879 S.E.2d 742
S.C.2022Background
- Sullivan Management (Carolina Ale House restaurants) sought business-interruption coverage for losses after COVID-19 appeared in or near its properties and after the governor prohibited on-site dining (March 17, 2020).
- Fireman's Fund/Allianz denied coverage; Sullivan sued; case removed to federal court; the district court certified five questions to the South Carolina Supreme Court.
- The certified question accepted: whether the presence of COVID-19 and/or government orders that hinder use of property constitute “direct physical loss or damage,” or whether that phrase requires permanent dispossession or physical alteration.
- The policy did not define “direct physical loss or damage”; the Court applied ordinary dictionary meanings and considered the policy’s “period of restoration” language.
- Relying on South Carolina contract principles and persuasive out-of-state authority, the Court held that mere presence of the virus and government shutdown orders do not constitute direct physical loss or damage because they do not cause tangible alteration, destruction, or a need to repair/replace the property.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether COVID‑19 contamination and related government closure orders constitute “direct physical loss or damage” under the policy | Presence of virus or orders that destroy fitness/habitability amount to physical loss or damage; terms are broad or ambiguous and should be construed for the insured | “Direct physical loss or damage” requires actual, discernible physical harm, material alteration, destruction, or permanent dispossession; economic or loss-of-use harms do not trigger coverage | No. Neither the virus’s presence nor government indoor‑dining bans meet the policy’s trigger because they do not materially alter or physically damage the property and there is nothing to repair/replace |
Key Cases Cited
- Santo's Italian Cafe LLC v. Acuity Ins. Co., 15 F.4th 398 (6th Cir. 2021) (shutdown orders did not arise from physical loss or damage)
- Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 15 F.4th 885 (9th Cir. 2021) (period of restoration language implies need for physical repair to trigger coverage)
- Sandy Point Dental, P.C. v. Cincinnati Ins. Co., 20 F.4th 327 (7th Cir. 2021) (coverage tied to physical alteration requiring repair/replacement)
- Estes v. Cincinnati Ins. Co., 23 F.4th 695 (6th Cir. 2022) (COVID and shutdowns caused economic/intangible harms, not physical loss)
- Colectivo Coffee Roasters, Inc. v. Soc'y Ins., 974 N.W.2d 442 (Wis. 2022) (loss of use distinct from physical loss or damage)
- Kim‑Chee LLC v. Philadelphia Indem. Ins. Co., 535 F. Supp. 3d 152 (W.D.N.Y. 2021) (courts generally require proof of change/alteration to property to show physical damage)
- Uncork & Create LLC v. Cincinnati Ins. Co., 498 F. Supp. 3d 878 (S.D. W. Va. 2020) (pandemic affects health and behavior, not physical structures)