(Article from Insurance Law Alert, September 2024)
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Holding
The Pennsylvania Supreme Court ruled that a commercial property insurer had no duty to cover business losses stemming from pandemic-related shutdowns because the policyholder did not suffer any “direct physical loss of or damage to” property. Ungarean v. CNA and Valley Forge Ins. Co., No. J-27A-2024 (Pa. Sept. 26, 2024).
Background
Ungarean, the owner of a dental practice, filed a claim with CNA to recoup business losses it incurred during the period of government-mandated shutdowns. When CNA denied coverage, Ungarean filed a class action suit seeking a declaration of coverage under the Business Income, Extra Expense and Civil Authority policy endorsements. A trial court granted Ungarean’s summary judgment motion, concluding that the loss of use of property due to the COVID-19 restrictions was “direct” and “physical.” The trial court rejected CNA’s assertion that a “period of restoration” clause in the policy indicated that tangible damage is required to establish “direct physical loss or damage.” Additionally, the trial court ruled that coverage was available under the Civil Authority endorsement, notwithstanding the fact that access to the insured property was not entirely prohibited, but rather significantly limited. Finally, the trial court concluded that coverage was not barred by exclusions relating to contamination, consequential loss, or ordinance of law, among others.
An intermediate appellate court affirmed, deeming the phrase “direct physical loss of or damage to” ambiguous and finding Ungarean’s interpretation (so as to include “loss of use”) to be reasonable. The appellate court also ruled that none of the exclusions precluded coverage.
Decision
The Pennsylvania Supreme Court reversed, reasoning that “the only reasonable interpretation of the operative phrase ‘direct physical loss of or damage to property’” is one that includes a physical alteration to the property. As the court explained, this interpretation is supported by the “period of restoration” language, which contemplates a suspension of operations during the repair, replacement or rebuilding of damaged property. In so ruling, the court rejected the trial court’s finding that the “period of restoration” clause is simply a temporal limit on coverage, which ends whenever such measures, if undertaken, would have been reasonably completed.
Applying this standard to the factual record, the court concluded that there was no direct physical loss of or damage to property because the insured property remained intact and accessible for emergency dental procedures. As the court emphasized:
The only loss Ungarean sustained, rather, was pure economic loss because the government-ordered COVID-19 shutdown prevented Ungarean from operating his Covered Properties at their full potential. That partial closure, however, had nothing to do with the physical attributes of the Covered Properties, as required by the CNA Policy for insurance coverage.
The Pennsylvania Supreme Court also rejected the lower courts’ finding that the installation of partitions, hand sanitization stations and other structures were physical changes that would require repair or rebuilding under the “period of restoration” language.
Finally, the court held that Ungarean was not entitled to coverage under the Civil Authority endorsement because that provision similarly required “physical loss of or damage to” property other than the covered premises.
Comments
The decision aligns with the overwhelming majority of decisions across jurisdictions, which have similarly concluded that property insurance is not available for COVID-19 related business losses.