Pennsylvania Supreme Court finds no coverage for COVID-19 business interruption losses

In a long-awaited decision, the Pennsylvania Supreme Court ruled in favor of the insurance companies in two appeals involving the availability of business interruption insurance coverage for losses stemming from the COVID-19 pandemic.  The cases are Ungarean, in which the Supreme Court reversed the lower courts’ rulings finding coverage for COVID-19 related losses, and MacMiles, in which the Supreme Court affirmed the lower appellate court’s ruling that COVID-19 related losses were not covered.  The Court held that the insurers’ policies do not provide coverage for economic loss during the COVID-19 pandemic because the insureds did not sustain “direct physical loss of or damage to property.”

Writing only on Ungarean, in which the Superior Court had found in favor of the policyholder, Timothy A. Ungarean, DMD D/B/A/ Smile Savers Dentistry, PC (“Ungarean”), the Court held that “direct physical loss of or damage to property” unambiguously means 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).”  The Court determined that “a physical alteration to the property was a threshold requirement” for coverage to apply. On this basis, the Court held that the policyholder in  Ungarean was not entitled to coverage because the claimed economic losses were due to the government-imposed closure of his business which cannot constitute “direct physical loss of or damage to” any property.

The Court did not directly address whether the presence of COVID-19 at an insured’s property causes physical loss or damage. However, the Court’s interpretation of “direct physical loss of or damage to property” to require some physical alteration to the property, suggests that the mere presence of COVID-19 particles on covered property does not constitute physical loss or damage. In addition, the Court affirmed the lower appellate court’s  decision in the MacMiles case in which the court stated that the possible presence of COVID-19 on surfaces does not qualify as physical damage. In addition, in a footnote of its opinion, the Court stated that  there could be narrow circumstances where “loss of use” could constitute “physical loss.” For example, if the “loss of use” were caused by the presence of sources unnoticeable to the naked eye, an insured must demonstrate that the function of the property is nearly eliminated or destroyed or that the structure is made useless or uninhabitable. It is unlikely that insureds, many of whom continued to use their properties with precautions in place to prevent the transmission of COVID-19, could meet such a high standard.

The Court’s discussion of the precautions and changes many insureds implemented during the pandemic is another aspect of the Court’s decision that is favorable to insurers.  The Court rejected the insured’s argument that COVID-19 mitigation measures, such as installing partitions, handwashing stations or installing or renovating ventilation systems were covered “extra expense” to address physical loss or damage to property, because these measures do not constitute repairing, rebuilding or replacing the property The court stated, “[a]dding new installations that do not correct a physical attribute of the property does not constitute repairing, rebuilding, or replacing the existing property as a result of a physical loss or damage.”

The Court concluded in finding that its reasoning under the Business Income and Extra Expense Endorsements applied with equal force to coverage under the Civil Authority Endorsement.

These decisions are positive for insurers in the Commonwealth of Pennsylvania and in accord with the prevailing view of courts from jurisdictions around the country that pure economic loss cannot constitute “direct physical loss of or damage to” property under commercial property policies’ grant of coverage.