Fearing Industry Solvency, Insurers Are Seeking To Leverage "Physical Loss Or Damage" Rulings In The COVID-19 Context To Roll Back Historic Coverage Generally

When the COVID-19 Pandemic incepted, and issues arose as to whether affected policyholders could seek Business Income and Civil Authority coverage from the presence or suspected presence of SARS-CoV-2 and consequent orders of Civil Authority, I thought that the easiest question to answer was whether such policyholders had suffered physical loss or damage ("PLOD") to their property.

The Majority PLOD Rule Prior to COVID-19

With my colleague, Nicholas Insua, I write and annually update a book discussing every Business Income (or Business Interruption) case decided in the United States. Many issues arising under policies providing "time element" coverage have but a handful of cases discussing them, but whether unusual circumstances – i.e., events other than fire, windstorm, etc. – cause "physical loss or damage" to property had been the subject of more than two score cases by March 2020. In about three quarters of those cases, courts held that such unusual circumstances – falling rocks which threatened but had not yet hit a property, temporary infusion of smoke or ammonia or gas fumes, risk of collapse caused by collapse of neighboring building – caused "physical loss or damage" if property could not be safely used as it had been used previously. I thought the same results would obtain in COVID-19 cases.

Courts Accept Insurers "PLOD" Arguments in the COVID-19 Context

Unfortunately, this prediction was incorrect. Largely, courts have accepted insurance company arguments that SARS-CoV-2 and consequent orders of Civil Authority do not cause PLOD. In the wake of these decisions, there have been two interesting, if wholly predictable, developments since then.

Courts Continued To Apply the Majority PLOD Rule in Other Contexts

First, in the first few non-COVID-19 coverage cases decided after March 2020, courts continued to interpret PLOD as including covered loss from events rendering property unfit for its intended use. See James W. Fowler Co. v. QBE Ins. Corp., No. 20-35926, 2021 U.S. App. LEXIS 31714, at *2 (9th Cir. Oct. 21, 2021) (unpublished) (agreeing on appeal that a micro-tunnel boring machine which was undamaged but trapped underground would suffer "direct physical loss" if it "either impossible or unreasonably expensive to recover"); Crisco v. Foremost Ins. Co., No. C 19-07320 WHA, 2020 WL 7122476, at *4-5 (N.D. Cal. Dec. 4, 2020) (finding mobile homes suffered PLOD when a fire destroyed the electric, gas, sewer, and potable water infrastructure which serviced them but did not damage the mobile homes themselves); National Ink & Stitch, LLC v. State Auto Prop. & Cas. Ins. Co., No. SAG-18-2138, 2020 WL 374460, at *5 (D. Md. Jan. 23, 2020) (finding policyholder which suffered a ransomware attack on its computer server causing permanently lost access to its art files and other data had suffered loss of "functionality" and thus PLOD); and EMOI Servs., LLC v. Owners Ins. Co., 2021-Ohio-3942, P5-7 (Ohio App. 2021) (rejecting insurer's argument that PLOD "does not occur when the insured merely loses access or use," concluding that "[a]s a result of the encryption, [the policyholder] and its clients were unable to access [the policyholder's computer] system for a significant period of time").

In all of these cases, there was not tangible damage or alteration of property; what was lost was instead the use of property for its intended purpose. The result in these cases indicates that something other than application of the common law as it existed in March 2020 was motivating courts ruling against policyholders in cases addressing insurance coverage for PLOD from SARS-CoV-2: concern about the solvency of the insurance industry.

Insurers Are Leveraging PLOD Rulings in the COVID-19 Context to Win in All Similar Contexts

Two, not satisfied with pleading poverty to win in COVID-19 cases, the insurance industry is using results in COVID-19 cases to affect a major restriction in the coverage they provide without securing regulatory approval (and incur a cut in rates). And this has now occurred. In EMOI, on appeal, the Supreme Court of Ohio reversed (EMOI Servs., L.L.C. v. Owners Ins. Co., 208 N.E.3d 818 (Ohio Dec. 27, 2022) (applying Ohio law), citing a COVID-19 case. Insurers have made arguments citing COVID-19 cases in other contexts:

• NMA Investments L.L.C. v. Fidelity & Guar. Ins. Co., No. 22-cv-1618, 2022 U.S. Dist. LEXIS 164606, at *8-10 (D. Minn. Sept. 13, 2022) (citing a COVID-19 case and rejecting Business Income claim of laundromat whose operations were affected by government and non-government barricades erected on streets in the wake of riots caused by the murder of George Floyd because the barricades did not cause PLOD to the policyholder's property);

• Cup Foods, Inc. v. Travelers Cas. Ins. Co., No. 22-cv-1620, 2023 U.S. Dist. LEXIS 10711 (D. Minn. Jan. 23, 2023) (rejecting Business Income claim for loss from barriers set up by government and private citizens citing COVID-19 case);

• Garland Connect, LLC v. Travelers Cas. Ins. Co., No. CV-20-09252, 2022 U.S. Dist. LEXIS 33960, at *9-11 (C.D. Cal. Feb. 3, 2022) (applying California law) (citing COVID-19 case and finding that policyholder who was unable to access its former business premises when the landlord refused to extend its contract to perform operations there did not suffer PLOD);

• Meridian Park Radiation Oncology Ctr., Inc. v. Allied Ins. Co. of Am., No. 3:21-cv-1471-AR, 2024 U.S. Dist. LEXIS 53178, at *10-14 (D. Or. Feb. 13, 2024) (applying Oregon law) (finding that facility administering radiation treatment which had to take its linear accelerator off line when its third-party cloud-network service provider went off line due to a cyberattack not suffered PLOD to its linear accelerator because that phrase requires "physical alteration or dispossession of the covered property" and citing COVID-19 cases);

• Archer Western-De Moya J.V. v. Ace Am. Ins. Co. 87 Uptown Road, No. 1:22-CV-21160, 2024 U.S. Dist. LEXIS 51943, at *36-40 (S.D. Fla. Jan. 12, 2024) (applying Florida law) (noting the insurance company's reliance on COVID-19 cases concluding that PLOD "requires a tangible alteration to the covered property" in arguing that the policyholder's bridge components did not suffer PLOD from defective concrete);

• 87 Uptown Road, LLC v. Country Mut. Ins. Co., 207 N.Y.S.3d 241, 244-45 (N.Y. App. Div. Mar. 14, 2024) (applying New York law) (citing COVID-19 case and concluding that loss at an apartment complex attributable to tenants moving, not because their apartments had been damaged by fire but rather because of "various inconveniences" accompanying rebuilding of damaged units, was not a loss caused by PLOD because "inconvenience alone, absent direct damage, is not enough to afford coverage"); and

• Century Aluminum Co. v. Certain Underwriters at Lloyd's, 97 F.4th 1019, 1023 (6th Cir. 2024) (applying Kentucky law) (rejecting policyholder's claim for loss from PLOD to its alumina ore when closure of inland waterways prevented it from timely receiving ore, citing cases addressing the effect of COVID-19, to find "[t]he temporary delay never threatened to deprive [the policyholder] of its ownership or control of the alumina," and policyholder did not suffer PLOD).

One court rejected the insurance company's argument: Tiffany & Co. v. Lloyd's of London Syndicates 33, 510, 609, 780, 1084, 1225, 1414, 1686, 1861, 1969, 2001, 2012, 2232, 2488, 2987, 3000, 3623, 4444, 4472, & 4711, No. 651544/2023, 2024 N.Y. Misc. LEXIS 2433, at *66-67 (N.Y. Supr. May 3, 2024)(applying New York law) (finding "loss" of ore not controlled by COVID-19 case).

Inevitably, however, insurance companies will leverage cases giving them relief in the COVID-19 context to reverse the former majority rule on PLOD in all contexts. This will dramatically restrict coverage for thousands of policyholders, given that the vast majority of property insurance claims are resolved by negotiation, not litigation, on the basis of the law set forth by courts. If any party is to accept this dramatic restriction of historic coverage, it is the regulator, who can impose a commensurate reduction in insurance rates.