” Under Pennsylvania Law
The court in Cher-D next turned to the meaning of “resulting from,” noting that the policy at issue “provides coverage not only for damage caused by a fire, but coverage for damage resulting from that same covered loss.” Id. The court observed that Pennsylvania law has interpreted the phrase “resulting from” with respect to insurance polices to refer to proximate causation (and noted that courts have interpreted the phrase “caused by” to equally relate to proximate causation):
The Supreme Court of Pennsylvania has interpreted the words “resulting from” in an insurance contract as meaning proximate causation. See Bowers v. Great E. Cas. Co., 260 Pa. 147, 103 A. 536, 537 (Pa.1918) (interpreting the words “resulting from” in an insurance policy as implying “a remote or proximate cause”); see also Donegal Mut. Ins. Co. v. Baumhammers, 595 Pa. 147, 938 A.2d 286, 290 (Pa.2007) (finding persuasive the rationale of courts that look to proximate cause to determine the number of occurrences under an insurance policy).3 Proximate causation is a familiar concept in tort law. “Proximate cause ‘is primarily a problem of law’ and ‘it is a … court’s responsibility to evaluate the alleged facts and refuse to find an actor’s conduct the legal cause of harm when it appears to the court highly extraordinary that [the actor’s conduct] should have brought about the harm.’ ” Brown v. Phila. Coll. of Osteo. Med., 760 A.2d 863, 868 (Pa.Super.Ct.2000) (citations omitted). “Proximate cause does not exist where the causal chain of events resulting in [the] plaintiff’s injury is so remote as to appear highly extraordinary that the conduct could have brought about the harm.” Lux v. Gerald E. Ort Trucking, Inc., 887 A.2d 1281, 1286-87 (Pa.Super.Ct.2005); see also Pittsburgh Nat’l Bank v. Perr, 431 Pa.Super. 580, 637 A.2d 334, 337 (Pa.Super.Ct.1994), appeal denied, 537 Pa. 665, 644 A.2d 1202 (Pa.1994) (“[T]he law makes a determination that, at some point along the causal chain, liability will be limited. The term ‘proximate cause,’ or ‘legal cause’ is applied by courts to those considerations which limit liability, even where the fact of causation can be demonstrated.”).
Id., citing Westchester Fire Ins. Co. v. Continental Ins. Co., 312 A.2d 664, 668-69 (N.J. App. Div. 1973), aff’d, 319 A.2d 732 (N.J. 1974) (applying New Jersey law and equating the phrases “caused by” and “resulting from” to proximate cause).
In advocating for coverage relative to the second fire, the insured in Cher-D argued that the “but for” the first fire, the second fire would not have occurred. Id. The Cher-D court, however, stated that under Pennsylvania law, “but for” causation is not “proximate causation.” Id. (“‘[T]he term ‘but for’ has been used in analyzing whether or not a particular act constitutes a cause in fact, rather than the legal or proximate cause of an injury.”) (citations omitted). As such, the court found that because proximate causation-and not “but for” causation-was intended by the policy’s use of the phrase “resulting from,” coverage was not available because the second fire did not “result from” the first fire. Id. (“The record in this case does not support a finding that the first fire, a covered harm, was the proximate cause of the second fire.”).
Challenges to COVID-19 Business Interruption Claims Under Pennsylvania Law
The majority of business interruption claims relating to the COVID-19 crisis nationwide appear to relate to an alleged loss of business income arising out of the loss of use of the insured’s business location-not that the virus itself has been detected at the insured location and has damaged the property therein. It is anticipated that most COVID-19 business interruption coverage claims in Pennsylvania will be no different.
Such presents the likelihood that Pennsylvania courts will grapple with the question of whether the alleged loss of use constitutes “physical loss or damage”-that is, whether the threatened contamination of property at the insured location “by a source unnoticeable to the naked eye” rendered the business location unusable.
If indeed the loss of use under these circumstances qualifies as “physical loss or damage,” policyholders in Pennsylvania will likely face the additional challenge of demonstrating that the suspension of their business operations was due to “direct” physical loss or damage-i.e., that the suspension resulted “immediately and proximately” from the loss of use of the insured location, which requires a “close logical, causal, or consequential relationship” between the suspension and the loss of use.
Policyholders will also likely be required to demonstrate that the loss or damage (i.e., the loss of use) was caused by or resulted from a Covered Cause of Loss (i.e., the virus, assuming it is not excluded). This requirement may pose a particularly difficult challenge to policyholders. Indeed, while it follows that “but for” the virus, businesses would not have lost the use of their property, proximate causation-rather than “but for” causation-is likely required under Pennsylvania law. As such, policyholders may face difficulty in establishing that the virus itself proximately caused an insured location to be unusable.
Perhaps already realizing the challenges associated with establishing that the virus itself has proximately caused insured locations to be unusable, some Pennsylvania policyholders have attempted to characterize the state- and city-mandated closure orders themselves-not the virus-as Covered Causes of Loss under “all risk” policies. In this regard, a trio of putative class action lawsuits advancing this very argument were filed in the United States District Court for the Eastern District of Pennsylvania on April 27, 2020. See Milkboy Center City, LLC. v. The Cincinnati Ins. Co., 2:20-cv-02036 (E.D. Pa., Apr. 27, 2020); Laudenbach Periodontics v. Liberty Mut. Ins. Grp., 2:20-cv-02029 (4 E.D. Pa., Apr. 27, 2020); Lansdale 329 Prop., LLC v. Hartford Underwriters Ins. Co., 2:20-cv-02034 (E.D. Pa., Apr. 27, 2020).
While it may presumably be easier for policyholders to demonstrate that the closure orders have proximately caused insured locations to be unusable, such an argument will undoubtedly be met with resistance on the basis that a closure orders is not “a fortuitous cause or event”-that is, the requirement for qualifying as a Covered Cause of Loss.
Suffice it to say that the uncertain times in which we find ourselves as a result of the COVID-19 crisis extend equally to the world of insurance coverage. It remains to be seen how Pennsylvania courts will resolve the uncertainty surrounding the availability of insurance coverage with respect to COVID-19 business interruption claims.