(Article from Insurance Law Alert, October 2024)
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Holding
The Alaska Supreme Court ruled that neither the presence of the COVID-19 virus on insured property nor government restrictions on use of insured property constitute “direct physical loss of or damage to” property for purposes of triggering coverage under a commercial property policy. Baxter Senior Living, LLC v. Zurich Am. Ins. Co., 2024 Alas. LEXIS 100 (Sept. 27, 2024).
Background
Baxter Senior Living sought coverage for business losses incurred during the COVID-19 pandemic. Baxter alleged that the presence of the virus at its facility, as well as the government directives that limited its ability to conduct full business operations, constituted direct physical loss of or damage to property.
In ensuing coverage litigation, Zurich moved to dismiss. The district court certified the following questions to the Alaska Supreme Court:
- Under Alaska law, can the presence of the COVID-19 virus at an insured property constitute “direct physical loss of or damage to” the property for purposes of a commercial insurance policy?
- Under Alaska law, can operating restrictions imposed on an insured property by COVID-19 pandemic-related governmental orders constitute “direct physical loss of or damage to” the property for the purposes of a commercial insurance policy?
The Alaska Supreme Court answered both questions in the negative.
Decision
Addressing this matter of first impression under Alaska law, the court rejected the notion that a loss of use of property can satisfy the “direct physical loss of or damage to” property standard, instead holding that a “tangible or material alteration” of property is required. The court acknowledged that the terms “loss” and “damage” must mean different things given use of the disjunctive term “or,” but concluded that both terms require some kind of physical change to (or a deprivation of possession of) property.
The court further held that the presence of virus particles does not constitute such a physical alteration because the virus “merely attaches to property” and can be eliminated with simple cleaning. The court therefore concluded that viral particles do not “give rise to the necessary transformative element of something like fire, water, or smoke.”
Additionally, the court rejected Baxter’s assertion that two microorganism coverage provisions, and inclusion of the term “virus” in the definition of microorganism, provided coverage. The court explained:
Baxter misunderstands or misrepresents policy language in its arguments. First, both the Property Coverage for Microorganisms and Microorganisms Coverage for Business Income provisions require that the microorganisms causing “direct physical loss of or damage to” property be “the result of a “covered cause of loss,” rather than being the covered cause of loss.
Finally, the court reasoned that other policy provisions supported its no coverage ruling. In particular, the court ruled a “period of restoration” provision—which refers to removal, repair and replacement of property—confirms that a physical alteration of property is required to trigger coverage.
Comments
This decision joins the overwhelming majority of state and federal court decisions rejecting coverage for business losses incurred in the wake of the COVID-19 pandemic, including the recent Pennsylvania Supreme Court decision discussed in our September 2024 Alert.
Alaska’s alignment with this consensus is noteworthy given its tendency to use the so-called “reasonable expectations doctrine.” Under Alaska law, insurance policies are generally treated as contracts of adhesion; thus, a policyholder’s “objectively reasonable expectations govern, even if painstaking study of the policy provisions would have negated those expectations.”