Virus' Presence Means 'Direct Physical Loss,' Pa. Judge Rules

By Hailey Konnath
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Law360 (July 13, 2021, 11:10 PM EDT) -- A Pennsylvania gym got the green light on Tuesday to proceed with its COVID-19 coverage suit against Cincinnati Insurance Co., with a Keystone State judge finding that the alleged "continuous presence" of the virus on a property constitutes "direct physical loss or damage" that should trigger business interruption coverage.

Lackawanna County Court of Common Pleas Judge Terrence R. Nealon overruled the insurer's preliminary objections to Brown's Gym's suit, noting that the gym has specifically claimed that the virus' presence rendered its property unusable, unsafe, inaccessible and unfit for its intended use. That's an adequate allegation under the contamination theory for purposes of business income, extra expense and civil authority coverage, Judge Nealon said.

And that means the allegations are enough to survive Cincinnati Insurance's dismissal bid, he said. Judge Nealon noted that the insurance policy in the dispute doesn't have a virus or pandemic exclusion, but it does contain a "communicable disease or virus" exclusion for other "crisis event response communication expense" coverage.

And that created "a reasonable expectation on the part of the gym that coronavirus-related damages would be covered by the policy's business interruption coverage, but excluded from crisis event response communication expense coverage," the judge said.

The Pennsylvania judge's order runs counter to the majority of COVID-19 insurance rulings, which have often held that the presence of the virus doesn't constitute "direct or physical loss or damage" and therefore doesn't trigger business interruption coverage.

Another Pennsylvania state judge, Allegheny County Court of Common Pleas Judge Christine Ward, has also sided with business owners. She's held, however, that the loss of use of a property during the pandemic is enough to warrant coverage and that property needn't sustain physical damage to have suffered a "direct physical loss."

According to Tuesday's ruling, Brown's Gym, located in northeast Pennsylvania, is looking to recover damages under the business income, extra expense and civil authority coverages in its commercial policy for costs it racked up and revenues it lost during the COVID-19 pandemic.

Brown's is seeking a declaratory judgment that its coronavirus-related losses are covered by the policy, according to the suit. The gym is alleging breach of insurance agreement and insurer bad faith.

Cincinnati Insurance had argued that the suit should be dismissed because the gym's declaratory judgment and breach of contract claims are insufficient, as the gym hasn't alleged any "direct physical loss or damage" to its property, per Tuesday's order. The insurer also sought to dismiss the gym's bad faith liability claim, arguing that its denial of coverage was proper.

Judge Nealon said Tuesday that his conclusion is supported by "well-established principles of insurance contract construction and the specific language of Cincinnati's policy."

"As the sole drafter of the policy, Cincinnati had the power to bar business income and extra expense coverage for losses caused by viruses by simply including a virus exclusion among its many exclusions, but it failed to do so," he said.

And the notion that business interruption coverage would apply for physical contamination caused by the pandemic is a reasonable expectation for Brown's to have, the judge said.

"Accordingly, Cincinnati has not established that it is clear and free from doubt that, based upon the facts alleged in the complaint and all inferences fairly deducible from those facts, Brown's is unable to satisfy the 'physical damage' requirement for business interruption coverage under the physical contamination theory," Judge Nealon said.

State courts tend to side with insurers in similar suits over pandemic coverage, according to the University of Connecticut Law School's COVID Coverage Litigation Tracker. When it comes to merits rulings on motions to dismiss, judges have opted to dismiss with prejudice more than 55% of those cases, per the tracker.

However, Judge Ward has doled out a few noteworthy wins in Pennsylvania cases. In March, Judge Ward granted a Pittsburgh-area dental practice's bid to hold an insurance unit of CNA Financial Corp. liable for financial losses suffered by a proposed class of businesses after the pandemic forced closures last year.

"Plaintiff's loss of use of its property was both 'direct' and 'physical,'" Judge Ward said in her order granting Smile Savers' summary judgment. "The spread of COVID-19, and a desired limitation of the same, had a close logical, causal [and] consequential relationship to the ways in which plaintiff materially used its property and physical space."

And in May, Judge Ward ruled that Erie Insurance Exchange must cover a Pittsburgh tavern's losses. In that case, the judge held that Grant Street Tavern didn't need to have sustained physical damage to have suffered a direct physical loss or damage to property, as covered by its insurance contract.

The pandemic and its associated closures were indeed a "direct" and "physical" loss of use of insured property, Judge Ward said at the time.

John Mulcahey, counsel for the gym, told Law360 on Tuesday that Judge Nealon took into consideration case law that predates COVID-19 coverage cases, "which is consistent with our argument."

Cincinnati Insurance and its counsel didn't immediately respond to requests for comment late Tuesday.

The gym is represented by Marion Munley, Daniel W. Munley, John M. Mulcahey, Caroline Munley, Katie Nealon and Ciara L. DeNaples of Munley Law PC.

The Cincinnati Insurance Co. is represented by Lawrence M. Silverman and Daniel G. Litchfield of Litchfield Cavo LLP.

The case is Brown's Gym Inc. v. The Cincinnati Insurance Co. et al., case number 20-CV-3113, in the Pennsylvania Court of Common Pleas of Lackawanna County.

--Additional reporting by Matt Fair and Hannah Albarazi. Editing by Regan Estes.

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