By Jeff Sistrunk

Law360 (January 26, 2021, 7:55 PM EST) -- A Georgia federal judge ruled Tuesday that a unit of The Hartford is not obligated to cover an Atlanta-area law firm's losses due to a COVID-19 stay-at-home order, saying the firm's office has not sustained the sort of direct physical loss or damage required by its policy.

U.S. District Judge William M. Ray dismissed a putative class action complaint filed against Hartford Casualty Insurance Co. by Karmel Davis & Associates Attorneys-At-Law LLC, finding that the firm failed to meet the prerequisites for coverage in any of the sections of its "all risk" policy with the insurer.

Karmel Davis & Associates, which is based in the Atlanta suburb of Douglasville and focuses on bankruptcy law, has argued it is entitled to coverage from Hartford for business interruption losses it suffered when a temporary shelter-in-place order imposed by Georgia Gov. Brian Kemp last April hobbled its ability to conduct in-person business.

The firm sought coverage under a number of policy clauses, including the "business income" provision, which covers lost income attributable to the firm's suspension of operations due to the direct physical loss of or damage to its office. Karmel Davis & Associates asserted that this threshold requirement was met by its inability to use its office because of the "likely" presence of COVID-19 on the premises.

But Judge Ray was unpersuaded, opining that applicable Georgia precedent has established that the terms "direct physical loss" and "direct physical damage" are synonymous with a tangible physical change to property. Even if the firm had alleged that an individual infected with the novel coronavirus had been present at its office — which it did not — that would be insufficient to trigger business income coverage, the judge said.

"Although the virus is transmitted through the air and may adhere to surfaces briefly, there is no indication that it causes any sort of physical change to the property it touches," the judge wrote. "The mere fact that it may rest unseen on surfaces before it can be cleaned up with a disinfectant is not the kind of direct physical change contemplated by Georgia law."

Karmel Davis & Associates fared no better under the other policy provisions it invoked. For instance, the firm separately requested coverage under its policy's "civil authority" clause, which provides coverage if access to the firm's office is prohibited by a government order issued in response to direct physical loss or damage at another property in "the immediate area."

Judge Ray said the firm's request for civil authority coverage fails for two reasons. For one, he said, Georgia's stay-at-home order explicitly permitted certain essential businesses, including law firms, to continue in-person operations, provided they take additional measures to prevent the spread of COVID-19 among their employees. Karmel Davis & Associates said in its complaint that it ceased in-person meetings with clients out of caution, but the firm was not barred from entering its office, Judge Ray noted.

Second, the stay-at-home order was not issued in response to any existing loss or damage at another property in the immediate area of Karmel Davis & Associates' office, the judge said. Instead, Kemp imposed the order as a preventative measure to stem COVID-19's spread in Georgia, Judge Ray found.

"Courts routinely reject these claims where, as here, orders of civil authority are aimed at fear of future harm, not existing property loss or damage," the judge wrote.

Judge Ray concluded that, because the law firm's own claims are not viable, its proposed claims on behalf of a nationwide class of Hartford policyholders that have faced similar coverage denials must also fail. 

Counsel for Karmel Davis & Associates and a Hartford representative did not immediately respond to requests for comment Tuesday evening. 

The decision adds to an ever-growing body of case law concerning whether property insurance covers business interruption losses tied to COVID-19 stay-at-home orders.

Overall, as of Tuesday, state and federal courts had issued nearly 180 decisions on motions to dismiss or summary judgment filed in COVID-19 business interruption cases, according to a database maintained by the University of Pennsylvania's Carey Law School. Of those, 147 granted dismissal of policyholders' complaints. In 28 cases, policyholders have survived dismissal motions and proceeded to discovery, and four policyholders have won outright summary judgment rulings obligating insurers to pay their pandemic-related losses, UPenn found.

Karmel Davis & Associates Attorneys-At-Law LLC is represented by David James Worley of Evangelista Worley LLC, Rachel Soffin, Greg Frederic Coleman, Jonathan Betten Cohen, Alex R. Straus and William A. Ladnier of Greg Coleman Law PC, Yechiel M. Twersky, John G. Albanese and Shanon J. Carson of Berger Montague and Daniel K. Bryson of Whitfield Bryson & Mason LLP.

Hartford is represented by Anthony J. Anscombe and Sarah D. Gordon of Steptoe & Johnson LLP, Joshua B. Belinfante and Joseph Harris Saul of Robbins Ross Alloy Belinfante Littlefield LLC, Ryan M. Chabot and Alan E. Schoenfeld of WilmerHale and Christopher C. Frost, John A. Little Jr., and Caleb C. Wolanek of Maynard Cooper & Gale PC.

The case is Karmel Davis & Associates et al. v. Hartford Financial Services Group, case number 1:20-cv-02181, in the U.S. District Court for the Northern District of Georgia.

--Additional reporting by Andrew Strickler. Editing by Bruce Goldman.

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