By Anthony Miscioscia and Timothy Carroll

Law360 (April 23, 2020, 5:37 PM EDT )

Anthony Miscioscia

Timothy Carroll

"These are, safe to say, uncertain times," Siobhan Roberts, a science journalist, recently wrote for the New York Times, referencing the COVID-19 pandemic. And yet, while the times may be uncertain, what the pandemic has not fundamentally altered are certain well-established legal standards governing first-party claims for business interruption losses.

That has not stopped policyholder attorneys from advocating creative ways around those standards. On April 16, Law360 published an article by one such advocate, who discussed his opinion about the impact of the Pennsylvania Supreme Court's recent — and rare — King's Bench opinion in Friends of Devito v. Wolf,[1] on COVID-19-related business interruption claims.

In short, the author believes policyholders have gained a clear advantage following the Supreme Court's opinion. Friends of DeVito, however, is a case that had absolutely nothing to do with insurance, let alone first-party business interruption insurance. The decision should provide no support to policyholders seeking to prove they are entitled to coverage for business interruption loss claims.

Gov. Tom Wolf's Proclamation And Order: Protecting Against "Loss Of Life," Not Property Damage

In Friends of DeVito, the Pennsylvania Supreme Court examined Gov. Tom Wolf's COVID-19-related proclamation and executive order, which forces nonessential businesses across the commonwealth to remain closed until conditions improve. Notably, neither the proclamation nor the order referenced property damage, or the threat of it, as a justification for either instrument.

Wolf's proclamation, as quoted by the Supreme Court in Friends of DeVito, was based on the pandemic's effect on the health of citizens — not on their tangible property. "[T]he possible increased threat from COVID-19," the proclamation was quoted as stating, "constitutes a threat of imminent disaster to the health of the citizens of the Commonwealth[.]" The proclamation, as quoted, also stated that "COVID-19 is a disease capable of causing severe symptoms or loss of life, particularly to older populations and those individuals with pre- existing conditions[.]"

The Supreme Court in Friends of DeVito did not quote any part of Wolf's proclamation referencing property damage. Nor could it have done so, as no such reference in the proclamation exists. Wolf's executive order, issued about two weeks later, is likewise devoid of any reference to property damage. The order does, however, reference the health secretary's authority under Pennsylvania statutes to "determine and employ the most efficient and practical means for the prevention and suppression of disease."

As Wolf's proclamation and order focused exclusively on the "health of the citizens of the Commonwealth," it just simply does not address the question whether COVID-19 has resulted in property damage to anyone, let alone to any particular premises.

Pa. Supreme Court: COVID-19 Inflicts "Hardship, Suffering Or Possible Loss Of Life," Not Damage To Property

The Supreme Court's opinion in Friends of DeVito likewise fails to provide the clear advantage policyholders may believe it provides in the context of business interruption loss claims. Like the governor's proclamation and executive order, the Supreme Court's opinion focused on the pandemic's effects on people, not property.

The petitioners in Friends of DeVito — several businesses forced to close as a result of Wolf's executive order — sought the extraordinary relief of being excused from complying with the order to remain closed to help prevent the spread of COVID-19. Among other things, they argued that "the COVID-19 pandemic is not a natural disaster as defined by the Emergency Code,"[2] and so Wolf lacked authority to issue the executive order.

The Emergency Code defines "natural disaster" as "[a]ny hurricane, tornado, storm, flood, high water, wind-driven water, tidal wave, earthquake, landslide, mudslide, snowstorm, drought, fire, explosion or other catastrophe which results in substantial damage to property, hardship, suffering or possible loss of life."[3]

The Supreme Court rejected the petitioners' argument, and upheld the governor's authority to issue the order closing their businesses, explaining that "[i]t is beyond dispute that the COVID-19 pandemic is unquestionably a catastrophe that 'results in ... hardship, suffering or possible loss of life.'"[4]

Notably, the Supreme Court purposefully omitted, through its use of an ellipsis in the prior quote, the phrase "substantial damage to property" when describing the pandemic as a natural disaster.[5] The Supreme Court's omission of these four words speaks volumes about what the court did, and importantly did not, hold.

The Supreme Court only found that COVID-19 is a catastrophe resulting in injury to persons. It made no such finding regarding property damage. That is not surprising. Wolf did not issue his executive order based on a threat of property damage; he issued the order in part to activate executive powers to contain the spread of disease.

The Supreme Court did observe that COVID-19 "can live on surfaces for up to four days and can remain in the air within confined areas and structures," citing a March 24 publication by the National Institutes of Health. However, the Supreme Court also stated that "COVID-19 does not spread because the virus is 'at' a particular location."

Instead, the court explained, "it spreads because of person-to-person contact, as it has an incubation period of up to fourteen days and that one in four carriers of the virus are asymptomatic." Thus, from start to finish, the court's discussion of COVID-19 in Friends of DeVito focused on what Wolf's executive order focused on — the virus's effects on human health, and not on any damage to property.

Friends of DeVito Offers No Advantage At All

Obviously, Friends of Devito was not an insurance coverage case. And, neither the case nor its subject, Gov. Wolf's executive order, turned on whether COVID-19 causes property damage. Nevertheless, policyholder advocates, like the author in Law360's April 16 article, see Friends of DeVito as providing an advantage to proving a physical loss of or damage to a scheduled or nearby premises, for purposes of accessing coverage for business interruption losses.

It was said, for example, that Friends of DeVito "supports at least two critical arguments supporting the position that [shuttered] businesses have experienced losses caused by covered property damage." Those arguments, paraphrased, are that (1) the COVID-19 pandemic is indistinguishable from other covered casualty events; and (2) actual COVID-19 contamination at an insured premises is not required to trigger business interruption coverage.

Friends of DeVito does not support either of those novel arguments. And the reasons go beyond the fact that insurance coverage was not even remotely at issue in the case.

The argument that the COVID-19 pandemic is indistinguishable from, say, a hurricane is misleading. The Supreme Court in Friends of DeVito did classify the pandemic as a natural disaster, according to the Emergency Code's description, but only for purposes of determining whether Wolf had authority to issue his executive order.

The court did not say the pandemic and a hurricane are indistinguishable because they both cause, or have the propensity of causing, property damage. As discussed above, the court omitted the phrase "substantial damage to property" when it concluded, based on the definition of "natural disaster," that the COVID-19 pandemic qualifies as such.

Even if the Supreme Court concluded that COVID-19 causes substantial damage to property, that conclusion should have no relevance in a dispute about coverage for business interruption losses under a policy that requires a showing of physical loss of or damage to the policyholder's (or a nearby) premises.

Courts have rejected requests by policyholders for the court to take judicial notice of a proclamation or order as evidence that the policyholder sustained a physical loss of or damage to a premises.[4] A governor's proclamation or executive order, like those at issue in Friends of DeVito, generally are not issued to address damage to one particular premises.[5] Policyholders cannot use such orders to satisfy their individualized burden of proving their premises (or a nearby premises) sustained physical loss or damage, for purposes of proving a business interruption loss claim.

The policyholder advocate also wrote that "[i]f the COVID-19 pandemic is sufficiently similar to an earthquake, tornado or fire so as to constitute a natural disaster triggering emergency executive powers, it must likewise be sufficiently similar to these occurrences to trigger coverage under insurance policies issued with precisely these events in mind."

"Must" trigger coverage? Even if that hyperbole were true, there is no debating that, even in instances of an earthquake, tornado or fire, an insured must still demonstrate that its own premises (or a nearby premises) actually sustained physical loss or damage to prove a business interruption loss claim. It is not enough that somewhere else in the state someone else suffered physical loss or damage.

For claims based on COVID-19, however, many policyholders and their advocates argue for coverage without even attempting to present any evidence of physical loss of or damage to the insured's or nearby premises. They cite medical or academic studies about what has been observed in other settings, but nothing about what is (or is not) actually present at the insured's own location.

In the coverage fights to come, a court's coverage determination should not be based on whether a governor has issued an order based on labeling the pandemic a natural disaster. Nor should it be based on a speculative or unproven assumption about COVID-19's purported presence inside a building.[6]

Instead, as with all other business interruption loss claims, it should and must be based on a presentation of sufficient evidence to prove a policy's requirement for directly physical loss of or damage to a premises, which is not otherwise excluded by a virus exclusion or other applicable policy provision. "In short," as one recent court stated, "the policy language controls."[7]

That access to insurance coverage for business interruption losses is tied to a policyholder's successful presentation of sufficient proof of damage to a premises renders the author's second argument unsustainable as a matter of law.

"The [Friends of DeVito] ruling," the author wrote on April 16, "undermines the argument that the actual presence of the virus at an insured's property is dispositive as to whether the insured's loss has been caused by physical property damage." But if, as even policyholders should concede, a business interruption policy requires physical damage to a premises, and COVID-19 is the purported basis for that alleged damage, the virus must be present at or on the premises.

The author's own discussion of pre-COVID-19 case law involving "ammonia, asbestos or other agents that do not cause clearly observable structural damage," supports the conclusion that COVID-19 must be present if a business interruption claim is predicated on loss or damage caused by the virus.[8]

If contamination by the virus is the needle policyholders wish to thread to prove direct physical loss of or damage to an insured or nearby premises, then contamination must be proven, not presumed, and certainly cannot be regarded as unnecessary to obtain business interruption coverage.[9] Nothing in Friends of DeVito removed that burden policyholders bear to obtain business interruption coverage.

The COVID-19 pandemic makes many aspects of life for individuals and businesses uncertain. The rules governing first-party coverage for business interruption losses, which have survived all manner of disasters, are not uncertain.

---

Anthony L. Miscioscia is a partner and Timothy A. Carroll is an associate at White and Williams LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Friends of Devito v. Wolf , 2020 Pa. LEXIS 1987 (Pa. April 13, 2020)

[2] See Friends of DeVito, 2020 Pa. LEXIS 1987, at *28 (quoting 35 Pa.C.S. § 7102).

[3] Id., at *28 (quoting 35 Pa.C.S. § 7102).

[4] Id., at *30.

[5] Id.

[4] See Easy Sportswear, Inc. v. Am. Econ. Ins. Co. , 2008 U.S. Dist. LEXIS 51402, at *1-4 (W.D. Pa. July 1, 2008) (denying motion in limine requesting that court take judicial notice of Pennsylvania Governor's Office "Proclamation of Disaster Emergency" regarding Hurricane Ivan in 2004, finding that the Proclamation "is not a source 'whose accuracy cannot reasonably be questioned' regarding the existence of a storm or its damage," and therefore "declin[ing] to take judicial notice of purported facts espoused therein").

[5] See Friends of Devito, 2020 Pa. LEXIS 1987, at *6 (quoting order of the governor of the commonwealth of Pennsylvania regarding the closure of all businesses that are not life sustaining, Mar. 19, 2020) ("WHEREAS, as of March 6, 2020, I proclaimed the existence of a disaster emergency throughout the Commonwealth pursuant to 35 Pa. C.S. § 7301(c). . . .") (emphasis added).

[6] See Gethsemane FBH Church of God v. Nationwide Ins. Co. , 2020 U.S. Dist. LEXIS 60780, at *4-7 (E.D. Pa. Apr. 7, 2020) ("Gethsemane failed to produce any evidence, beyond mere speculation, that the roof's collapse was caused by a wind and rain event. Gethsemane thus fails to make a factual showing sufficient to establish that the cause of the roof's collapse was a covered event under the policy an element essential to Gethsemane's case and on which it would bear the burden of proof at trial. ... Therefore, there exists no genuine issue as to any material fact, and the Court will grant Nationwide's motion for summary judgment on Gethsemane's claim for breach of contract.").

[7] Bedlion v. Travelers Indem. Co. of Am. , 2020 U.S. Dist. LEXIS 48395, at *4 (N.D. Ohio Mar. 20, 2020).

[8] See, e.g., Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am. , 2014 U.S. Dist. LEXIS 165232, at *5 (D.N.J. Nov. 25, 2014) ("Despite the parties' argument about how long it took to dissipate the ammonia, Travelers' statements about the remediation acknowledge that an unsafe amount of ammonia was released into the building, that it remained present in the building for some amount of time, and that it was remediated.").

[9] See, e.g., Port Auth. v. Affiliated FM Ins. Co. , 311 F.3d 226, 236 (3d Cir. 2002) ("We agree with the District Court's articulation of the proper standard for 'physical loss or damage' to a structure caused by asbestos contamination. The requirement that the contamination reach such a level in order to come within coverage limitation establishes a reasonable and realistic standard for identifying physical loss or damage. . . . We thus find ourselves in agreement with the District Court's ruling that plaintiffs' inability 'to produce evidence concerning the manifestation of an imminent threat of asbestos contamination' forecloses the existence of a viable claim. . . .").

For a reprint of this article, please contact reprints@law360.com.