Pa. Justices Say COVID Closures Aren’t Covered Losses

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Law360 (September 26, 2024, 5:25 PM EDT) — Pennsylvania’s Supreme Court shut the door Thursday on COVID-19 pandemic loss insurance coverage for businesses closed by government mandate, ruling that requisite physical loss or damage required tangible alteration to property, reversing a lower court decision that stated loss of use was sufficient.

In its en banc opinion, the court concluded Pittsburgh dentist Timothy A. Ungarean, who owned Smile Savers Dentistry PC, wasn’t entitled to coverage under his commercial property insurance policy with CNA and Valley Forge Insurance Co. because his business “did not sustain any physical loss or damage” from COVID-19 or related shutdowns.

The court held “plain and unambiguous language” in his policy precluded Ungarean and other similarly situated business owners from obtaining coverage in the Keystone State. Using its reversal in Ungarean, the court upheld a lower court’s conflicting finding that MacMiles LLC, owner of Grant Street Tavern in Pittsburgh, did not have coverage for its COVID-19 closure from Erie Insurance Exchange.

Scott B. Cooper, who represented MacMiles and Ungarean, said that while he was disappointed with the court’s ruling, “we are glad that we tried to represent the businesses and obviously we would do it again.”

He added that it was “unfortunate that the insurance companies can write the policies and then just pick and choose what to enforce, but they can raise premiums no matter what.”

The Supreme Court’s rulings following oral arguments clarified the state’s stance on issues that have commonly been resolved in favor of insurers across the country. Though the justices recognized that they shared “the prevailing view of courts from varying jurisdictions,” they noted that their rulings were based “solely on the language of the CNA policy and not the conclusions of other courts.”

In siding with the insurer, the court wrote that Ungarean “did not lose access” to his offices in Pittsburgh and nearby Aliquippa during government-ordered COVID-19 shutdowns. “Ungarean’s business remained open for emergency dental procedures,” the court wrote.

The only loss Ungarean sustained “was pure economic loss because the government-ordered COVID-19 shutdown prevented Ungarean from operating his covered properties at their full potential.”

These economic losses were not covered, the court reasoned, because they were not secondary to any physical loss he sustained.

The court held that the only reasonable interpretation of Ungarean’s policy was that in order for coverage to apply, “there must be a physical alteration to the subject property as a result of a direct physical loss or damage necessitating repairs, rebuilding, or entirely replacing the property.”

In Ungarean’s case, the court said there were no facts suggesting his properties met these requirements. The court reasoned that partial closure of his offices “had nothing to do with the physical attributes of the covered properties, as required by the CNA policy for insurance coverage.”

Nor did the dentist allege the virus caused requisite physical damage to his property, as the policy required, the court said.

The Supreme Court disagreed with the trial court and Superior Court majority rationale that because state businesses had to add ventilation or sanitizing stations, this could somehow constitute a type of rebuilding or replacing that was eligible for coverage.

“Adding new installations that do not correct a physical attribute of the property does not constitute repairing, rebuilding, or replacing the existing property as a result of a physical loss or damage,” the court wrote. To hold otherwise would distort the policy’s meaning, the justices said.

The Superior Court majority and the trial court both found that Ungarean’s interpretation of his policy was reasonable and that his policy was ambiguous because physical loss or damage could encompass loss of use. As a result, the trial court and the appeals court both found coverage under his policy’s civil authority endorsement, which offered compensation for government shutdowns so long as physical loss or damage was present.

The Supreme Court reversed this ruling, remanding the case back to the trial court with instructions that it rule in CNA’s favor.

Businesses in Pennsylvania aren’t alone in their struggle for COVID-19 loss compensation. Courts across the country have denied coverage to enterprises seeking compensation from insurers for their COVID-19 losses. High courts in Delaware, Connecticut, Iowa, Louisiana, Massachusetts, Nevada, New Hampshire, Ohio, Oklahoma, South Carolina, Washington, Wisconsin, New Jersey, New York, California and Maryland as well as a superior court in the District of Columbia have all found in favor of insurers on the issue. The Vermont Supreme Court has remained alone in handing a win to policyholders, reviving shipbuilder Huntington Ingalls’ coverage suit in September 2022.

Federal cases have been no easier for business owners, with district courts across the country permanently tossing about 56% of the 1,451 suits from policyholders seeking pandemic loss-related coverage, according to Law360’s COVID-19 Insurance Case Tracker. Another 26% of the pandemic insurance suits filed in federal courts have been voluntarily dismissed, the tracker shows, with about 14% yet to be fully decided.

A representative for Erie declined to comment. Representatives for CNA and Valley Forge did not immediately respond to requests for comments Thursday.

MacMiles and Ungarean are represented by James C. Haggerty of Haggerty Goldberg Schleifer & Kupersmith PC, Scott B. Cooper of Schmidt Kramer PC, John P. Goodrich of Goodrich & Associates PC and Jonathan Shub of Shub & Johns LLC.

Erie Insurance is represented by Robert T. Horst, Robert M. Runyon III and Matthew B. Malamud of Horst Krekstein & Runyon LLC; Richard W. DiBella and Tara L. Maczuzak of DiBella Weinheimer; Frederick P. Santarelli of Elliott Greenleaf PC; Adam J. Kaiser and Kristin A. Shepard of Alston & Bird LLP; and William A. Pietragallo of Pietragallo Gordon Alfano Bosick & Raspanti LLP.

CNA and Valley Forge are represented by Kannon Shanmugam, H. Christopher Boehning and James Durling of Paul Weiss Rifkind Wharton & Garrison LLP and Matthew A. Goldberg, Ilana H. Eisenstein and Timothy P. Pfenninger of DLA Piper.

The cases are MacMiles LLC v. Erie Insurance Exchange, case number 10-WAP-2023, and Ungarean v. CNA et al., case number 11-WAP-2023, in the Supreme Court of Pennsylvania.

–Editing by Bruce Goldman.

By: Elizabeth Daley