(Article from Insurance Law Alert, January 2023)
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The Tenth Circuit ruled that a restaurant’s pandemic-related business losses were not the result of direct physical loss or damage, as required by the relevant policy. Sagome, Inc. v. Cincinnati Ins. Co., 2023 WL 18796 (10th Cir. Jan. 3, 2023).
The court noted that the question of whether COVID-19 causes direct physical loss or damage under a property policy is an open question under Colorado law, but joined the consensus among other federal circuit courts in ruling that it does not. In particular, the Tenth Circuit rejected the restaurant’s assertion that there is physical loss or damage because the virus itself is physical. The court explained: “For coverage, the loss or damage itself must be physical, not simply stem from something physical.” In addition, employing similar reasoning to many other courts in this context, the court noted that the policy’s “period of restoration” clause, which references restoration and repair, reinforces the conclusion that there was no physical loss or damage because the operative event that allowed the business to reopen was the change in government orders rather than any specific repair or restoration.
Importantly, the court distinguished a decision in which the Colorado Supreme Court ruled that a church sustained direct physical loss or damage when it was required to close as a result of gasoline vapors. There, the court reasoned that the accumulation of gasoline around and under the church was so severe as to render it uninhabitable. The court explained that a complete dispossession of property due to gas accumulation is qualitatively different from the presence of COVID-19, which did not render the restaurant uninhabitable. As the court noted, the restaurant continued to use its property even after the initial shutdown orders were issued.