572 F.Supp.3d 119
E.D. Pa.2021Background
- Plaintiffs operate 13 affiliated medical practices in Pennsylvania and New Jersey and purchased an "all-risk" CNA Connect policy (9/1/2019–9/1/2020) including Business Income, Extra Expense, and Civil Authority coverages.
- State COVID-19 closure orders prohibited elective surgeries; plaintiffs substantially limited elective procedures but did not allege the virus was present at their premises or that facilities were structurally damaged or fully closed.
- Plaintiffs submitted a business-interruption claim; Continental denied coverage and plaintiffs sued for breach of contract and declaratory relief; CNA Financial (parent) was dismissed from the suit.
- Policy coverage for Business Income and Civil Authority is conditioned on "direct physical loss of or damage to" covered property (or to other property, for Civil Authority claims).
- The court evaluated whether plaintiffs plausibly alleged "direct physical loss or damage," whether Civil Authority coverage applied, and related doctrines (reasonable expectations; absence of a virus exclusion).
- Holding: the court dismissed the Amended Complaint with prejudice, ruling plaintiffs did not allege covered physical loss/damage and Civil Authority coverage was not triggered.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs alleged a "direct physical loss of or damage to" property (Business Income) | "Loss" and "damage" are ambiguous and include contamination or loss-of-use from COVID-19, so BI coverage applies | Policy requires actual, demonstrable physical alteration or loss of utility to the property; plaintiffs allege only economic loss/limited operations | No — plaintiffs failed to plead physical loss or damage; limited suspension of elective procedures is economic loss, not covered physical loss |
| Whether "damage" can include invisible contamination or the "COVID-19 Effect" | Invisible viral contamination or public fear that renders property less usable constitutes physical damage | Third Circuit and district precedent require property function be nearly eliminated or structural/physical alteration for non-visible harms | No — absent allegations that virus was present or property rendered unusable, contamination theory insufficient |
| Whether Civil Authority endorsement covers losses from closure orders | Closure orders issued due to risk of COVID-19 in area triggered Civil Authority coverage because policy covers "risks of direct physical loss" | Civil Authority requires direct physical loss/damage to OTHER property that caused the authority action; plaintiffs alleged preventive orders, not damage to other premises | No — plaintiffs did not allege direct physical loss/damage to other properties; orders were preventative and not within Civil Authority clause |
| Whether reasonable expectations or the absence of a virus exclusion require coverage | Plaintiffs reasonably expected pandemic losses to be covered; absence of a virus exclusion means coverage should attach | Reasonable-expectations doctrine limited; cannot create coverage when policy unambiguous and loss not within coverage; absence of exclusion irrelevant if coverage not triggered | No — doctrine inapplicable where policy terms are clear and no physical loss/damage alleged; lack of virus exclusion does not create coverage |
Key Cases Cited
- Port Authority of New York & New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir.) (presence of unnoticeable hazards like asbestos requires higher showing; mere presence or threat insufficient for coverage)
- Motorists Mut. Ins. Co. v. Hardinger, [citation="131 F. App'x 823"] (3d Cir.) (under Pennsylvania law, nonstructural contaminants trigger coverage only if they render the property useless or eliminate its function)
- 401 Fourth St., Inc. v. Investors Ins. Grp., 879 A.2d 166 (Pa. 2005) (insurance contract interpretation is a question of law; give effect to plain meaning)
- Post v. St. Paul Travelers Ins. Co., 691 F.3d 500 (3d Cir. 2012) (construe all policy provisions together and avoid creating ambiguity where none exists)
- Collister v. Nationwide Life Ins. Co., 388 A.2d 1346 (Pa. 1978) (reasonable expectations doctrine protects insureds in limited circumstances where insurer altered coverage beyond insured's expectation)