The Pennsylvania Supreme Court recently held that the governor of Pennsylvania properly invoked statutory authority to order non-life-sustaining businesses to shut down to reduce the spread of COVID-19. In a recent Law360 article, an enterprising attorney seized on the opinion to argue that it mandates property insurance coverage under civil authority and other provisions that cover business income losses due to “direct physical loss of or damage to property.” Even within Pennsylvania, this argument is seriously flawed for a host of reasons, not the least of which is that the opinion does not interpret any insurance policy, much less the specific policy language at issue in civil authority and other coverage provisions.
Friends of DeVito v. Wolf. On March 5, 2020, the governor of Pennsylvania declared the COVID-19 pandemic a “natural disaster” emergency. Acting pursuant to that declaration and to reduce the spread of COVID-19, the governor thereafter ordered closed the physical operations of all non-life-sustaining businesses. Four of those businesses sued, alleging that the governor lacked statutory authority to shut down their operations.
By statute, the governor may declare a state of emergency after a “natural disaster,” defined as “[a]ny hurricane, tornado, storm, flood, high water, wind-driven water, tidal wave, earthquake, landslide, mudslide, snowstorm, drought, fire, explosion or other catastrophe which results in substantial damage to property, hardship, suffering or possible loss of life.” The businesses argued that the COVID-19 pandemic did not qualify as a “natural disaster.” But the Pennsylvania Supreme Court disagreed. It reasoned that a pandemic qualifies as a “natural disaster” within the meaning of the statute, because it is of the “same general nature or class” as the specifically listed natural disasters and because the use of “other catastrophe” was “intended to expand the list of disaster circumstances.”
The businesses also argued that, even if the pandemic constitutes a “natural disaster,” the governor nevertheless could not order them closed pursuant to his statutory authority to control the “ingress and egress to and from a disaster area, the movement of persons within the area and the occupancy of premises therein.” The Pennsylvania Supreme Court found “no merit” to the argument that the businesses were not operating within a “disaster area,” reasoning that the businesses were ignoring the “nature of th[e] virus and the manner in which it is transmitted.” Because COVID-19 is present in all counties within the state and can spread in any area where two or more people can congregate, the court concluded that the businesses were within the disaster area.
An Attempt to Stretch Wolf to the Coverage Context. The following is an example of the “civil authority” provision in a policy based on an Insurance Services Office (ISO) form of property insurance policy:
We will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss.
Other property insurance policy provisions, such as business interruption provisions, have similar “direct physical loss of or damage to property” language.
Relying on Wolf, an attorney asserted in a recent article that actual contamination (i.e., physical presence of the virus) at insured premises is not required to establish “direct physical loss of or damage to property.” All that must be shown is that a property was rendered unusable because it was within a disaster area that has been declared physically unsafe for people to congregate because of the virus’s pervasiveness within the area. The attorney also maintains that Wolf’s holding that the pandemic qualifies as a “natural disaster” within the meaning of Pennsylvania’s emergency statute supports reading insurance provisions designed to provide coverage for “natural disasters” to afford coverage for pandemics.
Wolf Does Not Support Coverage Under Civil Authority, Business Interruption, or Similar Provisions
Putting aside the fact that the opinion never once mentions insurance policies, much less addresses potential coverage arising from COVID-19, this attorney’s efforts to extend Wolf to the coverage context are severely misguided.
First, the court did not hold that a pandemic results in “direct physical loss of or damage to property.” Rather, it concluded only that a pandemic falls within the disjunctive statutory phrase: “or other catastrophe which results in substantial damage to property, hardship, suffering or possible loss of life.” Although the court never said which one or more of these four categories a pandemic falls into, a pandemic clearly results in “hardship, suffering or possible loss of life”—each of which suffices to bring it within the statutory language.
Second, and relatedly, the court was interpreting statutory language, not ISO policy language—which is fundamentally different. In particular, although the statute in Wolf uses the phrase “damage to property,” it does not contain the key qualifier “direct” that courts have focused on when holding that actual physical loss or damage is required for coverage to exist. In addition, certain ISO policy language requires the damaged property to be ”at the described premises” or “other than at the described premises”—which suggests that a general business shutdown order would not qualify because it does not result in damage to property within, or outside of, the covered premises.
Third, fundamental rules of contract interpretation require insurance policy language to be given meaning in light of the policy as a whole, not by reference to the interpretation of different language in unrelated statutes, or worse, to words, such as “natural disaster,” that appear nowhere in the policy language. It also requires a court to give meaning to the intent of the contracting parties, not the intent of the Pennsylvania legislature in passing, decades ago, a statute providing for emergency powers.
Fourth, that a governor may have declared an area physically unsafe for people to congregate in groups of two or more because of COVID-19’s pervasiveness within the area says nothing about whether property therein has been “physically damaged” by the airborne, ephemeral virus. The virus requires a human host, and it is only upon that human host that it unleashes physical harm. But physical harm to people is not physical damage to property, and to conflate the two ignores that people are not property. Furthermore, even if the virus happens to be physically upon property at the covered premises for a few hours or days before it dies, that results in only a temporary loss of use of that property at most, with no accompanying physical alteration or, as required for coverage, physical loss or damage. Indeed, courts have even denied civil authority coverage to businesses ordered shut down before an impending hurricane, because the order was “due to” health and safety precautions, not physical damage. Lastly, to the extent that a business suffers a detrimental economic impact from that temporary loss of use, the loss is an intangible or incorporeal one to a business’s balance sheet—not a direct physical loss of or damage to property at the business’s premises.
Finally, virus and “ordinance or law” exclusions in certain insurance policies are potential bases for denying coverage for business income lost from shutdown orders—regardless of whether a court stretches the term “direct physical loss of or damage to property” to encompass a shutdown order. Virus exclusions generally exclude coverage for loss or damage “caused by or resulting from” any virus that is “capable of inducing physical distress, illness, or disease.” Thus, to the extent Wolf’s reasoning has any relevance to insurance policy language, its inherent conclusion that the pandemic causes “hardship, suffering or possible loss of life” weighs in favor of the virus exclusion applying. “Ordinance or law” exclusions generally apply when the enforcement of an ordinance or law regulating the “use” of property has caused loss or damage. The emergency declaration at issue in Wolf is clearly such a law, as the court recognized that the governor’s order results in a “loss of the use of the Petitioners’ business premises.”
Properly understood, the Pennsylvania Supreme Court’s opinion in Friends of DeVito v. Wolf does not provide any basis to extend property insurance coverage under provisions requiring “direct physical loss of or damage to property.”
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