Two Pennsylvania Restaurants Denied Insurance Coverage Benefits for Covid 19 Losses
The United States District Court for the Eastern District of Pennsylvania addressed insurance coverage issues relative to alleged business losses by Newchops and LH Dining restaurants (“Restaurants”) due to COVID-19 closures. Newchops Rest. Comcast LLC v. Admiral Indem. Co., No. 20-1949 (E.D. Pa. Dec. 17, 2020 Savage, J.) Ultimately, the Court granted Admiral Indemnity Company’s (“Admiral”) Motion for Judgment on the pleadings denying the Restaurants’ claims.
Newchops is a steakhouse located in Center City Philadelphia, and LH Dining operates River Twice Restaurant in South Philadelphia. Each served hundreds of customers weekly in outdoor and indoor dining spaces. In September 2019, Admiral issued insurance policies to the insureds, providing property, business personal property, business income, extra expenses and other coverage through September 2020. They are “all risks” policies.
In March 2020, in response to the COVID-19 pandemic, the City of Philadelphia and Governor Wolf respectively ordered the closure of all non-essential businesses, which included restaurant dine-in service. The Restaurants complied with the orders and as a result Newchops laid off 25 employees and LH Dining furloughed eight. Thereafter, the restaurants each filed an action seeking a declaration that its business losses were covered. Admiral answered the complaints and filed a motion for judgment on the pleadings.
The Restaurants asserted coverage under the civil authority and the business income provisions of the policy. Admiral contended that there is no covered loss under either provision. Admiral also relied on the virus exclusion as a basis for denying coverage.
The civil authority provision applies when a civil authority issues an order prohibiting access to the insured’s property in response to a dangerous physical condition caused by damage to another’s property. The business income provision is triggered when there is a suspension of the insureds’ operations caused by direct physical loss of or damage to the insured’s property. Both coverages share two essential elements. Each is predicated on damage to property, and also depends on the existence of a “covered cause of loss” as defined in the policy.
The dispute revolved around the question whether the Restaurants alleged loss of or damage to property caused by a covered cause of loss, i.e., whether the loss or damage must be physical or structural, not merely economic. The civil authority provision referred to “dangerous physical conditions resulting from the damage or a continuation of the Covered Cause of Loss that caused the damage.” The business income provision covers losses sustained by the suspension of operations during the “period of restoration.”
The Court determined property damage is “a distinct, demonstrable, physical alteration of the property.” 10A Couch on Ins. § 148.46 (3d ed. 1995) (citations omitted). Pure economic losses are intangible and do not constitute property damage. 9A Couch on Ins. § 129.7. See also, Phila. Parking Auth. v. Fed. Ins. Co., 385 F. Supp. 2d 280, 287 (S.D.N.Y. 2005) (finding the restoration language “strongly suggest[s] that the damage contemplated by the Policy is physical in nature” under Pennsylvania law). Ultimately, because the Restaurants did not allege facts showing damage to others’ properties or “a direct physical loss of or damage to” their own properties, they did not establish coverage under the civil authority or the business income provisions. Moreover, the Court determined the “Orders” regulating the use of the Restaurants’ properties were “governmental orders,” under the Policy; and therefore, which were not a covered cause of loss under either the civil authority or business income provision.
Finally, the Court determined even if the Restaurants had suffered covered losses under either or both the civil authority and business income provisions, the Policy’s virus exclusion precluded coverage. Specifically, the virus exclusion provided: “[w]e will not pay for loss or damage caused by or resulting from any virus, bacterium or other micro-organism that induces or is capable of inducing physical distress, illness or disease.” Furthermore, the virus exclusion explicitly provided that it “applies to all coverage under all forms and endorsements . . . including . . . business income . . . or action of civil authority,” demonstrating the parties had agreed that a suspension of an insured’s operations caused by a virus was not covered.
Interestingly, the Restaurants argued the virus exclusion was ambiguous and was permitted by state insurance departments “due to misleading and fraudulent statements by the Insurance Services Office (“ISO”) that property insurance policies do not and were not intended to cover losses caused by viruses.” The Restaurants maintained that “before the ISO made such baseless assertions, courts considered contamination by a virus to be physical damage.” Without relying on any facts, the Restaurants sought additional discovery on this issue under a theory of regulatory estoppel.
“[U]nder Pennsylvania’s doctrine of regulatory estoppel, an industry that makes representations to a regulatory agency to win agency approval ‘will not be heard to assert the opposite position when claims are made by [litigants such as] insured policyholders.’” Hussey Copper, Ltd. v. Arrowood Indem. Co., 391 F. App’x 207, 211 (3d Cir. 2010). To establish regulatory estoppel under Pennsylvania law, the party seeking to invoke it must establish the opposing party made a statement to a regulatory agency and later adopted a position contrary to the one presented to the regulatory agency. Simon Wrecking Co. v. AIU Ins. Co., 541 F. Supp. 2d 714, 717 (E.D. Pa. 2008).
Applying the law above, the Court found that even assuming that ISO’s statements can be imputed to Admiral, the Restaurants did not allege that Admiral is now contradicting those statements. On the contrary, the Court determined Admiral’s position was consistent with the ISO’s statement. Specifically, according to the Court, the ISO recognized that not every case alleging loss due to virus or bacteria involves property damage and that a virus exclusion can be helpful in clarifying that a policy does not cover losses stemming from a virus or other disease-causing agent. Finally, the Court held, even if the ISO’s statement was fraudulent or misleading, the Restaurants did not identify how Admiral’s position contradicts ISO’s earlier statements. Accordingly, the Restaurants’ claims were dismissed.