By Daphne Zhang

Law360 (October 22, 2020, 4:16 PM EDT) -- Continental Casualty Co. does not have to pay an optometrist office's losses due to the COVID-19 shutdown, an Alabama federal judge has ruled, finding that the policyholder did not allege any covered tangible alteration to its property.

U.S. District Judge Jeffrey U. Beaverstock said in a Wednesday order that Hillcrest Optical Inc. failed to allege physical damage. The practice's argument that it experienced a "period of restoration" when the government allowed it to reopen was also "unavailing," the judge said.

"A reasonable insured would not understand the policy language to cover plaintiff's purely economic losses incurred as a consequence of the [COVID-19 shutdown order]," the judge said. "The order did not immediately cause some sort of tangible alteration to plaintiff's office. Rather, plaintiff was only temporarily precluded from performing routine medical procedures while the order was in effect."

Hillcrest, which owns an optometry office in Mobile, Alabama, shut down the practice because of to state-mandated closures in late March. The office reopened on April 30 when the government allowed medical practices in the state to resume business.

The office filed a revenue loss claim and sued Continental, a unit of CNA Financial Corp., in May after not hearing from the insurer about the coverage decision, according to court records. The practice has argued that it suffered a direct physical loss of property covered by the policy because it could not conduct business or use its property as intended. The office also asked the court to certify the question of whether it has sufficiently alleged a direct physical loss of its property.

In Wednesday's order, Judge Beaverstock rebuffed the office's request for the certification, saying that Hillcrest failed to show "complete and permanent disposition" of its property. The judge said he was not convinced that the office's alleged inability to use its property constituted a direct physical loss.

"Plaintiff's loss of usability did not result from an immediate occurrence which tangibly altered its property," Judge Beaverstock said.

Alabama law requires "tangible alteration or disturbance to property" to show physical damage, and the mere existence of a pollutant in an area is not "a physical act," the judge added.

Hillcrest previously argued its losses should be paid because the property needed "repair" and went through a period of restoration covered by the policy. The office maintained that the government order first rendered it "unusable" by forcing it to shut down but then returned it to a "sound or healthy state" by permitting it to resume business.

"The period of restoration expressly assumes repair, rebuild or replacement of property," Judge Beaverstock said in the order. "How can a statewide order which 'required' plaintiff to shut down necessitate some sort of repair?"

The judge said the practice was never "dispossessed of its property," and its inability to operate was not caused by "an unsound and or unhealthy condition of the property itself," so the office could not claim it went through "repair" as required by the policy, and there is no coverage.

Representatives for the parties could not be immediately reached for comment. 

Hillcrest is represented by Richard H. Taylor of Taylor, Steven A. Martino, and W. Lloyd Copeland of Martino PC.

Continental is represented by M. Warren Butler of Starnes Davis Florie LLP.

The case is Hillcrest Optical Inc. v. Continental Casualty Company, case number 1:20-cv-00275, in the U.S. District for the Southern District of Alabama. 

--Editing by Gemma Horowitz.

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