DC Judge Rules Government Shutdown Orders Are Not A “Physical Loss” 1
August 24, 2020
By John Bond Atkinson, Tiffany A. Bustamante, and Anna O. Palm
We hope this Client Update finds you in good health and spirit. During these uncertain times, Atkinson, P.A. continues its mission to advise, address, and support your legal concerns relating to the diverse issues arising from this pandemic affecting individuals and businesses worldwide. As always, we hope to assist you in overcoming any complex case or coverage matter in any way we can.
As many businesses have been forced to close following government mandates calling for closure of all non-essential business, insurers are beginning to file claims for coverage under provisions that include “loss of ‘income’ and/or ‘rental income’ sustained due to partial or total ‘interruption of business’ resulting from ‘loss’ or ‘damage’ to the property insured.” This update follows our updates to you of April and July 2020 and serves to appraise you of a recent District of Columbia court order finding that government shutdown orders do not constitute a “direct physical loss.”
Rose’s 1 LLC, et al. v. Erie Insurance Exchange, Civ. Case No. 2020 CA 002424 B
In a recent decision of the Superior Court of the District of Columbia, Rose’s 1 LLC et al.
v. Erie Insurance Exchange, the Court addressed insurance claims for loss of revenue as a result of the government orders mandating closure of all non-essential businesses. Specifically, this review will demonstrate how the court places emphasis on the express language of the insurance contracts and defines the key phrase “direct physical loss.” Specifically, the Court was presented with the question of whether the closure of the business due to government shutdown orders constitute a “direct physical loss” under Rose’s 1 LLC’s insurance policy.
Defining Direct Physical Loss
The Court began by stating that “words used in an insurance contract [must be given] their common, ordinary, and popular meaning.” Peerless Ins. Co. v. Gonzalez, 697 A.2d 680, 682 (Conn.1997). Moreover, the interpretation of an insurance policy must follow the principles of contract interpretation, and thus must interpret the contract a “as a whole, giving reasonable, lawful, and effective meaning to all its terms, and ascertaining the meaning in light of all the circumstances surrounding the parties at the time the contract was made.” Carlyle Inv. Mgmt., 131 A.3d at 895 (internal quotation mark omitted) (quoting Debnam v. Crane Co., 976 A.2d 193, 197
(D.C. 2009)). Therefore, it is important that any considerations into the contract formation is reflected in the specific language in the executed contract.
Beginning its analysis, the Court interpreted the terms “direct,” “physical,” and “loss” using their plain dictionary meaning. The American Heritage Dictionary defines “direct” as “[w]ithout intervening persons, conditions, or agencies; immediate.” The Oxford English Dictionary defines “physical” as pertaining to things “[o]f or pertaining to matter, or the world as perceived by senses; material as [opposed] to mental or spiritual.” “Loss” is defined by the coverage document as “direct and accidental loss of or damage to covered property.” So, while some policies may differ in their definition of the broad term “loss,” the general approach of interpreting the more specific “direct physical loss” by and through the contract word choice, is designed to emphasis the intent of the parties. Consequently, anticipate this will be indicative to how Florida courts may deal with the term “direct physical loss” when dealing with coverage claims resulting from the government-mandated shutdown.
Finding that Government Orders Do Not Constitute a Direct Physical Intrusion
The claimants in the present case argued that the “loss of use of their restaurant properties was ‘direct’ because the closures were the direct result of the mayor’s governmental orders without intervening action.” (Rose’s 1 LLC et al. v. Erie Insurance Exchange, Order at p. 5 CA 002424 B, in the Superior Court of the District of Columbia, Civil Division 2020). The Court, however, rejected this argument, noting that there likely were intervening actions coming between the shut- down orders and the alleged loss. Furthermore, the Court emphasized that the mayor’s order itself did not have any effect on the “material and tangible structure of the insured properties,” meaning that no direct physical loss had occurred. Id.
Finding “Direct Physical Loss”
The Court then referred to the Colorado’s Supreme Court definition of “direct physical loss” in Western Fire Insurance Co. v. First Presbyterian Church. 437 P. 2d 52 (Colo. 1968). In First Presbyterian Church, gasoline fumes entered an insured church and “became so infiltrated and saturated” as to render the church uninhabitable. Id. at 55. The fire department ordered the church’s closure; however, the order standing alone itself did not constitute “a direct physical loss,” but instead it was the order together with the compromise to the physical integrity of the insured property. Id.; See Port Authority v. Affiliated FM Insurance Co., 311 F.3d 226, 236 (3d Cir. 2002) (presence of asbestos in building was not “physical loss” because building owner could not show real or imminent “contamination of the property such that its function is nearly eliminated or destroyed, or the structure is made useless or uninhabitable”); TRAVCO Insurance Co. v. Ward, 715 F. Supp. 2d 699, 709-10 (E.D. Va. 2010), aff’d 504 F. Appx. 251 (4th Cir. 2013) (home
rendered uninhabitable by toxic gases released by defective drywall constituted “direct physical loss”). In returning to the facts in the present case, the mayor’s order did not constitute a direct physical loss because it did not render the property physically damaged beyond repairs such that it was useless or uninhabitable.
Courts Reject Coverage Claims Finding No “Direct Physical Loss”
The above examples of findings of “direct physical loss” were typically cases in which the physical integrity of the insured property has been compromised. For example, closure of a theatre due to neighboring building’s construction collapse onto the street was insufficient to constitute a direct physical loss to the theatre because the theatre did not suffer a “direct physical loss as a result of the city mandating closure of the theatre.” Roundabout Theatre Co. v. Continental Casualty Co., 302 A.D.2d 1, 2-3 (N.Y. App. Div. 2002).
In preparing for future litigation for claims of “direct physical loss” following government shutdown orders in wake of COVID-19, it could be anticipated that courts will require an assertion of negative physical changes in the insured locations. The court in Roundabout provided a unique analysis by focusing on how the words “direct” and “physical,” which modify the phrase “loss or damage,” ordinarily connote actual, demonstrable harm of some form to the premises itself, rather than forced closure of the premises for reasons exogenous to the premises themselves, or the adverse business consequences that flow from such closure.” Id. at 331; see also United Airlines, Inc. v. Insurance Co. of State of Pa., 385 F. Supp. 2d 343, 349 (S.D.N.Y. 2005), aff’d 439 F.3d 128 (2d Cir. 2006) (“The inclusion of the modifier ‘physical’ before ‘damages’ . . . supports [defendant’s] position that physical damage is required before business interruption coverage is paid.”).
The question regarding how courts are interpreting “direct physical loss” is at the center of analysis for a number of COVID-19-related business interruption coverage cases because businesses are arguing the existence a loss resulting directly from the forced closure and/or from the virus itself, while insurers are arguing that there is no actual damage to the property itself and thus coverage should be denied.
Atkinson, P.A. remains committed to providing you with sound guidance and representation in response to the complex coverage issues presented by the coronavirus outbreak. We continue to monitor CDC guidelines, court developments, regulatory activity, and public sector announcements; and will continue to circulate articles with respect to the latest news and analysis of potential insurance claims and disputes stemming from the COVID-19 virus in the upcoming weeks.
While our office continues to remain open in limited capacity, all our attorneys remain fully available to assist you through remote access. As needs arise, continue to contact us via telephone or e-mail. Should you need immediate assistant, please feel free to contact our partners directly.
John Bond Atkinson
Tiffany A. Bustamante
John B. Atkinson