Is the Presence of Coronavirus "direct Physical Loss or Damage" Under a Property Policy?

• Publication year: 2020

Is The Presence of Coronavirus "Direct Physical Loss or Damage" Under A Property Policy?

ByTred R. Eyerly

To secure coverage for property damage, most property policies require a showing of "direct physical loss or damage" to covered property. Typical policy language reads:

Coverage
We will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.

With the closure of businesses throughout Hawaii and across the nation due to the onset of the coronavirus, policy-holders have submitted claims to insurers for their business losses under business interruption or civil authority provisions of commercial property policies. Here, also, the policyholder must also demonstrate "direct physical loss or damage" to trigger coverage. For example, business interruption coverage typically reads as follows:

We will pay for the actual Business Income you sustain due to the necessary "suspension" of your "operations" during the "period of restoration." The "suspension" must be caused by direct physical loss of or damage to property at the described premises.

Whether the presence of coronavirus creates "direct physical loss or damage" is currently a hotly contested issue. Early indications are that coronavirus remains on objects and surfaces. The duration can be from a few hours to three weeks, depending on the type of surface material. If a customer or employee is infected and the store or restaurant must close because the virus may rest on surfaces within the building, is there direct physical loss or damage, even though the building structure itself is unharmed?

While Hawaii case law offers no definitive answers, cases from other jurisdictions offer contrasting opinions.¹

Cases Finding Direct Physical Loss or Damage When No Harm to Structure

Many cases have determined there is "direct physical loss or damage" where a building, although structurally unchanged, is unusable or uninhabitable.

For example, in a case from Louisiana, the presence of excessive levels of organic lead forced the homeowner out of her home. Widder v. La. Citizens Prop. Ins. Corp., 82 So. 3d 294 (La. Ct. App. 2011). The insurer denied coverage because there was no direct physical loss. Id., 82 So. 2d at 295.The trial court agreed; since the home was still intact, no direct physical loss had occurred, and no coverage was available under the policy. Id. The appellate court reversed. The home was contaminated with inorganic lead that made it unusable and uninhabitable. Id. at 296. The intrusion of lead was a direct physical loss even if the building itself was not harmed. See id.

In another case, smoke from a nearby wildfire filled an outdoor theater, forcing cancellation of performances and loss of business income. Oregon Shakespeare Festival Ass'n v. Great Am. Inc. Co., No. 1:15-cv-01932-CL, 2016 U.S. Dist. LEXIS 74450 (D. Ore. June 7, 2016). Wildfires in the area caused smoke, soot, and ash to accumulate on the surface of seats and concrete ground of the open-air theater. The air quality was poor, but no federal, state or local agency ordered cancellation of the performances. Further, the theater did not suffer any permanent or structural damage to its property. Id., 2016 U.S. Dist. LEXIS 74450, at *7. The insurer denied coverage, contending the loss or damage must be structural to the building itself. After all, the smoke in the air at the theater did not require any repairs to the structure of the property. The court disagreed. The theater sustained "physical loss or damage to property" when the wildfire smoke infiltrated the theater and rendered it unusable for its intended purpose. Id., 2016 U.S. Dist. LEXIS 74450, at *26. The decision was eventually vacated by a joint stipulation of the parties, Oregon Shakespeare Festival Ass'n v. Great Am. Ins. Co., 2017 U.S. Dist. LEXIS 33208 (D. Ore. March 6, 2017), but the reasoning is still sound.

[Page 4]

A pervasive odor in a home caused by a subtenant's illegal methamphetamine operation was considered a "direct physical loss." The court concluded odor was "physical" because it damaged the house. Farmers Ins. Co. of Oregon v. Tru-tanich, 858 P.2d 1332 (Ore. Ct. App. 1993).

An accidental release of ammonia into a packaging facility caused the facility to shut down for one week while the ammonia dissipated. Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., Civ. No. 2:12-cv-04418 (WHW) (CLW), 2014 U.S. Dist. LEXIS 165232 (D. NJ., Nov. 25, 2014). The court noted that while structural alteration provided the most obvious sign of physical damage, property could sustain physical loss or damage without experiencing structural alteration. Id., 2014 U.S. Dist. LEXIS 165232, at *13. The release of ammonia into the building, rendering the building unfit for occupancy, constituted "physical loss or damage." Id., 2014 U.S. Dist. LEXIS 165232, at *17.

Where gasoline vapors penetrated the foundation of the insured church and accumulated, rendering the building uninhabitable, the property was held to have suffered a "direct, physical loss." Western Fire Ins. Co. v. First Presbyterian Church, 437 P. 2d 52 (Colo. 1968). Carbon monoxide levels in an apartment building sufficient to render the building uninhabitable was a "direct, physical loss." Matzner v. Seaco Ins. Co., No. 0498-B,1998 Mass...