In a long-awaited decision, the Pennsylvania Supreme Court has held that “direct physical loss” language in commercial property policies is not ambiguous and that COVID-related business-interruption claims do not trigger the insuring clause of these policies.
Based on this ruling, business interruption claims filed for losses caused by pandemic-related closures are not covered under standard commercial property policies. Moreover, the impact of the Court’s decision will reverberate beyond these pandemic-era claims, as the Court’s finding that the “direct physical loss” is not ambiguous will give insurers and policyholders clarity as to the nature of claims that are covered under these policies moving forward.
In Ungarean v. CNA and Valley Forge Insurance Company, the Pennsylvania Supreme Court joined the vast majority of jurisdictions that have considered this issue and found that policyholders are not entitled to insurance coverage for business interruption claims stemming from pandemic-era closures.
The Ungarean decision resolves a conflict that existed in the PA Superior Court’s holdings on this issue. Before the lower court, a sharply-split panel held in a 5-4 decision that claims related to COVID-related mandatory closures were covered because “direct physical loss” was undefined by these commercial policies and therefore ambiguous. A different Superior Court panel had reached the opposite conclusion in MacMiles, LLC v. Erie Insurance Exchange, where the Superior Court found that purely economic damages did not constitute direct physical loss or damage and therefore were not entitled to coverage.
In a unanimous decision, the Pennsylvania Supreme Court overruled the Superior Court’s Ungarean holding, sided with the reasoning set forth by the trial court in MacMiles, and found that the direct physical loss language contained in the pertinent policy was not ambiguous. Rather, the only reasonable interpretation of the insurance policy at issue was that “direct physical loss” requires a physical change to the property that requires some type of repair to or replacement of the impacted property. Thus, the economic loss suffered by the Plaintiff in Ungarean did not constitute direct physical loss under the policy.
