1:21-mc-00001
W.D. Pa.Oct 14, 2022Background
- This MDL consolidates 32 actions (47 plaintiffs) alleging Erie Insurance wrongly denied COVID-19–related business interruption claims under two commercial policies (Ultrapack Plus and UltraFlex).
- Policies provide coverage for "direct physical ‘loss’ of or damage to" covered property (triggering income protection, extra expense, civil authority, and dependent-property coverages) and define "interruption of business" by reference to repair, rebuild, or replace periods.
- Plaintiffs allege COVID-19 virus contamination and state "Mandated Shutdown" orders caused direct physical loss or damage and thus coverage; Erie denied claims and moved to dismiss counts seeking declaratory relief and breach of contract.
- Erie relies on policy text (including an UltraFlex virus exclusion) and precedent holding that "physical" requires tangible or materially disruptive harm; plaintiffs primarily argue the phrase is ambiguous and can include loss of use or contamination.
- The court applied relevant state-law principles across jurisdictions represented in the MDL and concluded plaintiffs failed to plausibly plead "direct physical loss of or damage to" property; dismissal of Counts One–Four was granted.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether COVID-19 contamination or Mandated Shutdowns caused "direct physical loss of or damage to" property | Virus particles on surfaces/air and government shutdowns deprived businesses of physical use; phrase can reasonably mean loss of functionality | "Direct physical" requires tangible/material alteration or total dispossession; shutdowns are non-physical and not a covered peril | Plaintiffs failed to plausibly allege physical alteration or uninhabitability; no covered "direct physical loss or damage" shown |
| Whether "loss of" differs from "damage to" such that "loss" can cover mere loss of use | "Loss" can mean deprivation of use even without structural change | Disjunctive difference is limited: "loss" = complete destruction/dispossession; "damage" = partial/physical alteration | Court adopts majority view that absent pervasive contamination rendering property unusable, mere loss of use is insufficient |
| Applicability of Law-and-Ordinance exclusion to shutdown orders | Plaintiffs: "use" in exclusion focuses on construction/repair context, so shutdown orders don't fit | Erie: shutdowns regulate property use and fall squarely within exclusion | Court found the exclusion ambiguous (construed for insured), but ambiguity is irrelevant because plaintiffs did not establish coverage |
| UltraFlex virus exclusion and regulatory estoppel claim | Plaintiffs: exclusion shouldn't apply where shutdowns (not virus) were proximate cause; industry statements to regulators estop Erie from invoking exclusion | Erie: shutdowns were not a covered peril; virus exclusion plainly bars virus-caused losses; plaintiffs fail to plead ISO/AAIS statements as Erie’s direct regulatory statements | Virus exclusion unambiguously applies to virus-caused losses; plaintiffs failed to plead regulatory estoppel (no plausible allegation Erie itself made contrary regulatory statements) |
| Reasonable expectations doctrine (Pennsylvania) | Plaintiffs: insurer misconduct and "all-risk" policy gave reasonable expectation of coverage | Erie: no misconduct pleaded; technical policy language is not misconduct; expectations not reasonable given clear policy terms | Court: plaintiffs did not plausibly allege misconduct or reasonable expectations justifying relief |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (complaint must state plausible claim; courts may disregard conclusory allegations)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard in pleading law)
- Port Authority of New York & New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir. 2002) (invisible contaminants require contamination so severe property function is nearly eliminated to constitute physical loss)
- Sandy Point Dental, P.C. v. Cincinnati Insurance Co., 20 F.4th 327 (7th Cir. 2021) (under Illinois law, "direct physical loss" generally requires physical alteration; only pervasive loss of use may qualify)
- 10012 Holdings, Inc. v. Sentinel Insurance Co., 21 F.4th 216 (2d Cir. 2021) (New York law: mere loss of use without physical damage does not satisfy "direct physical loss")
- Uncork & Create LLC v. Cincinnati Insurance Co., 27 F.4th 926 (4th Cir. 2022) (interpreting West Virginia law to require material alteration or imminent physical threat tied to uninhabitability)
- Santo’s Italian Café LLC v. Acuity Insurance Co., 15 F.4th 398 (6th Cir. 2021) (Ohio law: shutdown orders do not create direct physical loss; need physical alteration or destruction)
- Travelers Insurance Co. v. Eljer Mfg., Inc., 757 N.E.2d 481 (Ill. 2001) ("physical injury" connotes alteration in appearance, shape, color, or other material dimension)
- U.S. Fidelity & Guaranty Co. v. Wilkin Insulation Co., 578 N.E.2d 926 (Ill. 1991) (contamination by asbestos fibers can constitute physical injury when it renders property unusable)