In a unanimous ruling on Thursday, August 25 (Slip Opinion), the Washington Supreme Court added its voice to the developing “strong, if not unanimous” national consensus that COVID-19 and related government closures do not amount to “direct physical loss of property” within the meaning of property insurance policies.
Upholding summary judgment for Mutual of Enumclaw against a dental practice, Hill and Stout, PLLC, the Court held that the “claim for loss of intended use and loss of business income” occasioned by Washington Governor Jay Inslee’s March 2020 Emergency Declaration temporarily limiting the practice of dentistry to emergency dental procedures “is not a physical loss of property.”1
Drs. Hill and Stout brought suit against Mutual of Enumclaw under their commercial property insurance policy, which provided coverage for business income loss due to “direct physical loss of or damage to” the Hill and Stout dental offices. In April of 2020, Drs. Hill and Stout filed a complaint seeking a declaration that their Mutual of Enumclaw policy covered “losses and expenses resulting from the interruption of [their] business” and that their “property sustained direct physical loss or damage as a result of the [Governor’s COVID-19] proclamations and orders.”
Mutual of Enumclaw lost its initial motion to dismiss—brought on the basis that the Proclamation resulted in neither “loss of” nor “damage to” the dentists’ covered property—before King County Judge Susan Amini. Judge Amini found that the term “direct physical loss” was ambiguous and could reasonably include the “deprivation” alleged.2 However, after the case was transferred to King County Judge Samuel Chung, and subsequent discovery revealed that the dentists had continued to perform urgent dental procedures and had maintained the regular presence of reception personnel in their offices throughout the period subject to the Proclamation, Mutual of Enumclaw succeeded in achieving dismissal on summary judgment. Granting the motion, Judge Chung reasoned that the coverage language at issue required some “external force” that “causes alteration or direct physical change” to the covered properties.3 Further, he held, there could be no coverage under a civil authority clause in the policy because, likewise, such coverage is premised upon “the same direct physical loss” requirement.4
The Washington Supreme Court unanimously agreed. Contrary to the dentists’ contention that “direct physical loss” could reasonably be interpreted to include loss of the ability to use property or suffering a “deprivation” of such property, the Court instead interpreted the phrase “physical loss of . . . property” to require “a property that has been physically destroyed” or one which an insured “is deprived of in that the property is no longer physically in their possession.” 5 Nevertheless, the Court agreed with the dentists that “direct physical loss” might include a “physical deprivation of property that immediately results from some non-excluded cause[,]” but found this was not such a case. Although the dentists correctly alleged they had been “kept from using the property as [they] intended,” the Proclamation had not “physically kept [them] from using [the] property,” noting that they had, in fact, continued to use it.6
Instead of mandating the occurrence of physical “alteration” to the property, the dentists urged the Court to employ a “loss of functionality test.” While the Court accepted there could be fact patterns resulting in a “direct physical loss” without alteration to the property, the Court pointed to three examples to distinguish the instant case. 7 Indeed, the Court found that although “there may be some flexibility to a physical alteration requirement under a loss of functionality test[,]” “there must nevertheless be some physical effect on the property.” 8
Further, the Court pointed to a recent federal decision by Judge Barbara Rothstein of the U.S. District Court for the Western District of Washington and voiced agreement with her conclusion that “direct physical loss” means that an alleged peril must set in motion events that bring about an inability to physically own or manipulate the property, such as theft or total destruction. 9
Turning to the question of ambiguity, the Court found that “[a]ny ambiguity in the policy is only to the extent that [“direct physical loss of”] could mean” one of three things: “the property is completely physically destroyed, is no longer physically in the insured’s possession, or the insured is physically incapable of using the property.” 10 “[T]he average person purchasing a property insurance policy would take this to mean that the property must be directly physically lost to trigger coverage.” 11 Identifying no such physical loss here—noting the dentists had at most alleged the loss of their “intended use” of the property—the Court found no coverage.12
Notably—in addition to the question of “direct physical loss”—the Washington Supreme Court addressed an important subsidiary issue: whether and how Washington’s “Efficient Proximate Cause” (EPC) rule might apply in light of the policy’s virus exclusion. Although the Court found the application of the rule non-essential to its holding, the Court addressed it nonetheless. Because the parties had briefed the EPC rule and because it was sure to resurface given the number of COVID cases currently before Washington courts, the Court seized the opportunity to clarify its metes and bounds.
Washington’s EPC rule is implicated when two or more independent forces operate to cause a loss.13 Where an insured risk sets into operation a chain of causation in which the last step may have been an excluded risk, the EPC rule steps in to declare that the later excepted risk will not defeat recovery. Importantly, as the Court noted, there is no “inverse EPC rule.” In other words, the doctrine does not operate to mandate exclusion of a loss when an excluded peril sets in motion a causal chain which later includes a covered peril.14 Nevertheless, insurers are at liberty to include language within their policies to achieve the effect of such an inverse rule, namely, “to deny coverage when an excluded occurrence initiates a causal chain and is itself either the sole proximate cause or the efficient proximate cause of the loss.”15 Here, the Court quoted with approval Mutual of Enumclaw’s language:
We will not pay for loss or damage caused by any of the excluded events described below. Loss or damage will be considered to have been caused by an excluded event if the occurrence of that event:
- Directly and solely results in loss or damage; or
- Initiates a sequence of events that results in loss or damage, regardless of the nature of any intermediate or final event in that sequence.
Because Mutual of Enumclaw included inverse EPC language, and because “there is no reasonable question as to whether COVID-19 caused the Governor to issue the Proclamation[,]” the Court unanimously held the policy’s virus exclusion operates to exclude the causal chain of losses which were initiated by COVID-19, an excluded peril.
Readers may also consult the University of Pennsylvania Carey Law School’s COVID Coverage Litigation Tracker, which for more than a year has diligently tracked nationwide trends in state and federal courts on this issue. Likewise, for those with a subscription, LexisNexis’ Law360 publishes its own near-up-to-the-minute COVID-19 Insurance Case tracker, accessible here.
1 Slip Op., 12 (emphasis in original).
2 Slip Op. at 7.
3 Slip Op. at 8.
4 Id.
5 Slip Op., at 12.
6 Slip Op. at 13 (emphasis in original).
7 Slip Op. at 15 (citing W. Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 437 P.2d 52 (1968) (finding “direct physical loss” when a building was ordered closed because the presence of gasoline fumes made use unsafe); Murray v. State Farm Fire & Cas. Co., 203 W. Va. 477, 493, 509 S.E.2d 1 (1998) (finding “direct physical loss” when residential home properties became unsafe for habitation due to evident and imminent danger of falling rocks and boulders); and Graff v. Allstate Ins. Co., 113 Wn. App 799, 54 P.3d 1266 (2002) (finding coverage for vandalism when, despite lack of “visible damage,” residue and vapors from a methamphetamine lab physically remained in a rental property)).
8 Slip Op. at 17 (emphasis in original).
9 Slip Op. at 17 (citing Nguyen v. Travelers Cas. Ins. Co. of Am., 541 F. Supp. 3d 1200 (W.D. Wash. 2021).
10 Slip Op. at 19.
11 Id.
12 Id.
13 Slip Op. at 20.
14 Slip Op. at 21.
15 Id.
