The United States District Court for the Eastern District of Pennsylvania, in Chester County Sports Arena v. Cincinnati Specialty Underwriters Ins. Co., No.: 20-CV-02021-MMB (E.D. Pa. March 30, 2021), determined insurance coverage was unavailable to several Pennsylvania businesses affected by the Covid 19 pandemic.
The Plaintiffs, which comprised three Pennsylvania small businesses, held “all-risk” insurance policies issued by Cincinnati that included coverage extensions for Business Income, Extended Business Income, Extra Expense and a Civil Authority provision. After suspending their operations because of government-ordered restrictions aimed at preventing exposure to the novel coronavirus pandemic, which closed a great deal of commerce in the United States, Plaintiffs each filed a claim under their policies with Cincinnati. All the claims were denied. The Plaintiffs alleged they experienced a “Covered Cause of Loss” due to the government’s Closure Orders, which “operates as a blockade that prevents employees and patrons from entering and operating the business for its intended purpose.” Plaintiffs allege this renders Cincinnati’s denial of coverage improper.
The policies and their extensions obligated Cincinnati to pay the insured for the loss of business income sustained during the suspension of operations because of a “Covered Cause of Loss.” The policies’ general coverage provision reads:
We will pay for the direct “loss” to Covered Property at the ‘premises’ caused by or resulting from any Covered Cause of Loss.
The Business Income provision stated:
We will pay for the actual loss of “Business Income” and “Rental Value” you sustain due to the necessary “suspension” of your “operations” during the “period of restoration.” The “suspension” must be caused by direct “loss” to property at a “premises” caused by or resulting from any Covered Cause of Loss.
The Extended Business Income provision stated:
For “Business Income” other than “Rental Value,” if the necessary “suspension” of your “operations” produces a “Business Income” or Extra Expense “loss” payable under this Coverage Part, we will pay for the actual loss of “Business Income” you sustain and Extra Expense you incur during the [relevant period.]
. . .
Loss of “Business Income” must be caused by direct “loss” at the “premises” caused by or resulting from any Covered Cause of Loss.
The Extra Expense provision stated:
We will pay Extra Expense you sustain during the “period of restoration.” Extra Expense means necessary expenses you sustain . . . during the “period of restoration” that you would not have sustained if there had been no direct “loss” to property caused by or resulting from a Covered Cause of Loss.
The policies also include a Civil Authority provision:
When a Covered Cause of Loss causes damage to property other than Covered Property at a “premises,” we will pay for the actual loss of “Business Income” and necessary Extra Expense you sustain caused by action of civil authority that prohibits access to the “premises”, provided that both of the following apply:
(a) Access to the area immediately surrounding the damaged property is
prohibited by civil authority as a result of the damage; and
(b) The action of civil authority is taken in response to dangerous physical
conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.
Finally, two key terms in the policies were explicitly defined:
Covered Cause of Loss means direct “loss” unless the “loss” is excluded or limited in this Coverage Part.
“Loss” means accidental physical loss or accidental physical damage.
The Court noted that neither the Pennsylvania Supreme Court nor the Third Circuit Court of Appeals had yet reviewed the issue of whether government-ordered restrictions in response to COVID-19 constitute a direct physical loss to property. However, there were several cases in Pennsylvania and in other states that addressed this issue with different outcomes.
This Court held that clear and unambiguous terms (like “direct physical loss”) must be given their plain meaning, and when there is no alteration to a physical structure, Third
Circuit precedent leaned in the direction of finding no physical loss. See Port Auth. of New York and New Jersey v. Affiliated FM Ins. Co., 311 F.3d at 235–36. The Court explained that a contrary holding would require expanding “direct physical loss” beyond its plain meaning to encompass purely economic loss. Therefore, the Court determined that the Plaintiffs did not suffer a “Covered Cause of Loss” fails.