Is a cash register that is not being used damaged property? When you need to wash a table, a chair, or a section of flooring with readily available cleaning products to make them safe and useable, are you repairing damaged property? Is a spilled cup of coffee waiting to be wiped up actual damage to the premises? If your customers stay home to help stop the spread of a virus, has there been a physical loss inside your shuttered store or restaurant?
The insuring agreements typically found in commercial property insurance policies require “direct physical loss of or damage to” covered property as the triggering event. Without establishing direct physical loss or damage a policyholder cannot meet its burden to trigger coverage for a purely economic loss of business income resulting from shuttering its business due to concerns over exposure to—or even the actual presence of—COVID-19. Despite this well-understood policy language, it is already beyond question that insurers will confront creative—albeit strained—arguments from policyholder firms attempting to trigger coverage for pure economic loss. The scope of the human and economic tragedy we all face will be matched by the scope of the effort to force the financial harm onto insurance companies.
The plaintiffs in what appears to be the first-filed case seeking a declaratory judgment in the context of first-party insurance coverage rely on the assertion that “contamination of the insured premises by the Coronavirus would be a direct physical loss needing remediation to clean the surfaces” of its establishment, a New Orleans restaurant, to trigger coverage for business interruption. See Cajun Conti, LLC, et. al. v. Certain Underwriters at Lloyd’s, London, et. al. Civil District Court for the Parish of Orleans, State of Louisiana. The complaint alleges that the property is insured under an “all risk policy” defining “covered causes of loss” as “direct physical loss.” The plaintiffs rely on the alleged presence of the virus on “the surface of objects” in certain conditions and the need to clean those surfaces. They go so far as to claim that “[a]ny effort by [the insurer] to deny the reality that the virus causes physical damage and loss would constitute a false and potentially fraudulent misrepresentation. . . .”
The complaint cites a case from the Court of Appeal of Louisiana, Widder v. Louisiana Citizens Property Insurance Corporation, 82 So. 3d 294 (La. App. 2011), writ denied, 76 So. 3d 1179 (La. 2011), for the proposition that “[s]imilar to the Coronavirus, Louisiana Courts have interpreted that the intrusion of lead or gaseous fumes constitute a direct physical loss under insurance policies that would need to be remediated.”
The assertion of fraudulent misrepresentation seems to be largely a matter of projection, as the truth seems to have been stretched by the claims that the possible presence of an easily cleaned virus damaged the restaurant sufficiently to trigger coverage for business interruption at the plaintiffs’ restaurant. As an initial matter, Widder involved a house contaminated with “inorganic lead which makes it uninhabitable until it has been gutted and remediated.” 82 So. 3d 294, 296. Gutting and remediating a home to remove materials which must be treated as hazardous waste is a far cry from cleaning property with disinfectant. In Widder an inspection revealed the presence of lead dust on walls, which originated in part from lead paint outside of the house. Id. at 295. Apparently without any scientific foundation, the Widder court compared the loss before it to the emission of gaseous fumes from Chinese drywall and reversed the trial court’s summary judgment in favor of the insurer.
Glaringly, the alleged presence of a virus on objects is not analogous to noxious odors or gaseous releases. In Widder the alleged physical harm involved tangible damage. Further, gaseous emissions from Chinese drywall corroded building components and in some instances required demolition and rebuilding of entire physical structures to remediate the condition. The proposition that the alleged presence of Coronavirus is somehow analogous to this type of harm is, at best, a contrived argument to attempt to trigger coverage. Indeed, whether and to what extent Coronavirus stays present on physical surfaces is as yet untested under Daubert. We do know that government health officials believe that proper cleaning with standard disinfectants will kill the virus. In any event, there is no indication or evidence that the virus corrodes physical surfaces.
Courts in other jurisdictions have addressed more analogous circumstances and found a lack of coverage. For instance, a federal district court applying Michigan law found that the presence of mold and bacteria in ductwork and a resulting odor did not constitute direct physical harm despite that the ductwork needed to be physically cleaned as part of remediation. Universal Image Productions, Inc. v. Chubb Corp., 703 F. Supp. 2d 705 (E.D. Mich. 2010). A water leak caused the mold, bacteria, and odor, and the policyholder argued that the “pervasive odor, mold and bacterial contamination (both visual and aerosolized), as well as water damage” constituted direct physical loss. The court concluded that the policyholder did not demonstrate “that it suffered any structural or any other tangible damage to the insured property. Rather, the bulk of [the policyholder’s] argument relies upon proof that it suffered such intangible harms as strong odors and the presence of mold and/or bacteria in the air and ventilation system within its Building which, in its judgment, rendered the insured premises useless.” Id. at 719. Citing a case from Oregon, the court stated that “even physical damage that occurs at the molecular or microscopic level must be ‘distinct and demonstrable.’” Id. (citing Columbiaknit, Inc. v. Affiliated FM Ins. Co., No. Civil No. 98-434-HU 1999, U.S. Dist. LEXIS 11873 (D. Or. Aug. 4, 1999)).
At least two courts—a federal court in Florida and an appellate court in Ohio—have recognized that if the alleged physical harm can be cleaned, then there is no physical harm. Mama Jo’s, Inc. v. Sparta Ins. Co., No. 17-CV-23362-KMM, 2018 U.S. Dist. LEXIS 201852 (S.D. Fla. June 11, 2018) (debris and dust from road work required the insured to clean its floors, walls, tables, chairs, and countertops and the court held that “cleaning is not considered direct physical loss.”); Mastellone v. Lightning Rod Mut. Ins. Co., 884 N.E.2d 1130 (Ohio 2008) (affirming lower court’s ruling that dark staining from mold did not constitute “physical loss” where plaintiff’s expert testified that mold could be removed from wood surface by cleaning).
Further, the mere risk of contamination has been deemed insufficient to trigger coverage. Specifically, loss of income due to an embargo by the United States Department of Agriculture because of the risk that “mad cow disease” contaminated beef product was not “direct physical loss” to beef product. Source Food Tech., Inc. v. United States Fid. & Guar. Co., 465 F.3d 834 (8th Cir. 2006) (applying Minnesota law). The Eighth Circuit distinguished between the actual presence of contamination and the inability to sell a product because of the fear of contamination. “Although Source Food’s beef product in the truck could not be transported to the United States due to the closing of the border to Canadian beef products, the beef product on the truck was not—as Source Foods concedes—physically contaminated or damaged in any manner. To characterize Source Food’s inability to transport its truckload of beef product across the border and sell the beef product in the United States as direct physical loss to property would render the word ‘physical’ meaningless.” Id. at 838.
As of this writing the insurers had not yet moved to dismiss the Cajun Conti complaint. However, we believe that on the face of the complaint, which expressly incorporates the policy language requiring direct physical loss or damage, there is no triggering event. Even assuming that COVID-19 is, at a molecular level, present on physical surfaces, we also believe that disinfecting of surfaces does not constitute physical harm sufficient to trigger coverage.
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