Same Virus, Different Outcomes

• Published date: 27 August 2021
• Subject Matter: Insurance, Coronavirus (COVID-19), Insurance Laws and Products, Operational Impacts and Strategy
• Law Firm: Mound Cotton Wollan & Greengrass
• Author: Ms Kyla Thornton

State and federal courts across the country are grappling with insurance coverage litigation, as insureds who suffered business losses due to government-mandated shutdowns look to their property insurers for relief.

These cases present the following key issue for courts: does the alleged presence of the COVID-19 virus on property constitute physical damage to that property?

On January 14, 2021, the U.S. District Court for the Eastern District of Pennsylvania found that the presence of COVID-19 on property does not constitute property damage.

In Independence Restaurant Group v. Certain Underwriters at Lloyd's, London, Independent Restaurant Group, the owner/operator of Independence Beer Garden in Philadelphia, alleged that it was unable to operate its business as a result of government shutdown orders.¹

IRG had a policy with Lloyd's providing that Lloyd's would pay for direct physical loss or damage to property caused by a covered cause of loss. IRG claimed that the presence of COVID-19 on its property caused physical damage and that the virus remained present in various forms for certain periods of time, e.g., in airborne aerosols for up to three hours, on certain surfaces for between four hours and three days, and on fomites (objects or materials that are likely to carry infection) for up to 28 days.²

Lloyd's moved to dismiss the complaint, arguing that there was no physical loss or damage to the property from a covered cause of loss.³ IRG opposed, contending that "direct physical loss of ... property" is different from "direct physical ... damage to" property, and that the former includes "direct physical loss of use of ... property." According to IRG, its loss of use of the restaurant was covered.⁴

The court was guided by Port Authority of New York & New Jersey v. Affiliated FM Insurance Company, 311 F.3d 226 (3d Cir. 2002). There, in determining whether the presence of asbestos in a building constituted "direct physical loss or damage," the court held that "physical damage to property means distinct, demonstrable, and physical alteration of its structure."⁵ According to the court, damage by sources unnoticeable to the naked eye must "meet a higher threshold" than "typical examples of physical damage from an outside source that may demonstrably alter the components of a building."⁶ The Third Circuit held that the proper standard for physical loss or damage is one that triggers coverage "only if an actual release of asbestos fibers from asbestos containing materials has resulted in contamination of the property such that its function is nearly eliminated or destroyed, or the structure is made useless or uninhabitable...."⁷

Finding this precedent instructive...