;)
October 3rd, 2024
In Ungarean v. CNA, No. 11 WAP 2023 (Pa. September 26, 2024), the Pennsylvania Supreme Court found in favor of CNA Insurance and against a class of business owners who believed they were entitled to insurance benefits for losses sustained due to the Covid-19 pandemic, and Pennsylvania’s non-essential business shut down in March 2020.
Ungarean owned and operated Smile Savers Dentistry, PC (Covered Properties). He purchased a commercial property insurance policy from CNA that provided coverage for certain business- and property-related losses of his dental practice. In March 2020, due to the COVID-19 pandemic, Pennsylvania’s governor directed all non-essential businesses to suspend business operations (Shutdown). Except for emergency dental procedures, Ungarean closed his dental practice, which he claims caused a significant loss in income, the furloughing of employees, and other harmful consequences. Ungarean filed a claim with CNA pursuant to the CNA Policy to recoup those losses. CNA denied coverage on the basis that the Covered Properties did not suffer any physical damage or harm.
Ungarean filed a class action complaint, seeking a declaration that the CNA Policy—through the Business Income and Extra Expense Endorsement and the Civil Authority Endorsement—covered his pandemic-related business losses. Ungarean contended that “direct physical loss of . . . property” is not limited to the physical alteration of or damage to the Covered Properties but also includes the loss of use of the Covered Properties. CNA submitted that “direct physical loss of or damage to” the Covered Properties required the physical alteration of or harm thereto.
Relative to the Business Income and Extra Expense Endorsement, the trial court concluded that Ungarean’s loss of use of the Covered Properties was both “direct” and “physical” because Covid-19 and the Shutdown had a close logical and consequential relationship to the ways in which Ungarean materially utilized the Covered Properties and physical space. Thus, contrary to CNA’s contention that Ungarean merely suffered economic losses, the trial court reasoned that any economic losses were secondary to Ungarean’s physical loss of use of the Covered Properties.
Relative to the Civil Authority Endorsement of the CNA Policy, which provides, in pertinent part:
When the Declarations show that you have coverage for Business Income and Extra Expense, you may extend that insurance to apply to the actual loss of Business Income you sustain and reasonable and necessary Extra Expense you incur caused by action of civil authority that prohibits access to the described premises. The civil authority action must be due to direct physical loss of or damage to property at locations other than the described premises caused by or resulting from a Covered Cause of Loss.
CNA contended that the provision did not apply because the Shutdown did not limit Ungarean’s access to the Covered Properties entirely because Ungarean was still able to conduct emergency procedures. The trial court applied its same analysis concerning the Business Income and Extra Expense Endorsement to conclude that Ungarean had established “direct physical loss of . . . property” as expressed in the Civil Authority Endorsement. It then rejected CNA’s contention concerning prohibited access and concluded that the Civil Authority Endorsement likewise afforded Ungarean coverage.
CNA sought to deny Ungarean coverage under the CNA Policy based on the following exclusions: (1) Contamination Exclusion; (2) Fungi, Wet Rot, Dry Rot, and Microbes Exclusion (Microbe Exclusion); (3) Consequential Loss Exclusion; (4) Acts or Decisions Exclusion; and (5) Ordinance or Law Exclusion. The trial court, however, concluded that none of the exclusions applied.
On appeal, the Superior Court affirmed the trial court’s decision.
The Supreme Court referred to Black’s Law Dictionary for the definition of each word in the policy term “direct physical loss of or damage to,” and concluded that 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). The Court further reasoned that its interpretation was also supported by the “period of restoration” language in the Business Income and Extra Expense Endorsement, which provides that CNA will cover the loss of income “due to the necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration’” as a result of “physical loss of or damage to” the subject property. For those reasons, the Supreme Court determined that Ungarean was not entitled to insurance coverage under the plain and unambiguous language of the CNA Policy because the Covered Properties did not sustain any physical loss or damage.
The Supreme Court’s opinion in Ungarean v. CNA, No. 11 WAP 2023 (Pa. September 26, 2024) can be accessed here.
