1 S.A.N.T. operates Lawrence County-based Gatherings Banquet and Event Center as well as the adjacent tavern, Town & Country. 1 S.A.N.T claimed that it incurred and continues to incur a substantial loss of business income and other expenses due to Governor Tom Wolf’s March 19, 2020 Executive Order which closed all non-life sustaining businesses, including 1 S.A.N.T. 1 S.A.N.T. submitted a business interruption claim to National Fire, its commercial property insurance company. National Fire denied the claim, citing to multiple policy provisions.

In its complaint, 1 S.A.N.T. asserted that the policy provided coverage for “direct physical loss of or damage to Covered Property . . . caused by or resulting from any Covered Cause of Loss.” 1 S.A.N.T. took the position that the policy did not define the phrase “direct physical loss of or damage to” but that the use of the word “or” in the phrase “direct physical loss of or damage to” meant that coverage would be triggered if either a physical loss of property or damage to property occurs. The complaint goes on to assert that “[p]hysical loss of, or damage to, property may be reasonably interpreted to occur when a covered cause of loss threatens or renders property unusable or unsuitable for its intended purpose or unsafe for normal human occupancy and/or continued use.” 1 S.A.N.T. further noted that the policy afforded payment for “the actual loss of Business or Rental Income you sustain due to the necessary ‘suspension’ of your ‘operations’ during the ‘period of ‘restoration.’ 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.”

1 S.A.N.T. also claimed that coverage was afforded for loss of business income resulting from an “action of civil authority” which prohibited access to the insured property due to a “Covered Cause of Loss” at property other than the covered property.

In its motion to dismiss, National Fire argued that: (1) 1 S.A.N.T. did not sustain "direct physical loss of or damage to Covered Property" necessary to trigger coverage under the Policy; (2) 1 S.A.N.T.'s Policy excluded the alleged loss or damage because it was caused by COVID-19, which is barred by the Virus Exclusion provision; and (3) the orders issued by state and local governments in response to COVID-19 did not prohibit access to 1 S.A.N.T.'s property (alternative operations were available, such as take-out), which was required to trigger Civil Authority coverage.

1 S.A.N.T. opposed the motion to dismiss, arguing that (1) physical alteration was not required to trigger coverage for physical loss or damage, and that coverage was in fact triggered because 1 S.A.N.T. could not use the property for its intended purpose; (2) that “the Virus Exclusion did not bar coverage because Governor Wolf’s orders were the efficient, proximate cause of 1 S.A.N.T.'s loss and not the virus.” Notwithstanding, “the ubiquitous presence of the virus is enough to constitute a covered cause of loss.”; and (3) National Fire should be estopped from applying the Virus Exclusion provision under the theory of Regulatory Estoppel.

The court looked to the plain, collective meaning of “direct physical loss of” or “direct physical damage to” since neither was defined in the policy. It ultimately concluded that “there is no reasonable question that the policy language presupposes that the request for coverage stems from an actual impact to the property's structure, rather than the diminution of its economic value because of governmental actions that do not affect the structure.”

As to 1 S.A.N.T.’s argument that there was "direct physical loss of or damage to" the property because COVID-19 is a physical substance that is readily transmissible and ubiquitous, the court held that this was distinguishable from other cases cited to by 1 S.A.N.T involving actual impending danger already impacting the property. Here, the court reasoned that even if COVID-19 was “so ubiquitous as to be considered present at the insured property, it still does not fall within the policy definition for a covered loss.”

Because 1 S.A.N.T. did not sustain “direct physical loss of or damage to property,” the court found that it did not have coverage under the Civil Authority provision of the policy which required an "action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss." That aside, the court held that coverage could be denied because “reduction to partial access does not suffice to trigger business income coverage under the Civil Authority provisions.” Here, 1 S.A.N.T.’s business remained opened for take-out and delivery. In sum, the court’s ruling came down to how it interpreted “direct physical loss of or damage to covered property.”

Other courts have taken the same approach. In Rose’s 1, LLC v. Erie Insurance Exchange, 2020-CA-00242B, the District of Columbia dismissed an action brought by a group of restaurants for COVID-19-related business interruption coverage. The restaurants argued that because a loss under the policy was defined as encompassing either a loss or damage, a loss of use of the restaurants triggered coverage. The court rejected this argument, finding “loss” was modified by the words “direct” and “physical” that immediately preceded it.

In Sandy Point Dental PC v. The Cincinnati Insurance Company, 20-cv-2160 (N.D. Ill. 2020), a federal judge held there was no coverage afforded for the losses a dentist’s office incurred when it was forced to shut down during the COVID-19 pandemic. The court reasoned that the policy language “unambiguously” required “demonstrable, physical alteration to the property” to trigger coverage.

Not all courts have denied attempts to recover COVID-19-related losses under business insurance policies. For instance, in Studio 417, Inc., et al. v. The Cincinnati Ins. Comp., No. 20-cv-03127-SRB (W.D.Mo. 2020), a federal judge denied a motion to dismiss filed by Cincinnati Insurance Company based on the now ubiquitous argument that COVID-19 cannot satisfy the requirement that “direct physical loss or damage” caused the loss. The court held that the coverage trigger is physical loss or damage and that it "must give meaning to both terms." To adopt Cincinnati's argument would be to conflate physical loss with physical damage.

With local and state-wide shutdowns across many parts of the country, the fight for coverage, or lack thereof, for COVID-19-related business income losses will continue into the foreseeable future. Courts will likely remain split, although the majority of recent decisions do not favor the policyholder. In fact, a recent article published by JDSupra estimates roughly 85 percent of the motions to dismiss filed by insurers across some 30 states have been granted.[1] Of course, whether a particular business has insurance coverage for such losses will depend on the type of coverage in place, the specific terms of the policy, and the underlying facts of the claim.

[1] https://www.jdsupra.com/legalnews/covid-19-covid-19-insurance-coverage-9144825/