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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. 

The Ruling

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.

Read the Order.

© 2020 Wilson ElserNational Law Review, Volume X, Number 227

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About this Author

Siobhán A. Breen Associate New York Directors & Officers Liability Insurance & Reinsurance Coverage
Associate

Siobhán A. Breen represents primary and excess professional liability insurers and drafts coverage opinions with respect to complex insurance coverage matters involving directors and officers liability, errors and omissions liability, miscellaneous professional liability, lawyers professional liability, and employment practices liability.

Prior to joining Wilson Elser, Siobhán’s practice consisted of insurance coverage and insurance defense litigation. Siobhán has experience in securities class actions, shareholder derivative actions, cyber/privacy actions, and professional...

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Paul S. White Partner Insurer Litigation: Coverage/Extra-Contractual Insurance & Reinsurance Coverage Professional Liability & Services

Paul White focuses his practice on complex insurance coverage and bad faith litigation and represents defendants in commercial litigation. Paul's insurance coverage practice includes advising and representing insurers in bad faith litigation and insurance policy disputes, including first-party property policies, general liability coverage, errors and omissions insurance, and media liability insurance. He also advises and represents insurers in subrogation actions on property losses. In addition, Paul has litigated and arbitrated disputes throughout the United States involving domestic and foreign insurance agents and brokers in all lines of coverage. He has broad experience in the business practices of all types of insurance intermediaries, including brokers at every level in the broking process, from producers to managing general agents to London Market brokers.

In his litigation practice, Paul focuses on commercial business litigation, including professional liability actions brought against insurance agents and brokers. In addition to his insurance practice, Paul advises entertainment and technology companies on the management of intellectual property risks.

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