U.S. District Judge Mitchell S. Goldberg dismissed Quakertown, Pennsylvania-based Hair Studio 1208 LLC's proposed class action against Hartford Underwriters Insurance Co. on the grounds that closing to prevent the pandemic's spread did not cause physical loss of or damage to the salon, and thus wasn't covered.
"When the structure continues to function, there is no physical loss that would be eligible for coverage," Judge Goldberg wrote. "Plaintiff does not assert the presence of COVID-19 on its property. Indeed, the amended complaint does not allege any facts regarding the physical integrity or use of the covered property. Rather, plaintiff contends that it closed its business due to Governor [Tom] Wolf's closure orders ... There was no physical source or threatened presence of a physical source that caused plaintiff's inability to use its property for its intended purpose."
Judge Goldberg granted Hartford's motion to dismiss the salon's suit, joining a number of other federal courts that have denied that coverage exists when there was no physical alteration of the insured business's property.
Hair Studio 1208 had contended that its "all-risk" policy from Hartford assumed that all potential losses not specifically excluded from the policy would be covered, but Judge Goldberg said that argument improperly flipped the burden of proof for a plaintiff to show that a loss was covered.
"The policies do not cover 'all losses,' but rather only 'direct physical loss or direct physical damage to covered property at the premises' and any extension of those losses set forth in the business income and civil authority endorsements," the judge wrote. "Accordingly, the burden remains on plaintiffs to show a 'covered cause of loss.'"
The salon had failed to plead that the virus itself was present or had contaminated its building, and the loss of use of the facilities and equipment due to the government closure orders didn't qualify as a physical change to the premises either, and could not be read as causing a covered loss or damage, the court found.
"To read the insurance policies as covering losses from the closure orders would render the policy's use of the word 'physical' meaningless or superfluous," Judge Goldberg wrote. "Mere loss of use of property without any physical change to that property cannot constitute direct physical loss or damage to the property."
Nor were the closure orders enough to trigger the "civil authority" parts of the insurance policy, since those still required there to be some kind of physical damage surrounding or impeding access to the property, the court ruled.
The salon also tried to claim loss of income coverage under part of the policy that contemplated the business being closed due to a disaster, but Judge Goldberg said that was also dependent on there being physical damage to be cleaned up, since the policy referred to a "period of restoration."
"Nothing in the amended complaint suggests that plaintiff's property needs to be repaired, rebuilt, replaced, or moved to a new location. Rather, plaintiff's ability to operate fully depends solely on whether the closure orders are in effect at any particular time," he wrote. "Should the closure orders be lifted, plaintiff may immediately reopen its business without any period of restoration."
Judge Goldberg noted that because he didn't think there was any covered loss, he didn't have to get into whether the pandemic fell under the policy's virus exclusion, or address the salon's contention that the virus exclusion should be tossed out because it was never intended to cover a pandemic.
"We appreciate the court's thoughtful analysis and careful work on the issues in this case. We respectfully disagree with the conclusion, and appreciate the court's recognition that a number of courts have reached opposite conclusions," said Ian Birk of Keller Rohrback, representing the salon. "We continue to believe that ordinary insurance consumers in Pennsylvania and around the country would have believed their business interruption policies would cover them in this unprecedented crisis."
Counsel for Hartford did not immediately respond to requests for comment Friday.
Hair Studio 1208 and the proposed class are represented by Alison E. Chase, Amy C. Williams-Derry, Gabriel Verdugo, Gretchen Freeman Cappio, Ian S. Birk and Nathan L. Nanfelt of Keller Rohrback LLP and Joseph B. Kenney and Joseph G. Sauder of Sauder Schelkopf LLC.
Hartford is represented by Alan E. Schoenfeld and Ryan M. Chabot of WilmerHale, Anthony J. Anscombe, Caitlin R. Tharp and Sarah D. Gordon of Steptoe & Johnson LLP and Richard D. Gable Jr. of Butler Weihmuller Katz Craig LLP.
The case is Hair Studio 1208 LLC v. Hartford Underwriters Insurance Co., case number 2:20-cv-02171, in the U.S. District Court for the Eastern District of Pennsylvania.
--Editing by Daniel King.
Update: This article has been updated with a response from Hair Studio 1208's counsel.
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