Insurance Coverage for Pandemic-related Business Losses
MacMiles, LLC v. Erie Insurance Exchange, 286 A.3d 353 (Pa Super. 2022 (en banc)), allocatur granted July 13, 2023, appeal docket 10 WAP 2023; Ungarean v. CNA, 286 A.3d 353 (Pa. Super. 2022) (en banc), allocatur granted July 13, 2023, appeal dockets 11 & 12 WAP 2023
In the following cases, the Supreme Court will consider a business’s entitlement to coverage under an insurance policy for losses associated with the COVID-19 pandemic.
MacMiles, LLC
MacMiles, LLC, an insured operator of a restaurant, brought action against Erie Insurance Exchange, MacMiles’ insurer, seeking declaratory relief and alleging breach of contract arising from MacMiles’s loss of certain uses of its restaurant during the period in which the Governor, by executive order, closed restaurant’s dine-in service in response to the COVID-19 pandemic. Superior Court summarized the factual background as follows:
Erie sold MacMiles an insurance policy (the “Policy”) covering, among other things, “physical loss of or damage to Covered Property [….]” Policy, Commercial Property Coverage Part, Section I, Coverages/Insuring Agreement. In relevant part, the covered property in this case is the building wherein MacMiles operates the Grant Street Tavern. On March 6, 2020, in response to the spread of the Covid-19 virus, Governor Tom Wolf issued a Proclamation of Disaster Emergency. The proclamation was followed by a March 19, 2020 executive order directing the temporary closure of non-essential businesses. Restaurateurs such as MacMiles were limited to offering take out, drive-through, and/or delivery. Dine-in service was prohibited.
MacMiles claimed coverage under the Policy for the loss of use of its physical premises due to the Covid-19 pandemic and Governor Wolf’s orders. Erie declined coverage and, on September 29, 2020, MacMiles filed a complaint for breach of contract and declaratory relief. On December 22, 2020, MacMiles filed a motion for summary judgment. Erie filed a cross motion for judgment on the pleadings on March 10, 2021.
Slip op. at 2-3. The trial court entered an interlocutory order granting partial summary judgment in favor of MacMiles, finding coverage under the business income protection portion of the Policy but a triable issue of fact and denying Erie’s motion for judgment on the pleadings. Superior Court summarized the trial court’s opinion as follows:
The trial court, construing the phrase “direct physical loss of or damage to Covered Property”, reasoned that the disjunctive “or” between “direct physical loss of” and “damage to Covered Property” supports a reasonable reading of the Policy whereby a “direct physical loss” need not necessarily result from physical or structural damage.
The spread of COVID-19, and a desired limitation of the same, had a close logical, causal, and/or consequential relationship to the ways in which [MacMiles] materially used its property and physical space. Indeed, the spread of COVID-19 and social distancing measures (with or without the Governor’s orders) caused [MacMiles], and many other businesses, to physically limit the use of property and the number of people that could inhabit physical buildings at any given time, if at all. Thus, the spread of Covid-19 did not, as [Erie] contends, merely impose economic limitations. Any economic losses were secondary to the businesses’ physical losses.
Trial Court Opinion, 5/25/21, at 14-15 (emphasis in original; citation omitted).
Regarding the amount of insurance provision, the trial court reasoned that it “merely imposes a time limit on available coverage, which ends whenever any required building, repairs, or replacements are completed to any damaged or destroyed property that might exist, or twelve (12) months after the initial date of the loss.” Id. at 17. Because it merely imposes a time limit, the trial court found that the amount of insurance provision did not alter its interpretation of “physical loss or damage.” Id. In essence, the trial court concluded that MacMiles’ claim is covered because MacMiles’ proposed reading of the Policy is a reasonable one.
Slip op. at 7-8. The insurer appealed.
Superior Court held that as a matter of first impression, MacMiles’s loss did not fall within commercial property policy’s coverage of “direct physical “loss” of or damage to Covered Property.” Noting a lack of precedent from Pennsylvania appellate courts, Superior Court noted that: “many parties similarly situated to MacMiles have claimed coverage for loss of income during the Covid-19 pandemic and the resulting economic shutdown under insurance contracts substantially similar or identical to the Policy. Court decisions from across the country overwhelmingly and persuasively support a conclusion that MacMiles’ loss of income claim is not covered.” Slip op. at 8. Persuaded by this precedent, Superior Court concluded that:
Ultimately, the question before us is not complicated. The provisions of the Policy at issue here cover commercial property. But MacMiles argues, and the trial court found, that “direct physical loss of or damage to Covered Property” covers pure economic loss caused by MacMiles’ loss of use because of the disjunctive “or” between loss and damage. Policy, Commercial Property Coverage Part, Section I, Coverages/Insuring Agreement (emphasis added). That reading is reasonable if and only if “physical loss” means something distinct from a loss due to a physical alteration or destruction of the property. That is, we must conclude it is reasonable to read the Policy as covering mere loss of use even though the Policy never expressly says so; even though the policy repeatedly uses the word damage; and even though the amount of insurance provision references the time period necessary to “repair, replace, or rebuild” any part of the covered property that had been “damaged or destroyed.” These latter terms make sense only in the context of partial physical damage to or total destruction of the covered property. They do not make sense in the context of a purely economic loss. See e.g., Dino Drop, Inc. v. Cincinnati Ins. Co., 544 F.Supp.3d 789, 798 (E.D. Mich. 2021) (holding that physical loss and damage “can only be reasonably be construed as extending to events that impact the physical premises completely (loss) or partially (damage).”). The trial court’s reading of the Policy is strained, and we find that we are constrained to reject that holding.
Further, MacMiles has failed to allege any physical damage. Dine-in service was prohibited, but preparation of meals for takeout or delivery was permitted. Thus, MacMiles’ building was not rendered unusable or uninhabitable. And Covid-19, a primarily airborne illness, did no physical damage to MacMiles’ covered property. In-person dining was prohibited to prevent infected diners from spreading the virus to others, not because any condition immanent in the Grant Street Tavern rendered the building unusable by diners.
Ultimately, our analysis, aided by persuasive authority from numerous other federal and state jurisdictions, leads us to conclude the trial court erred in finding that MacMiles established a valid claim for coverage under the business income provisions of the Policy. We will therefore reverse the trial court’s order granting summary judgment insofar as it granted summary judgment in favor of MacMiles on this issue. Because the pertinent facts are undisputed and the question before us is purely one of law, we direct the trial court to enter an order granting judgment on the pleadings in favor of Erie on this issue.
Slip op. at 15-17.
President Judge Panella, joined by Judges Lazarus, Kunselman, and Nichols, filed a concurring opinion, explaining the basis for reaching a different conclusion in Ungarean et al. v. CNA et al., 286 A.3d 353 (Pa. Super. 2022):
I reach this conclusion, which is different from the relief I grant in the related case, Ungarean et al. v. CNA et al., 286 A.3d 353 (Pa. Super. 2022), because these cases, in which the Court must address coverage issues, are fact intensive matters which require, in each case, a review of the individual policy. We must base our decision solely on the policy’s language. Therefore, I write separately to highlight that our review of MacMiles’s claims is restricted to the “specific terms employed” in Erie’s policy. See Harleysville Ins. Cos. v. Aetna Cas. & Sur. Ins. Co., 568 Pa. 255, 795 A.2d 383, 387 (2002).
Concurring slip op. at 1.
The Supreme Court granted allocatur in MacMiles to consider the following issue, and directed the Prothonotary to list the case with Ungarean v. CNA simultaneously for argument:
Did the Superior Court err as a matter of law in finding that Petitioner is not entitled to coverage under its policy of insurance with Respondent for losses associated with the COVID-19 pandemic when the insurance policy is ambiguous and Pennsylvania law mandates that an ambiguity should be construed in favor of the insured?
Ungarean
Superior Court summarized the background in this case as follows:
Ungarean owns and operates a dental practice, with an office in Pittsburgh and an office in Aliquippa. The practice of dentistry necessarily requires close contact not only between the dentist and his patients, but also between the patients and various staff at the office.
To protect himself from unforeseen interruptions of his practice, Ungarean procured an insurance policy from CNA that provided coverage for certain losses associated with the dental practice during the year from April 1, 2019, to April 1, 2020. In March 2020, the state of Pennsylvania was struck by the full force of the COVID-19 pandemic. COVID-19 is a novel contagious virus that can cause severe acute respiratory illness. In the first three months of the pandemic, it killed thousands of Pennsylvanians, and over 100,000 people nationwide.
After consulting with public health experts, Governor Tom Wolf issued several orders in March 2020 directing that all non-essential businesses should close until further notice. Further, the Governor issued an order directing the residents of Allegheny County, which contains the city of Pittsburgh, to stay at home.
In addition to these shutdown orders, public health officials implemented masking and social distancing protocols. Even those businesses that were deemed essential were required to modify their business models by decreasing the number of people allowed in buildings and requiring people to remain masked. Furthermore, in these early months, enhanced cleaning protocols were implemented due to fears that the virus could linger for days on hard surfaces.
As a result of the pandemic, Ungarean was forced to close his dental practice to the public except for emergency dental procedures. He claims this caused a drastic loss in income from the practice, causing him to furlough employees and suffer other harmful consequences. As a result, Ungarean filed a claim with CNA for these losses under the CNA Policy which provides coverage for, inter alia, loss of business income due to the physical loss of or damage to covered property. CNA denied coverage on the basis that Ungarean’s dental practice did not suffer physical damage.
Ungarean filed a class action complaint asserting one count of relief under the Declaratory Judgments Act. See Complaint, 6/5/20, at ¶ 77. In essence, Ungarean sought a declaration that his pandemic-related business losses were covered under the CNA Policy’s Business Income, Extra Expense and Civil Authority provisions. See id. at ¶¶ 7, 31, 34. Ungarean subsequently filed a motion for summary judgment, which the trial court granted on the basis that Ungarean had, in fact, suffered a direct physical loss of his dental practice and was therefore owed business insurance coverage under the policy.
Slip op. at 3-5. The trial court entered declaratory judgment in favor of Ungarean, concluding that Ungarean was entitled to coverage under the CNA Policy’s Business Income and Extra Expense provisions, which states in relevant part:
1.b. We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration.” The “suspension” must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss. …
2.a. Extra Expense means reasonable and necessary expenses you incur during the “period of restoration” that you would not have incurred if there had been no direct physical loss of or damage to property caused by or resulting from a Covered Cause of Loss.
CNA Policy, Business Income and Extra Expense Endorsement, at 1.b., 2a. The policy defines “suspension” as “[t]he partial or complete cessation of your business activities; or … [t]hat a part or all of the described premises is rendered untenantable.” CNA Policy, Businessowners Special Property Coverage Form, at G.29. Further, the policy defines “operations” as “the type of your business activities occurring at the described premises and tenantability of the described premises.” Id., at G.19.
Slip op. at 6-7. The trial court further found that Ungarean was entitled to coverage under the Civil Authority Provision in the CNA Policy, which states:
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 described premises, caused by or resulting from a Covered Cause of Loss.
Slip op. at 25, quoting CNA Policy, Civil Authority, at 1. The trial court further concluded that the Contamination; Consequential Loss; Fungi, Wet Rot, Dry Rot, and Microbes; Acts or Decisions; and Ordinance or Law exclusions in Ungarean’s policy apply. The contamination exclusion in the CNA Policy precludes coverage for “Contamination by other than pollutants.” CNA Policy, Businessowners Special Property Coverage Form, at B.2.d.8. The CNA Policy defines “pollutants” as follows:
any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, waste, and any unhealthy or hazardous building materials (including but not limited to asbestos and lead products or materials containing lead). Waste included material to be recycled, reconditioned, or reclaimed.
Slip op. at 19. The Ordinance or law exclusion contained in the policy states the following:
Ordinance or Law
(1) The enforcement of any ordinance or law:
(a) Regulating the construction, use or repair of any property; or
(b) Requiring the tearing down of any property, including the cost of removing its debris.
(2) This exclusion applies whether the loss results from:
(a) An ordinance or law that is enforced even if the property has not been damaged; or
(b) The increased costs incurred to comply with an ordinance or law in the course of construction, repair, renovation, remodeling or *366 demolition of property, or removal of its debris, following a physical loss to that property.
Slip op. at 22, quoting CNA Policy, Businessowners Special Property Coverage Form, at 1.a. The trial court concluded that CNA was obligated to provide business loss and extra expenses coverage to Ungarean for the direct physical loss of his dental practice that he suffered due to COVID-19 and the governmental orders issued in response to the pandemic. CNA appealed.
Superior Court agreed with the trial court’s conclusion that Ungarean established a claim that he suffered a “physical loss of or damage to covered property,” reasoning that:
Importantly, the CNA Policy does not define “direct,” “physical,” “damage,” and, perhaps most significantly in our view, “loss.” The trial court therefore turned to the dictionary definitions of these words to determine whether Ungarean’s interpretation of the phrase as including the loss of use of his property was a reasonable one. See Wagner v. Erie Ins. Co., 801 A.2d 1226, 1231 (Pa. Super. 2002) (stating that courts may utilize dictionary definitions to inform its understanding of the language of a contract). The court emphasized that this determination was crucial because “if the contractual terms are subject to more than one reasonable interpretation, [the] [c]ourt must find that the contract is ambiguous,” and ambiguous provisions must be construed in favor of Ungarean as the insured. Trial Court Opinion, 3/25/21, at 10-11 (citing Madison Constr. Co. v. Harleysville Mutual Ins. Co., 557 Pa. 595, 735 A.2d 100, 106 (1999), and Kurach v. Truck Ins. Exchange, 235 A.3d 1106, 1116 (Pa. 2020)). Ungarean’s interpretation of an ambiguous contract need only be reasonable to be controlling. See Collister v. Nationwide Life Ins. Co., 479 Pa. 579, 388 A.2d 1346, 1353 (1978); see also Consol. Rail Corp. v. ACE Prop. & Casualty Ins. Co., 182 A.3d 1011, 1026 (Pa. Super. 2018).
In finding that Ungarean’s interpretation was, at the very least, reasonable considering the ordinary meaning of the operative words, the trial court explained:
This [c]ourt [begins] its analysis [of what the phrase ‘direct physical loss of …. property’ reasonably means] with the terms ‘damage’ and ‘loss,’ as these terms are the crux of the disputed language. … ‘[D]amage’ is defined as ‘loss or harm resulting from injury to person, property, or reputation.’ and ‘loss’ is defined as ‘DESTRUCTION, RUIN … [and/or] the act of losing possession [and/or] DEPRIVATION …
Based upon the above-provided definitions, it is clear that ‘damage’ and ‘loss,’ in certain contexts, tend to overlap. This is evident because the definition of ‘damage’ includes the term ‘loss,’ and at least one definition of ‘loss’ includes the terms ‘destruction’ and ‘ruin,’ both of which indicate some form of damage. However, [ ] in the context of this [CNA Policy], the concepts of ‘loss’ and ‘damage’ are separated by the disjunctive ‘or,’ and, therefore, the terms must mean something different from each other. Accordingly, in this instance, the most reasonable definition of ‘loss’ is one that focuses on the act of losing possession and/or deprivation of property instead of one that encompasses various forms of damage to property, i.e., destruction and ruin. Applying this definition gives the term ‘loss’ meaning that is different from the term ‘damage.’ Specifically, whereas the meaning of the term ‘damage’ encompasses all forms of harm to [Ungarean’s] property (complete or partial), this [c]ourt conclude[s] that the meaning of the term ‘loss’ reasonably encompasses the act of losing possession [and/or] deprivation, which includes the loss of use of property absent any harm to [the] property.
Trial Court Opinion, 3/25/21, at 12-13 (capitalization and some ellipses in original, footnotes citing Merriam-Webster Dictionary for definitions of terms omitted).
The trial court’s reasoning is both straightforward and compelling. The CNA Policy provides coverage for “direct physical loss of or damage to the property….” CNA, as the insurer, wrote that phrase in the disjunctive, meaning that “direct physical loss” must mean something different from “direct physical damage.” See In re Paulmier, 594 Pa. 433, 937 A.2d 364, 373 (2007) (stating that “ ‘or’ is disjunctive. It means one or the other of two or more alternatives.”). The definition of “loss” includes the loss of possession or deprivation of the property, whereas damage does not; it is therefore reasonable to find that “loss of property” includes the act of being deprived of the physical use of one’s property. We are convinced the trial court’s reasoning is correct, and results in a reasonable interpretation of the CNA Policy. See Collister, 388 A.2d at 1353; Consol. Rail Corp., 182 A.3d at 1026.
We agree with the trial court that it is, at a minimum, reasonable to find that Ungarean’s loss of the use of his dental practice due to COVID-19 and the governmental orders equated to a direct physical loss of his property. See Collister, 388 A.2d at 1353; Consol. Rail Corp., 182 A.3d at 1026. In fact, to say otherwise not only ignores the reality of the impact COVID-19 had on businesses and the world at large but ignores the dictionary definitions of the words in the CNA Policy which, as written, reasonably encompass the direct physical loss of the use of one’s property due to COVID-19 and the physical restrictions placed on properties because of it.
Slip op. at 8-11. Based on its holding that Ungarean has established a claim that he suffered a “physical loss of or damage to covered property,” Superior Court likewise agreed with the trial court that Ugarean established a claim under the Civil Authority Endorsement. Superior Court further agreed with the trial court that the policy exclusions did not apply to Ungarean’s claim, concluding that:
…as for the exclusions, we find in the first instance that the ambiguity created by Section B. Exclusions means only the fourth category of exclusions, under the heading of “Business Income and Extra Expense Exclusions,” is available for CNA to invoke against Ungarean’s claim under the Business Income and Extra Expense provisions. None of those exclusions are applicable to Ungarean’s claim. Nonetheless, even if the exclusions under the three other Exclusions sections not labeled “Business Income and Extra Expense Exclusions” were available to CNA, we agree with the trial court that those exclusions are also not applicable and cannot absolve CNA of its responsibility to provide coverage for Ungarean’s losses.
Therefore, we conclude that the trial court properly declared that CNA was obligated to provide business loss and extra expenses coverage to Ungarean for the direct physical loss of his dental practice that he suffered due to COVID-19 and the governmental orders issued in response to the pandemic.
Slip op. at 25.
In dissent, Judge Stabile criticized the Majority’s “strained construct of the Policy,” stating:
In affirming the trial court, the Majority endorses a strained construct of the Policy that parses individual words under dictionary meanings to arrive at a disjointed and unreasonable interpretation of the operative phrase at issue – “direct physical loss or damage to property”. In doing so, the Majority violates rules relating to contract interpretation that do not allow individual terms and provisions to be read in isolation. Individual terms must be considered under the policy as a whole. The Majority decision now places Pennsylvania as an outlier from the near unanimous conclusions reached by all state and federal courts to have considered the meaning of substantially similar language.
Dissent slip op. at 1. Judge Stabile “would reach the same result as the almost unanimous majority of jurisdictions to have addressed this issue: the Policy does not cover mere loss of use of commercial property unaccompanied by physical alteration or other condition present in the property that renders the property itself unusable or uninhabitable.” Dissent slip op. at 3. Applying this reasoning, Judge Stabile explained that:
…the proper disposition of this appeal is clear. The provisions of the Policy at issue here cover commercial property. Ungarean does not allege that any covered property was destroyed, damaged, or in need of repair, rebuilding, or replacing. He had access to his business property at all times; there was no physical alteration to the property itself that prevented him from using it as normal. Rather, he was limited to performing emergency dental procedures so as to limit the number of patients coming in and thereby limit the potential for person-to-person spread of Covid. There is no reasonable reading of the phrase “direct physical loss” that applies to the covered property involved in this case. Ungarean’s claim fails for this reason alone.
Dissent slip op. at 15. Judge Stabile further observed:
The Majority and the trial court have engaged in a strained reading of a property insurance policy in order to find coverage for a purely economic loss. The conclusion they reach is unsupportable and unreasonable under the plain language of the Policy and case law governing the interpretation of insurance policies. While I sympathize with the plight of the many business owners who have suffered, and continue to suffer, significant financial hardship because of the Covid-19 pandemic, this Court must render decisions based on the law and the facts of each case.
Dissent slip op. at 17. Having determined Ungarean would not be entitled to coverage generally, Judge Stabile found it unnecessary to address the applicability of the exclusions. Judge Stabile would likewise conclude that Ungarean failed to establish a claim for coverage under the Policy’s Civil Authority provision, as such requires the “direct physical” loss Judge Stabile found Ungarean failed to prove.
The Pennsylvania Supreme Court granted allocatur as to the following issues:
(1) Did the Superior Court err in its decision affirming the trial court’s opinion concluding that Respondent Timothy A. Ungarean, DMD is entitled to Business Income, Extra Expense and Civil Authority coverage under the policy issued by Petitioner Valley ForgeInsurance Company as a result of the COVID-19 pandemic and associated orders issued by Governor Wolf, where the policy only provides coverage following “direct physical loss of or damage to” property and neither the relevant government orders nor the COVID-19 pandemic caused a physical alteration to property?
(2) Did the Superior Court err in its decision affirming the trial court’s opinion concluding that Respondent Timothy A. Ungarean, DMD is entitled to Civil Authority coverage under the policy issued by Petitioner Valley Forge Insurance Company as a result of the COVID-19 pandemic and associated orders issued by Governor Wolf, where the policy provides such coverage only following an action by a civil authority that was issued “due to” physical loss of or damage to property and “prohibit[s] access” to a policyholder’s premises?
(3) Did the Superior Court err in its decision affirming the trial court’s opinion concluding that the Contamination; Consequential Loss; Fungi, Wet Rot, Dry Rot, and Microbes; Acts or Decisions; and Ordinance or Law exclusions in the policy issued by Petitioner Valley Forge Insurance Company did not bar coverage for Respondent Timothy A. Ungarean, DMD’s alleged losses related to the COVID-19 pandemic and associated orders issued by Governor Wolf?
For more information, contact Kevin McKeon or Dennis Whitaker.