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Law360 (August 12, 2020, 10:20 PM EDT) -- The owners of a Philadelphia shopping complex told a state judge that its insurer should be estopped from enforcing a virus exclusion in its policy to avoid coverage of claims due to COVID-19 and state-mandated closures.
Chestnut Hill Complex Corp. and Glengarry Properties LP, which operate a commercial center in Philadelphia, urged the state court to declare that the virus exclusion should not apply to property insurance and that it has experienced direct physical damage from the pandemic covered under its policy with Erie Insurance Exchange.
"A business and/or property owner who was even aware of the virus exclusion would conclude that the exclusion related to liability claims against the insured for transmitting the virus, not property damage claims," the owners said.
The companies operate a hotel, restaurants, a farmers market, a beauty salon and a post office in the commercial complex in Philadelphia. Chestnut Hill and Glengarry said that the shopping center was forced to suspend operations in March, and Erie Insurance wrongfully denied coverage for their COVID-19 losses in July, adding that their all-risk policy offers business income and civil authority coverages.
In the complaint, the companies claimed that the virus exclusion should be rendered void because it was never designed to bar direct property loss, loss of use or physical damage from civil authority orders caused by a virus such as COVID-19.
Chestnut Hill and Glengarry said that the insurance industry has recognized as early as 2006 that a virus can constitute physical damage to property but misrepresented the virus exclusion to regulators. The insurance companies "understood that the presence of a virus caused damage to property which would trigger coverage under the business income or civil authority coverage forms," the owners contended.
But the insurers in 2006 told regulators through its two trade groups, Insurance Services Office Inc. and the American Association of Insurance Services, that the virus exclusion was only meant to "'clarify' that coverage for 'disease-causing agents' has never been in effect, and was never intended to be included, in the property policies," Chestnut Hill and Glengarry said.
The companies said that by 2006, courts had repeatedly held that property policies covered claims of "disease-causing agents" and ruled on "numerous occasions" that a property's loss of intended purpose created a physical loss.
The shopping complex owners said that Erie Insurance should be estopped from enforcing the virus exclusion because the exclusion was never discussed or negotiated with policyholders who did not get any premium reduction or any benefits from insurers adding the virus exclusion in the policies.
The suit said insurance companies like Erie Insurance "received the unilateral benefit of excluding coverage for risk while also receiving the same or even greater premium for the lesser coverage."
"In securing approval for the adoption of the virus exclusion by misrepresenting to the state regulators that the virus exclusion would not change the scope of coverage, defendant effectively narrowed the scope of the insuring agreement without a commensurate reduction in premiums charged," the companies said. "Defendant receives the benefit of an exclusion for which plaintiffs and similarly situated insureds received no bargain, reduction of premiums or any benefit whatsoever. "
Chestnut Hill and Glengarry are asking the court to declare that Erie Insurance cannot deny coverage by asserting virus exclusion and should cover its loss, as well as demanding damages to be determined in a jury trial as well as attorney fees.
Representatives for the parties could not be immediately reached for comment.
Counsel for Erie Insurance Could not be determined.
Chestnut Hill and Glengarry are represented by James R. Ronca, Sol H. Weiss and Gregory S. Spizer of Anapol Weiss.
The case is Chestnut Hill Complex Corp. et. al. v. Erie Insurance Exchange, case number 200800884, in The Court of Common Pleas of Philadelphia County.
--Editing by Michael Watanabe.
For a reprint of this article, please contact reprints@law360.com.
