In a published decision filed March 7, 2022, the U.S. Court of Appeals for the Fourth Circuit in Uncork and Create LLC v. The Cincinnati Insurance Company, affirmed the U.S. District Court for the Southern District of West Virginia’s judgment dismissing the case, holding that unambiguous terms of an insurance policy did not permit businesses to recover for loss of income resulting from the COVID-19 pandemic.

In March 2020, Uncork and Create LLC (Uncork) operated two business locations in West Virginia.  However, due to the emergence of COVID-19, the Governor declared a state of emergency and issued an executive order requiring non-essential businesses in West Virginia to temporarily cease operations.  In compliance, Uncork closed its two locations and suffered a substantial loss of business income.  One location reopened, but the other remained permanently closed.  Uncork filed a claim with its insurer under its commercial property insurance policy for its lost business income, but the claim was denied because there was no evidence of “direct physical loss or damage” to Uncork’s property, as required by the policy.  Uncork filed a class action with similarly situated businesses, arguing that the loss of use and access to its business satisfied the policy language.  The District Court granted the insurer’s motion to dismiss, holding that neither the closure nor COVID-19 caused “physical loss or physical damage” under the terms of the policy.  Uncork appealed.

On appeal, the Fourth Circuit affirmed the District Court, concluding that the policy terms are unambiguous and supported by West Virginia law.  When considering the plain meaning of “physical loss” or “physical damage” as used in the policy, the terms relate to natural or material things in the state of being destroyed or placed beyond recovery (destruction, ruin).  Therefore, the need to repair, rebuild, or replace the property is a pre-condition for coverage of lost business income and other expenses.  Any other meaning that does not require material alteration to the property would render the terms and pre-conditions meaningless.  Further, the Court recognized that the West Virginia case of Murray v. State Farm Fire & Casualty Company required coverage for physical loss when there was a present or imminent threat of material damage, which was not present at Uncork’s locations.  Uncork’s “lost” access to its property was limited to the number of individuals working in the space and depended on whether members of the public were invited into the space.  Importantly, the property did not suffer material harm or destruction because no repairs or replacements were needed in order to use the property as intended.  Because of this, Uncork’s closure, due to circumstances surrounding COVID-19, was not covered under its policy, and the Court affirmed the District Court’s dismissal of its claim for coverage.