Reprinted with permission from the October 15, 2024 edition of The Legal Intelligencer. © 2024 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or asset-and-logo-licensing@alm.com.
The Pennsylvania Supreme Court recently rendered its eagerly awaited decision in Ungarean v. CNA et al.,[1] declaring that losses resulting from Covid-related governmental closure orders were not covered by business interruption insurance. In the wake of that decision, the question remains as to whether the war over insurance coverage for Covid-related losses has been lost by policyholders in Pennsylvania or if Ungarean represents only a single battle in a longer, still-undecided war. A careful reading of Ungurean reveals the limited scope of its ruling.
The policyholders alleged that the governmental orders requiring the closure of their businesses in response to the covid pandemic resulted in a loss of use of their properties and resulting lost income. Each alleged this amounted to “direct physical loss of or damage to” covered property and, therefore, fell within the policies’ coverage grant. Crucially, however, as the Supreme Court took pains to point out, the policyholders failed to allege that the coronavirus was actually present at or on their properties, or how the virus may have affected their properties. They instead relied solely on the fact that they were ordered to close.
In upholding the insurers denial of coverage, the Court concluded that for coverage to exist under the all-risk commercial property insurance policies at issue, there must be either “(1) a physical disappearance, partial or complete deterioration, or absence of a physical capability or function of the property (loss), or (2) a physical harm or injury to the property (damage).”[2] Notably, however, the Court did not conclude that, as a matter of fact (or law), the coronavirus’ presence at or on property can never result in “direct physical loss of or damage to” property. That question is still open. Also, although the Court made clear that new modifications to existing property to make it safer do not constitute the type of repair or restoration work indicative of a physical alteration of property, it did not further expound on what activity may be enough to be a restoration or repair.
Furthermore, the Court declined to rule on whether various exclusions in the relevant policies applied. Accordingly, the question remains open under Pennsylvania law whether coverage under an all-risk property policy may exist in circumstances where a policyholder alleges, and can ultimately prove, that the coronavirus was present at or on Covered Property in such a quantity or condition that it caused the “absence of a physical capability or function of the property.”[3]
In this way, the Court’s holding is consistent with the Third Circuit’s recent ruling in Wilson v. USI Services, Inc.[4] In Wilson, the Third Circuit held that to establish coverage for covid losses, the insured businesses at issue “must show that their operations were suspended because of ‘direct physical loss of or damage to’ the [covered] properties.”[5] Correctly predicting that the Pennsylvania Supreme Court would follow the Third Circuit’s earlier ruling in Port Authority of New York and New Jersey v. Affiliated FM Insurance Company,[6] Wilson held that the “loss of use of a property’s intended business purpose is not a physical loss of property covered by the businesses’ insurance policies” unless it is tethered to the “physical condition of the premises.”[7]
The Third Circuit explained in Wilson that coverage may exist if an insured can “show that the functionalities of their properties were nearly eliminated or destroyed, that the structures were made useless or uninhabitable, or that there was an imminent risk of either of those things happening.”[8] For example, there may be direct physical loss of or damage to property “[w]hen the presence of large quantities of asbestos in the air of a building is such as to make the structure uninhabitable and unusable, then there has been a distinct loss to its owner.”[9]
The Wilson court also confirmed that the actual or suspected presence of noxious substances, like ammonia or gasoline, can result in physical loss when “the substance was present to such a degree that it became physically dangerous to be inside of the building, rendering the building useless until there was some kind of remediation.”[10] Thus, “in cases where sources unnoticeable to the naked eye – here, the coronavirus and resultant closure orders – have allegedly reduced the use of the property to a substantial degree….an insured will have lost tangible possession of property sufficient to constitute physical loss or damage.”[11]
The policyholders in Wilson, like those in Ungarean, never “alleged that the coronavirus was present in its property in such a form or quantity as to make the property dangerous and uninhabitable.”[12] Instead, they alleged that various closure orders deprived them of the use of their property.[13] Thus, the Wilson court held that they were not entitled to coverage.[14]
Although the Pennsylvania Supreme Court was sure to state in Ungarean that it was not influenced by other courts’ decisions, it nevertheless favorably cited the Third Circuit’s reasoning in Wilson, and Ungarean’s ultimate holding is similar regarding direct physical loss: “There must be either (1) a physical disappearance, partial or complete deterioration, or absence of a physical capability or function of the property (loss), or (2) a physical harm or injury to the property (damage)”[15] – and an allegation of loss due solely to government closure orders is not enough to establish either.
It would seem, therefore, that the Pennsylvania Supreme Court has not written off all possibility of business interruption coverage for losses arising from the covid pandemic. To be sure, if policyholders are to hope for a recovery, they must allege, and ultimately prove, that the coronavirus was present (or imminently present) at their property, that some kind of remedial action or repair was needed to return the property to its pre-loss condition, and its presence made the property unusable or dangerous.
Finally, although the Court declined to address policy exclusions, Policyholders still hoping to recover for covid losses must be able to rebut insurers’ arguments that various exclusions bar coverage, such as a “virus” or “contamination” exclusion. The Ungarean decision, in addition to the Wilson decision and the New Jersey Supreme Court’s similar decision in AC Ocean Walk, LLC v. American Guar. & Liab. Ins. Co.[16], could raise a question about the enforceability of virus-related exclusions.
In the end, only time will tell if the death knell for covid insurance claims has sounded. But Ungarean does not seem to be it.
[1] Docket No. 10 WAP 2023 and No. 11 WAP 2023
[2] Ungarean v. CAN et al. (Docket No. 10 WAP 2023 and No. 11 WAP 2023), at 21.
[3] Id.
[4] 57 F. 4th 131 (3d Cir. 2023) (interpreting both Pennsylvania and New Jersey law in a consolidated appeal).
[5] Id. at 141.
[6] 311 F.3d 226 (3d Cir. 2002).
[7] Id. at 138, 143.
[8] Id. at 142.
[9] Port Authority, 311 F.3d at 236.
[10] Id. at 145.
[11] Id. at 142.
[12] Id. at 146.
[13] Id.
[14] Id. at 147-48.
[15] Ungarean v. CAN et al. (Docket No. 10 WAP 2023 and No. 11 WAP 2023), at 21.
[16] 256 N.J. 294, 319 n.4 (2024).
