The Path to the Recovery of Business Interruption Losses for Pennsylvania Policyholders

April 29, 2020

In the wake of government edicts and orders around the world, including Pennsylvania Governor Tom Wolf’s March 19, 2020 Executive Order closing non-life sustaining businesses and restricting access to business premises, many Pennsylvania businesses are sustaining huge losses. Business owners are submitting claims for business interruption insurance losses, but many insurance companies’ knee-jerk reaction is to deny. This has led to a proliferation of lawsuits. While the viability of these suits depends on each business’s unique circumstances and policy language, the prospects look very good for many Pennsylvania business owners.

Many Pennsylvania businesses bought “all-risk” commercial property insurance policies that contain business interruption coverage. The coverage provisions are broad. They state that losses caused by a suspension of business are covered so long as they involve “direct physical loss or damage” to the insured premises.

So-called “all-risk” policies are meant to cover every conceivable kind of loss that may happen, except by the willful or fraudulent acts of the insured. Miller v. Bos. Ins. Co., 420 Pa. 566, 572, 218 A. 2d 275, 278 (1966). Under these policies, the policyholders are required to show only that a loss occurred. Betz v. Erie Ins. Exch., 2008 PA Super 221, ¶ 17, 957 A. 2d 1244, 1256 (2008), app den. by 606 Pa. 659 (Pa. 2010). There is, in effect, a presumption of coverage. Betz v. Erie Ins. Exch., 2008 PA Super 221, ¶ 19, 957 A. 2d 1244, 1257 (2008), app. den.

Many insurance companies will dispute that COVID-19 losses satisfy the “direct physical loss or damage” requirement. They espouse a flat-earther view that only losses you can see meet this requirement. Courts have rejected this view on numerous occasions in numerous contexts.

For example, in Motorists Mut. Ins. Co. v. Hardinger, 131 F. App’x 823 (3d Cir. 2005) (applying Pa. law), homeowners had to vacate their homes because their well was contaminated by E. coli bacteria. The insurance company made the same argument about physical loss they make now but the court rejected it. The court ruled that the policy’s “physical loss or damage” requirement could be met well short of structural harm, for example when: (1) the property is contaminated to such an extent that its function is nearly eliminated or destroyed; (2) the structure is made useless or uninhabitable; or (3) an imminent threatened release of contamination causes a loss of use or utility. Id. at 826.

This pandemic can easily meet all of those tests. The Pennsylvania Supreme Court has already recognized that because COVID-19 can live for up to four days outside of a human host, it can spread not only through person-to-person contact, but also by contact with surfaces an infected person touched. Friends of DeVito v. Wolf, No. 68 MM 2020, 2020 WL 1847100, at *13 (Pa. Apr. 13, 2020). The disease is highly contagious. It emerged in Wuhan, China in December 2019, but by March 6, 2020, two cases were confirmed in Pennsylvania. As of April 26, 2020, Pennsylvania cases spiked to 41,165. The Court characterized the pandemic as a “catastrophe” and called any location where even two people can congregate a disaster area. Id. Importantly for coverage, it found the disease is no different from other disasters, such as hurricanes and fires—typically insured events—because, like them, it can cause “substantial damage to property, hardship, suffering or possible loss of life.” Id. at *12.

Even though some commercial package polices exceed three hundred pages, they do not define “physical loss or damage.” Considering Hardinger and other cases like it, one can assume that the insurance industry left that term vague to try to use it to deny coverage, but in Pennsylvania and many other jurisdictions, the burden of drafting with precision rests with the insurance company. Meyer v. CUNA Mut. Ins. Soc., 648 F. 3d 154, 163–64 (3d Cir. 2011). Coverage clauses are interpreted broadly to afford the greatest possible coverage. Eichelberger v. Warner, 290 Pa. Super. 269, 275–76, 434 A. 2d 747, 750 (1981). Ambiguities are interpreted in favor of finding coverage. Meyer, supra. Since there is already an established body of case law interpreting the term in favor of coverage where properties are only functionally, as opposed to structurally, impaired, the best insurance companies can hope for is a finding that the term is ambiguous which means it would not be able to be relied on to limit coverage for claims arising from this pandemic.

Some policies have virus exclusions, but an insurance company’s reliance on a virus exclusion to deny coverage would be equally misguided. A common example of the exclusion reads:

We will not pay for loss or damage caused by or resulting from any virus, bacterium or other micro­ organism that induces or is capable of inducing physical distress, illness or disease.

In Pennsylvania, exclusions are interpreted narrowly. Cozza v. State Farm Fire & Cas. Co., No. CV 09-2380-LDD, 2010 WL 11537732, at *2 (E.D. Pa. June 16, 2010), aff’d sub nomCozza ex rel. Cozza v. State Farm Fire & Cas. Co., 440 F. App’x 73 (3d Cir. 2011). This version of the exclusion does not mention closures necessitated by disaster declarations or caused by orders in response to the imminent threat of contamination, catastrophe, or natural disasters. A narrow reading of the exclusion, therefore, should mean that it would not apply where the losses arise from those other causes.

Not only that, but most of these policies recognize the distinction between a disaster and governmental actions in response that limit access to property. For example, many business interruption policies provide coverage when a business suffers losses as a result of a civil authority’s orders necessitated by damage to another property. This demonstrates that the industry knew how to address actions collateral to a disaster, but failed to do so in the exclusionary language above. Under Pennsylvania law, “[a]n insurer’s failure to utilize more distinct language which is available reinforces a conclusion of ambiguity.” Griggs Rd., L.P. v. Selective Way Ins. Co. of Am., 368 F. Supp. 3d 799, 806–07 (M.D. Pa. 2019), reconsideration denied, No. 4:17-CV-00214, 2019 WL 3230916 (M.D. Pa. May 22, 2019). This is another reason why the virus exclusion should not apply to business losses from this pandemic.

It is the insurance company’s burden to prove an exclusion’s applicability. T.H.E. Ins. Co. v. Charles Boyer Children’s Tr., 455 F. Supp. 2d 284, 290–91 (M.D. Pa. 2006), aff’d, 269 F. App’x 220 (3d Cir. 2008). It will be difficult, if not impossible, for insurance companies to establish the existence of virus contamination at the policyholder’s premises due to the disease’s limited survivability on surfaces and the prolonged closures businesses are experiencing.

Lastly, the language above limits the exclusion to losses “caused by or resulting from any virus.” There is no mention of excluding losses from concurrent causes such as closure orders or the threat of mass contamination. The closures and other orders are collateral to the virus in the chain of causation. Indeed, many businesses have no evidence that they or their employees were contaminated at all.

When drafters intend to extend an exclusion to losses from causes concurrent to the excluded losses, they know how to say it. For example, in the policy discussed above, an exclusion states:

We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.

The drafters knew what language to use when they intended to exclude losses from concurrent causes, but did not use it for the virus exclusion. This should result in an interpretation that losses caused by concurrent causes such as closure orders are not excluded.

Lastly, even if the virus exclusion could be interpreted to apply to losses the pandemic caused, it should not be enforced because of statements the insurance industry made to regulators when seeking its approval. For example, in 2006, to obtain regulatory approval for the virus exclusion, the American Association of Insurance Services submitted a “Virus or Bacteria Exclusion-Filing Memorandum” stating:

Property policies have not been, nor were they intended to be, a source of recovery for loss, cost or expense caused by disease causing agents.

The Filing Memorandum went on to explain that the exclusion, therefore, was being added not to reduce coverage, but to merely clarify it. That statement, however, ignores the robust body of case law that had developed by then, such as in Hardinger. The proposed virus exclusion actually represented a major reduction in coverage. A reduction in coverage should come with a reduction in premiums, but the “clarification” was presented as a premium-neutral event.

Regulatory estoppel prevents insurance companies from asserting an interpretation of policies contrary to the interpretation they offered regulators. Sunbeam Corp. v. Liberty Mut. Ins. Co., 781 A. 2d 1189, 1192-93 (Pa. 2001) (“Thus, having represented to the insurance department, a regulatory agency, that the new language in the 1970 policies—‘sudden and accidental’—did not involve a significant decrease in coverage from the prior language, the insurance industry will not be heard to assert the opposite position when claims are made by the insured policyholders.”) Here, that should prevent insurance companies from asserting that the virus exclusion applies to the types of losses that were covered before it was added which, as the cases show, should include the types of losses caused by the pandemic.

Each business interruption claim is unique. If you think you have a claim for business interruption or related coverages, our Insurance Recovery Practice Group is here to help guide you through that process. For many Pennsylvania business owners, there should be a path to a recovery. Visit the firm’s Coronavirus (COVID-19) Resource Center for more information and updates on this constantly evolving situation.