Scores of insureds have sued their insurance carriers seeking coverage for business interruption losses stemming from the COVID-19 pandemic and related governmental closure orders. A vast majority have lost. Time and again, courts presiding over these cases have rejected them on the ground that there was no physical loss or damage to the insured’s property. In one Pennsylvania state court, that trend has changed.

In MacMilles, LLC d/b/a Grant Street Tavern v. Erie Insurance Exchange, Judge Christine Ward of the Court of Common Pleas of Allegheny County, Pennsylvania, recently awarded summary judgment to a tavern that was forced to close “[a]s a result of the spread of COVID-19 and the Governor’s orders.” Unlike other cases of this character, the court determined that MacMilles’ “loss of use of its property was both ‘direct’ and ‘physical’. The spread of COVID-19, and a desired limitation of the same, had a close logical, causal, and/or consequential relationship to the ways in which Plaintiff materially utilized its property and physical space.”

The Income Protection provision in the commercial general liability policy issued by Erie offered coverage for “direct physical ‘loss’ of or damage to Covered Property…caused by or resulting from a peril insured against.” The term “loss” was defined as the “direct and accidental loss of or damage to covered property.” Further, “Income Protection” was denoted as “loss of ‘income’ and/or ‘rental income’ you sustain due to partial or total ‘interruption of business’ resulting from ‘loss’ or damage to property…” “Interruption of business” was the period of time the applicable business was “partially or totally suspended.”

The court determined that the critical inquiry hinged on whether MacMilles had suffered “direct physical loss of or damage to its property.” The insurer, as insurers have done in courts across the country over the last 16 months, argued that “direct physical loss or damage” required a physical alteration or harm to the property itself. Demurring, plaintiff asserted that the operative phrase did not mandate a physical alteration of the property insofar as that loss of use of the property was also covered.

Recognizing that some courts had interpreted “‘direct physical loss of or damage to’ property to require some degree of physical alteration or harm to the property in order for coverage to attach, Judge Ward noted that such an interpretation conflated “direct physical loss of” and “direct physical…damage to”, and ignored the separate nature of these phrases, which were separated by the disjunctive “or.” Moreover, an interpretation not distinguishing these separate phrases would reduce some words in the policy to mere surplusage, and contradict the “vital principle of contract interpretation” that all words be given effect. Consequently, it was clear to Judge Ward that “due to the presence of … ‘or’”, “direct physical ‘loss’ of” meant something different than “direct physical …damage to.”

Turning next to the oft-cited Merriam-Webster Dictionary, the court determined that the ordinary meaning of “loss” included the act of losing possession and/or deprivation of property, rather than damage, destruction, or ruin to property. The distinction lied in the fact that “damage” could encompass all forms of harm to property, while “loss” could involve a deprivation of use of the property without any per se harm. The court also considered the meaning of “direct” which it saw as “‘proceeding from one point to another in time or space without deviation [and/or ] characterized by close logical, causal or consequential relationship’”; and, “physical”, which it defined as “of or relating to natural science…having a material existence…[and/or] perceptible…through the senses and subject to the laws of nature…’”

In granting summary judgment against the insurer, the court held that the tavern had indeed suffered a direct physical loss of use of the property absent any harm to the property itself. The spread of COVID-19 and the desire to stunt its proliferation had a causal/consequential relationship to the plaintiff’s ability to utilize its physical space. Moreover, it was COVID-19’s spread and related social distancing measures (with or without the Governor’s orders) that, according to the court, caused the tavern to “physically limit the use of property and the number of people who could inhabit physical buildings at any given time, if at all.”

This holding does not appear to be a mere parsing of words by some renegade court. Its reasoning, while in the clear minority of cases dealing with COVID-19 related business interruption insurance disputes, indicates that courts will continue to make coverage determinations based on the express terms of the specific contract of insurance at issue and applicable state law.