541 F.Supp.3d 1200
W.D. Wash.2021Background
- Dozens of Western Washington businesses sued their insurers seeking business-interruption and related coverage for losses caused by COVID-19 and state-ordered restrictions; cases were consolidated into ten actions against different insurer groups.
- Policies at issue are "all-risk" commercial property/business-interruption forms that require "direct physical loss of or damage to" covered property to trigger coverage; many policies also contain extensions (Business Income, Extra Expense, Civil Authority) and exclusions (notably Virus/Contamination).
- Plaintiffs argued COVID-19 and the Governor’s proclamations caused covered "physical loss" (loss of use/occupancy) or else triggered coverage under policy extensions or special communicable-disease endorsements; some plaintiffs alleged actual on-premises presence of the virus.
- Defendants argued COVID-19 does not cause tangible, physical alteration or dispossession of property, so the physical-loss trigger is unmet; many insurers also invoked Virus/Contamination exclusions.
- The court resolved common legal issues as a matter of law on motions to dismiss/for judgment on the pleadings (limited discovery stayed), rejecting plaintiffs’ theories and dismissing all consolidated actions with prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does COVID-19 (and related shutdown orders) cause "direct physical loss of or damage to" property sufficient to trigger coverage? | "Loss" includes loss of use/deprivation of occupancy; actual presence of virus or governmental restrictions effected a physical loss. | "Physical loss or damage" requires tangible, discernible physical alteration or dispossession (theft, destruction); COVID-19 causes illness, not property damage. | Court: No. COVID-19 does not cause the required physical alteration or dispossession; shutting or restricting operations is an economic loss, not covered physical loss. |
| Do Business Income / Extra Expense / Extended Business Income provisions or Practice-Income endorsements provide independent coverage absent physical loss? | Some endorsements or policy language broaden coverage to suspension of operations (independent of physical alteration). | Endorsements modify calculation or are conditioned on the policy’s physical-loss trigger; they do not create independent coverage where none exists. | Court: No independent coverage; endorsements adjust recovery methods or limits but still depend on physical-loss trigger. |
| Do Civil Authority (and similar access) provisions provide coverage for shutdown orders? | Civil Authority extensions cover losses from governmental orders prohibiting access, so Proclamations cause coverage. | Civil Authority provisions require that the civil order be due to direct physical loss/damage to nearby property; without physical loss, extension is inapplicable. | Court: No. Civil Authority provisions here incorporate physical-loss requirements and thus do not apply to COVID-19 shutdowns. |
| Do Virus / Contamination exclusions bar coverage or are they inapplicable (e.g., efficient-proximate-cause, pandemic vs virus, regulatory estoppel)? | Plaintiffs: loss caused by governmental response (not virus) or efficient proximate cause favors coverage; some argue exclusions shouldn’t apply or are subject to regulatory estoppel. | Defendants: Even if orders played a role, COVID-19 was the efficient proximate cause; exclusions exclude virus-related losses; regulatory estoppel is not adopted under Washington law. | Court: Virus/Contamination exclusions (where present) bar coverage; efficient-proximate-cause points to virus as predominant cause; court declines to adopt regulatory estoppel. |
| Can plaintiffs maintain extra-contractual claims (bad faith, WCPA, IFCA, negligence) absent coverage? | Plaintiffs: insurers may still have unreasonably denied claims or performed inadequate investigations even if coverage is disputed. | Defendants: Where denial was legally justified (no coverage), extra-contractual claims premised solely on denial fail; plaintiffs must plead independent, specific misconduct. | Court: No. Extra-contractual claims dismissed for failure to plead independent wrongful acts beyond denial of coverage or conclusory allegations. |
| Should plaintiffs be granted leave to amend after dismissal? | Plaintiffs sought leave to amend. | Defendants opposed where amendment would be futile given legal determination on physical loss. | Court: Denies leave — amendment would be futile because COVID-19 cannot be pled to cause the required physical loss or overcome exclusions; dismissals with prejudice. |
Key Cases Cited
- C. H. Leavell & Co. v. Fireman’s Fund Ins. Co., 372 F.2d 784 (9th Cir. 1967) (describing "all-risk" policies and scope of coverage absent exclusions)
- Vision One, LLC v. Philadelphia Indemnity Ins. Co., 276 P.3d 300 (Wash. 2012) (all-risk policy interpretation principles)
- Xia v. ProBuilders Specialty Ins. Co., 400 P.3d 1234 (Wash. 2017) (efficient proximate cause rule in exclusion context)
- Overton v. Consolidated Ins. Co., 38 P.3d 322 (Wash. 2002) (two-step coverage analysis: insured shows covered loss, insurer shows exclusion)
- Villella v. Public Employees Mut. Ins. Co., 725 P.2d 957 (Wash. 1986) (interpreting physical-loss/damage requirement)
- Fujii v. State Farm Fire & Casualty Co., 857 P.2d 1051 (Wash. Ct. App. 1993) (no coverage where only threatened physical harm existed)
- Wolstein v. Yorkshire Ins. Co., Ltd., 985 P.2d 400 (Wash. Ct. App. 1999) (financial or performance problems did not constitute physical loss)
- MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 115 Cal. Rptr. 3d 27 (Cal. Ct. App. 2010) (articulating "distinct, demonstrable, physical alteration" test adopted by many courts)