DC Court Rules COVID-19 Closure Orders Are Not “Physical Loss”
On August 6, 2020, a District of Colombia court found that a property insurance policy does not provide business interruption coverage for COVID-19 losses. In Rose’s 1, LLC, et al. v. Erie Insurance Exchange, Case No. 2020 CA 002424 B, Washington, D.C. Superior Court Judge Kelly A. Higashi found for the insurance company, holding that COVID-19 does not cause direct physical damage to property, which is a prerequisite to coverage. Judge Higashi concluded that despite the absence of the widely discussed virus exclusion, “even in the absence of such an exclusion, plaintiffs would still be required to show a ‘direct physical loss.’”
Rose’s 1, LLC and other restaurants that own and operate restaurants in the city were forced to shut down operations in response to government mandates. The restaurants sought coverage under “Ultrapack Plus Commercial Property Coverage” insurance policies, and insurer Erie denied coverage. Rose’s 1, LLC and Erie both filed motions for summary judgment.
Judge Higashi granted summary judgement for the insurer, ruling that loss has to have a direct impact on the physical property. Plaintiffs first argued that the orders were the direct reason the restaurants closed; however, Judge Higashi held that the orders only directed businesses to take certain actions, but “did not effect any direct change to the properties.”
Second, plaintiffs argued that the losses were “physical” because the COVID-19 virus is “material” and “tangible,” and because the harm they experienced was caused by the mayor’s orders rather than “some abstract mental phenomenon such as irrational fear causing diners to refrain from eating out.” In response, Judge Higashi held that the restaurants offered no evidence that COVID-19 was actually present on their insured properties at the time they were forced to close and that the “mayor’s orders did not have any effect on the material or tangible structure of the insured properties.”
Lastly, plaintiffs argued that by defining “loss” in the policy as encompassing either “loss” or “damage,” the insurer must treat the term “loss” as distinct from “damage,” which connotes physical damage to the property. Judge Higashi held that “under a natural reading of the term ‘direct physical loss,’ the words ‘direct’ and ‘physical’ modify the word ‘loss.’” The court reasoned that any “loss of use” must be “caused, without the intervention of other persons or conditions, by something pertaining to matter – in other words, a direct physical intrusion on to the insured property.”
For a Michigan ruling on this topic, see our July 23, 2020, article.