(Article from Insurance Law Alert, December 2015)
For more information, please visit the Insurance Law Alert Resource Center.
An Iowa federal district court ruled that the threat of flooding and alleged loss of use of office space did not constitute physical damage for purposes of coverage under a property policy. The Phoenix Ins. Co. v. Infogroup, Inc., 2015 WL 7755976 (S.D. Iowa Nov. 30, 2015).
Faced with threats of Missouri River flooding, a policyholder relocated its business and then sought compensation for its relocation costs and associated expenses from its insurer, Phoenix Insurance. Phoenix initially advanced some money, but later brought suit seeking a declaration that it had no coverage obligation. The parties disputed several aspects of coverage, including whether the policyholder established “direct physical loss or damage,” a prerequisite for coverage under the Extra Expense Clause (“EEC”). The policyholder argued that it sustained physical loss in two respects: (1) the “loss of use” of its office due to the threat of flooding; and (2) physical loss at various times after it relocated its office. The court rejected both contentions.
First, the court held that physical loss or damage “generally requires some sort of physical invasion, however minor.” The court therefore reasoned that the policyholder’s loss of use of its office space due to a threatened event (rather than actual, existing damage) did not constitute a physical loss. The court further held that the factual record did not establish a loss of use of the property because the policyholder continued to house employees and equipment at its original office during the relevant time frame. Second, the court ruled that to the extent the policyholder suffered physical losses after relocation, those losses were not covered by the EEC because there was no causal relationship between the covered physical losses and the policyholder’s decision to relocate (i.e., that the physical damage caused the policyholder to incur moving expenses). No causal relationship existed here because all alleged physical losses occurred after the policyholder had already relocated. In emphasizing the causal relationship requirement, the court cited to United Airlines, Inc. v. Ins. Co. of the State of Pa., 385 F. Supp.2d 343 (S.D.N.Y. 2005), in which the court rejected a claim for $1.2 billion in business interruption coverage following the World Trade Center attack because the amount of recovery sought, based on the total shutdown of U.S. aviation system, bore no relation to the actual property damage suffered by the policyholder at its World Trade Center ticket counter. See December 2012 Alert.