Third Circuit Joins Other Federal Circuits in Finding No Coverage for COVID-19 Business Interruption Claims

Today, in Wilson, et al. v. USI Insurance Service LLC, et al., the U.S. Court of Appeals for the Third Circuit affirmed district court orders ruling in favor of insurers in COVID-19 business interruption claims, becoming the latest federal circuit court to conclude that there is no coverage for such claims. Specifically, applying the law of Pennsylvania and New Jersey, the court held that “the loss of use of a property’s intended business purpose is not a physical loss of property covered by the businesses’ insurance policies.” Opinion at 22. With this ruling, the federal circuit courts for the First, Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth and Eleventh Circuits now have all determined that there is no coverage for COVID-19 business interruption claims.

The Wilson plaintiffs were businesses in Pennsylvania, New Jersey, New York, Maryland, and Delaware in the food service, medical, health and wellness, art, music, and legal sectors. Each of them closed or limited their operations as a result of COVID-19 closure orders that restricted the activities of nonessential businesses and filed claims for income lost as a result. With minor variations in policy terms, their policies provided coverage for “‘the actual loss of Business Income’ that businesses sustain ‘due to the necessary ‘suspension’ of their ‘operations’ during the ‘period of restoration,’ when the ‘suspension is caused by direct physical loss of or damage to’ the property and the loss or damage is ‘caused by or resulting from a Covered Cause of Loss.’” Id. at 23 (internal brackets omitted).

The Third Circuit rejected each of the businesses’ arguments for coverage and concluded that their inability to use their properties for their intended purposes does not constitute “physical loss of” property under Pennsylvania and New Jersey law. Id. at 27. According to the court, physical damage to property “typically means a ‘distinct, demonstrable, and physical alteration’ of its structure” and physical loss of property “means a failure to maintain tangible possession of the structure.” Id. at 30. Therefore, in order for there to be coverage, “[t]he businesses . . . must show that the functionalities of their properties were nearly eliminated or destroyed, that the structures were made useless or uninhabitable, or that there was an imminent risk of either of those things happening.” Id. at 31-32. They could not do so, because their loss of ability to use their properties for their intended purposes was due to executive orders “closing or limiting the activities of nonessential businesses, not because there was anything wrong with their properties. Their properties were not destroyed in whole or in part; their structures remained intact and functional.” Id. at 32. And “[t]he properties could certainly be used or inhabited, just not in the way the businesses would have liked.” Id. Accordingly, the court held “that loss of use of intended purpose under the circumstances presented here is not a physical loss of property within the meaning of the policies.” Id. at 33.

The court had no trouble distinguishing cases where a court found physical loss or damage based on contamination by noxious substances, such as ammonia or gasoline.  It held in those cases, the substances were present to such a degree that it became physically dangerous to be inside of the building, rendering the building useless until there was some kind of remediation. This wasn’t the case here. 

The court further found that other terms in the policies supported its conclusion that loss of use must involve some physicality, such as the “period of restoration,” which ends when the property should be “repaired, rebuilt or replaced.” In these cases, “there is nothing to repair, rebuild, or replace.” Id. at 34. Instead, the businesses’ loss of use was “cured by an end to the closure orders, and not by the rebuilding or repairing of any property.” Id.

In addition to finding that none of the businesses had met its burden of showing coverage under the policies’ business income or extra expense coverage provisions, the court concluded that none of them could demonstrate coverage under the policies’ civil authority provisions, which require a demonstration of “physical loss or damage to a property other than the insured premises and that an action of civil authority prohibited access to the insured premises because of that loss or damage.” Id. at 42. Indeed, “[n]o business alleged that a property other than the insured premises was damaged or suffered a physical loss or that an action of a civil authority prohibited access to the insured premises because of loss or damage to another property.” Id.

Finally, because no business demonstrated coverage under its policy, the court found it unnecessary to determine whether the insurers demonstrated that the policies’ virus or ordinance and law exclusions barred coverage. Id. at 43.

Crowell & Moring LLP represented amici curiae American Property Casualty Insurance Association and National Association of Mutual Insurance Companies in this case.