Is There Direct Physical Loss Under A Property Policy When COVID-19 is Present?

Most property policies provide coverage for property damage only when there is “direct physical loss” to covered property. Early indications are that COVID-19 remains on surfaces. The duration can last from a few hours to three weeks, depending on the type of surface material. If an employee is infected and the store or restaurant must be closed because the virus may rest on surfaces within the building, is there direct physical loss, even though the building structure itself is unharmed?

To answer this question, cases from jurisdictions outside Hawaii may provide guidance. In a case from Louisiana, the homeowner had to move out of her home when excessive levels of organic lead were discovered in the kitchen, living room, master bedroom, and attic. Widder v. La. Citizens Prop. Ins. Corp., 82 So. 3d 294 (La. Ct. App. 2011). The insurer denied coverage because there was no direct physical loss. The trial court agreed; since the home was still intact, no direct physical loss had occurred, so there was no coverage under the policy. The appellate court reversed. It compared the presence of inorganic lead in the home to cases that found a direct physical loss from the existence of Chinese drywall, from which gaseous fumes were released, rendering the home unusable or uninhabitable. Physical damage was not necessary.

What if smoke from a nearby wildfire fills an outdoor theater, forcing cancellation of performances and loss of business income? This was the situation in Oregon Shakespeare Festival Ass’n v. Great Am. Inc. Co., 2016 U.S. DIst. LEXIS 74450 (D. Ore. Jun 7, 2016). Wildfires in the area caused smoke, soot, and ash to accumulate on the surface of seats and concrete ground of the open-air theater. The air quality was poor, but no federal, state or local agency ordered cancellation of the performances. Further, the theater did not suffer any permanent or structural damage to its property. The insurer denied coverage, contending that the loss or damage must be structural to the building itself. After all, the smoke in the air at the theater did not require any repairs to the structure of the property. The court disagreed. The theater sustained “physical loss or damage to property” when the wildfire smoke infiltrated the theater and rendered it unusable for its intended purpose. The decision in Oregon Shakespeare Festival was eventually vacated by a joint stipulation of the parties. Oregon Shakespeare Festival Ass’n v. Great Am. Ins.Co., 2017 U.S. Dist. LEXIS 33208 (D. Ore. March 6, 2017), but the reasoning is still sound.

The Oregon Shakespeare Festival case cited several cases to support its view. A pervasive odor in a home caused by a subtenant’s illegal methamphetamine operation was considered a “direct physical loss.” The court concluded that odor was “physical” because it damaged the house. Farmers Ins. Co. of Oregon v. Trutanich, 858 P.2d 1332 (Ore. Ct. App. 1993).

An accidental release of ammonia into a packaging facility caused the facility to shutdown for one week while the ammonia dissipated. The court noted that while structural alteration provided the most obvious sign of physical damage, property can sustain physical loss or damage without experiencing structural alteration. The release of ammonia into the building, rendering the building unfit for occupancy, constituted “physical loss or damage.” Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., 2014 U.S. Dist. LEXIS 165232 (D. N.J. Nov. 25, 2014).

Where gasoline vapors penetrated the foundation of the insured church and accumulated, rendering the building uninhabitable, the property was held to have suffered a “direct, physical loss.” Western Fire Ins. Co. v. First Presbyterian Church, 437 P. 2d 52 (Colo. 1968). Carbon monoxide levels in an apartment building sufficient to render the building uninhabitable was a “direct, physical loss.” Matzner v. Seaco Ins. Co., 1998 Mass. Super. LEXIS 407 (Mass. Super. 1998).

Finally, contamination due to microscopic asbestos fibers was found to be contamination causing the physical loss or damage required to trigger coverage under a property policy. United Stat Fidelity & Guar. Co. v. Wilkin insulation Co., 144 Ill. 2d 64 1991).

Based upon these cases, a building in which the virus is located may well present “direct physical loss” under a property policy. Of course, exclusions will also have to be considered to determine whether coverage exists.

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