By Eli Flesch

Law360 (May 28, 2021, 8:09 PM EDT) -- In a major loss for hundreds of businesses in western Washington state, a federal judge found Friday that pandemic losses they sustained are not covered by their policies because they didn't show the virus caused physical loss or damage.

U.S. District Judge Barbara J. Rothstein said provisions covering physical loss in the businesses' all-risk policies did not apply to the loss of access to a property. The economic damage wrought by the pandemic and government orders restricting the use of property do not warrant coverage under the property insurance the businesses had purchased, she said. A property must be physically altered for coverage, she added.

"In its common usage, 'loss' means that the alleged peril must set in motion events which cause the inability to physically own or manipulate the property," Judge Rothstein said. "This reasoning aligns with most of the federal courts who have confronted this question and held that 'physical loss of' requires tangible, material, discernable or corporeal dispossession of the covered property, which COVID-19 does not cause."

She boosted the findings of courts that have called COVID-19, the respiratory ailment caused by the coronavirus, a detriment to human health rather than to property.

Some of the numerous insurance companies named in the suit are Travelers Casualty Insurance Co. of America, Ohio Casualty Insurance Co., Hartford Casualty Insurance Co., and Aspen American Insurance Co.

Ian Birk, one of the lead attorneys in the suit, and a trial attorney at Keller Rohrback LLP, told Law360 on Friday that the firm is currently reading and analyzing the decision, and consulting about it with its clients and the other involved counsel.

The decision will affect businesses large and small — restaurants, barbershops and law firms were all included in the consolidated case before Judge Rothstein. The Seattle Symphony Orchestra was among the policyholders seeking a more favorable ruling.

Also included were a group of dental practices, which had asked Judge Rothstein in February to send to the state supreme court the question of whether the physical loss required for coverage under their policies could include loss of use of a property.

But in a decision two months later, she said she had all the tools necessary to decide the case. Kicking the question out to the state supreme court would only result in needless delays and costs, she added.

"The proposed questions, while new, substantial and not yet addressed by the Washington Supreme Court, do not present such unique and exceptional issues as to warrant certification," Judge Rothstein said at the time.

In Friday's 82-page decision, she noted that two Washington state trial courts have ruled in favor of coverage. Those courts found that the meaning of direct physical loss or damage is at least ambiguous in the context of pandemic losses — a ruling that favored coverage for the involved businesses, a dental practice and a brewery.

"Ultimately there will have to be a reconciliation by an appellate court of conflicting rulings at the trial court level," Birk said on Friday of the discrepancy. "With this ruling there is now a split of trial court rulings in Washington state."

The state rulings have been generally more favorable to policyholders. Earlier this month, a group of Ohio universities including Kenyon College and Denison University refiled their coronavirus coverage suit against underwriters at Lloyd's of London in Washington state court, joining a group of 60 other colleges and universities.

In another bid for coverage, the owner of LA Fitness brought its insurers to Washington state court in two consolidated cases, claiming $950 million in covered losses after 1,200 of its employees tested positive for COVID-19.

On Friday, Judge Rothstein noted that several businesses tried to distinguish their cases by alleging the coronavirus was actually present at their properties — through an infected person, for example — but she found those assertions unpersuasive. They were immaterial, she said, because the virus still caused no physical harm to property.

Counsel for the insurers did not immediately respond to requests for comment.

The businesses are represented by Amy C. Williams-Derry, Ian S. Birk, Gretchen Freeman Cappio, Irene Margret Hecht and Lynn Lincoln Sarko of Keller Rohrback LLP.

The insurers are represented by Stephen E Goldman and Wystan M. Ackerman of Robinson & Cole LLP.

The cases include Aspen Lodging Group LLC v. Affiliated FM Insurance Co., case number 20-cv-01038; Marler v. Aspen American Insurance Co., case number 20-cv-00616; McCulloch v. Valley Forge Insurance Co., case number 20-cv-00809; Vita Coffee LLC v. Fireman's Fund Insurance Co., case number 20-cv-01079; and Caballero v. Massachusetts Bay Insurance Co., case number 20-cv-05437, among others. All the cases are in the U.S. District Court for the Western District of Washington.

--Additional reporting by Shawn Rice and Daphne Zhang. Editing by Leah Bennett.

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