JD Supre
The Pennsylvania Supreme Court recently rendered its eagerly awaited decision in Ungarean v. CNA et al.,[1] declaring that losses resulting from Covid-related governmental closure orders were not covered by business interruption insurance. In the wake of that decision, the question remains as to whether the war over insurance coverage for Covid-related losses has been lost by policyholders in Pennsylvania or if Ungarean represents only a single battle in a longer, still-undecided war. A careful reading of Ungurean reveals the limited scope of its ruling.
The policyholders alleged that the governmental orders requiring the closure of their businesses in response to the covid pandemic resulted in a loss of use of their properties and resulting lost income. Each alleged this amounted to “direct physical loss of or damage to” covered property and, therefore, fell within the policies’ coverage grant. Crucially, however, as the Supreme Court took pains to point out, the policyholders failed to allege that the coronavirus was actually present at or on their properties, or how the virus may have affected their properties. They instead relied solely on the fact that they were ordered to close.
In upholding the insurers denial of coverage, the Court concluded that for coverage to exist under the all-risk commercial property insurance policies at issue, there must be either “(1) a physical disappearance, partial or complete deterioration, or absence of a physical capability or function of the property (loss), or (2) a physical harm or injury to the property (damage).”[2] Notably, however, the Court did not conclude that, as a matter of fact (or law), the coronavirus’ presence at or on property can never result in “direct physical loss of or damage to” property. That question is still open. Also, although the Court made clear that new modifications to existing property to make it safer do not constitute the type of repair or restoration work indicative of a physical alteration of property, it did not further expound on what activity may be enough to be a restoration or repair.
Furthermore, the Court declined to rule on whether various exclusions in the relevant policies applied. Accordingly, the question remains open under Pennsylvania law whether coverage under an all-risk property policy may exist in circumstances where a policyholder alleges, and can ultimately prove, that the coronavirus was present at or on Covered Property in such a quantity or condition that it caused the “absence of a physical capability or function of the property.”[3]
In this way, the Court’s holding is consistent with the Third Circuit’s recent ruling in Wilson v. USI Services, Inc.[4] In Wilson, the Third Circuit held that to establish coverage for covid losses, the insured businesses at issue “must show that their operations were suspended because of ‘direct physical loss of or damage to’ the [covered] properties.”[5] Correctly predicting that the Pennsylvania Supreme Court would follow the Third Circuit’s earlier ruling in Port Authority of New York and New Jersey v. Affiliated FM Insurance Company,[6] Wilson held that the “loss of use of a property’s intended business purpose is not a physical loss of property covered by the businesses’ insurance policies” unless it is tethered to the “physical condition of the premises.”[7]
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https://www.jdsupra.com/legalnews/does-the-pennsylvania-supreme-court-s-7681105/
