A Washington state court in The Board of Regents of the University of Washington v. Employers Insurance Company of Wausau, No. 22-2-15472-1, recently held that the University of Washington has made a plausible claim for coverage for losses sustained as the result of the outbreak of the COVID-19 pandemic under Washington’s “loss of functionality” test.

Background

In 2022, the University of Washington sued Employers Insurance Company of Wausau, alleging that the insurer failed to provide coverage under five policies it issued the University.

The insurer moved to dismiss the complaint, arguing that there was no coverage under the policies because the University’s property was not physically damaged.

Both parties cite to Hill & Stout, PLLC v. Mut. of Enumclaw Ins. Co., 200 Wash. 2d 208, 515 P.3d 525 (2022), a landmark case interpreting insurance policies as applied to claims arising out of the COVID-19 pandemic. In Hill & Stout, the Supreme Court of Washington held that there was no coverage under the policy for two dentists who sought to recover income due to a government order that prohibited nonemergency dental care. The dentists alleged they had suffered “direct physical loss of or damage to” their property as a result of the order.

In dicta, the court considered the possibility of other potentially covered claims under a “loss of functionality test.” Under this test, a plaintiff may recover losses in certain circumstances, including but not limited to, when there is (1) imminent damage to the property; (2) contamination with a problematic substance; (3) an event that physically prevented the use of the property or rendered it useless; or (4) a property that was rendered unsafe or uninhabitable because of a dangerous physical condition.

The loss of functionality test did not help the dentists in Hill & Stout because the court acknowledged that there “must be some physical effect on the property,” which had not occurred.

Washington State Court’s Analysis

In rejecting the insurer’s motion to dismiss the University’s complaint, the court differentiated the University from the dentists in Hill & Stout because the University alleged in detail how the SARS-CoV-2 virus can physically effect and transform both indoor environments and physical surfaces, causing physical loss and damage. To the same end, the court recognized that the University included extensive references to scientific data and related studies that outline the physical impact of COVID-19.

The court acknowledged that “[e]ven if invisible, or detectible only through magnification, the depicted effects on the air and hard surfaces” have a material existence.

Takeaways

The Board of Regents of the University of Washington decision is significant because the court distinguishes instances where the policyholder did not allege a physical basis for the alleged loss of functionality, as discussed in Hill & Stout, from other instances including the University’s pleading, where it is alleged that the actual presence of COVID-19 particles had a physical impact on the property that resulted in a loss of functionality.

The decision is also significant because it illustrates how a careful and thoughtful analysis of the alleged facts can make a critical difference in the outcome, even in the face of seemingly adverse high court authority. Until now, most courts have applied similar reasoning, but without affording an appropriate depth of analysis, leading to a homogenized body of caselaw that fails to honor specifically pled allegations and factual distinctions. If other courts would employ a similarly diligent analysis, we would not have the disparity that currently exists between COVID-19 business interruption decisions and the more than 60 years of nationwide precedent, where courts repeatedly found dangerous and noxious airborne substances to cause physical loss or damage sufficient to trigger coverage.