In another victory for policyholders, a Pennsylvania judge denied an insurer’s early attempt to avoid coverage for losses arising from the COVID-19 pandemic. Although the judge did not explain his reasoning, the denial is positive news for policyholders who are litigating whether COVID-19 causes “physical damage or loss” and whether so-called “virus” exclusions limit or bar coverage for pandemic-related losses.

Taps & Bourbon on Terrace LLC, a Philadelphia restaurant and bar, sought coverage for lost income and extra expenses incurred as a result of the pandemic. Their insurer Lloyd’s, London underwriters denied coverage on the grounds that Taps & Bourbon failed to allege “direct physical loss or damage” and because the policy contained an exclusion the insurer asserted as applicable to the claimed loss. The restaurant subsequently filed suit for breach of contract and bad faith.

Seeking a dismissal of all claims, Lloyd’s argued that the denial of coverage was proper because the claim was not covered under the policy.

Lloyd’s asserted the restaurant suffered no “direct physical loss or damage,” as required to trigger coverage and even if there was physical loss or damage, the policy’s virus exclusion applies. The virus exclusion states that the insurer will not cover “loss or damage caused by or resulting from any virus.”

Taps & Bourbon responded that the “direct physical loss or damage” was clear. In support, the restaurant cited to Third Circuit precedent defining “physical loss” as a loss that results “immediately and proximately from an event.” Here, the complaint alleged that the premises were immediately closed and all business operations ceased as a result of the civil authority orders issued in response to COVID-19. A direct physical loss, according to the restaurant.

Taps & Bourbon questioned why the policy would even contain a virus exclusion if a virus can’t cause physical loss. Furthermore, the restaurant argued the virus exclusion should not apply in any case because it is ambiguous and was removed from the policy by an endorsement that deleted all exclusions unless specifically excepted.  The virus exclusion was not among those excepted from the exclusion.

In their respective motions, the two parties also disputed the applicability of the civil authority endorsement and the food contamination endorsement.  Lloyd’s claimed the civil authority provision does not apply because the restaurant failed to identify “damage to the property” and access to the premises was not prohibited, two requirements that Lloyds argued were required to establish coverage. Lloyd’s also argued that the food contamination provision is inapplicable because there was no food poisoning alleged.  The court provided no substantive insight or reasoning for its denial of Lloyd’s motion. The court noted, however, that the arguments raised factual issues that could not be resolved on a preliminary motion.  The decision suggests, therefore, that courts will refrain from rendering quick decisions on COVID-19 business interruption claims based on policy wording alone, especially where the policy language chosen by the insurers is unclear or susceptible to yielding different outcomes based on the specific facts at issue.  Nonetheless, the decision is a step in the right direction for policyholders seeking coverage under myriad variations of business interruption insurance policies for the catastrophic financial losses suffered due to the COVID-19 pandemic.  Policyholders should be reminded to look at their policy wording carefully and not assume that one decision based on different policy language might somehow dictate the availability of coverage under other, different wording.

This post was also written by Casey L. Coffey.