530 F.Supp.3d 533
E.D. Pa.2021Background
- Plaintiffs (three Philadelphia bars/restaurants and putative class) purchased AAIC all-risk commercial property policies covering losses from “direct physical loss of or damage to” property and containing a virus/bacteria exclusion.
- Pennsylvania and Philadelphia COVID-19 orders in March 2020 curtailed in-person dining (takeout/delivery generally permitted) and later allowed limited reopenings with restrictions; Plaintiffs lost income and incurred extra expenses.
- Plaintiffs submitted claims; AAIC denied coverage. Plaintiffs sued for declaratory judgment, breach of contract, and bad faith on behalf of three classes (Business Income, Extended Business Income, Civil Authority).
- AAIC moved to dismiss under Rule 12(b)(6), arguing Plaintiffs fail to allege a “direct physical loss of or damage to” property and, alternatively, that the virus exclusion bars coverage.
- The court applied Pennsylvania law and the usual contract/ambiguity rules, accepting Complaint facts as true but examining policy language and reasonable expectations.
- The court found the policies unambiguously require a physical alteration or contamination of the premises to trigger coverage, and that the Complaint alleges only loss-of-use caused by government orders (not physical damage or contamination).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Business Income/Extra Expense coverage is triggered by government closure orders as a "direct physical loss of or damage to" property | Government orders deprived Plaintiffs of use/possession of premises (loss of use equals physical loss) | "Direct physical loss" unambiguously requires a physical change/contamination or damage to the premises | Held for AAIC: loss-of-use from government orders, without physical alteration/contamination, does not satisfy "direct physical loss" and BI/Extra Expense coverage not triggered |
| Whether Extended Business Income (EBI) is recoverable absent initial Business Income coverage | Plaintiffs seek EBI for losses continuing after restoration period | EBI applies only if Business Income loss is payable under the policy | Held for AAIC: EBI unavailable because Business Income coverage was not triggered |
| Whether Civil Authority coverage applies because government orders prohibited access to premises | Orders (by civil authority) prohibited access and thus civil authority coverage applies | Civil Authority coverage requires damage to other property and a prohibition on access; orders did not prohibit access and Plaintiffs allege no damage to other property | Held for AAIC: Civil Authority coverage not triggered—no allegations of damage to other property and access was not prohibited (takeout/limited access allowed) |
| Applicability of the virus exclusion | Plaintiffs contend loss caused by civil orders and loss-of-use; dispute whether exclusion applies | AAIC relies on virus exclusion barring losses caused by or resulting from any virus | Court did not reach exclusion (found policy language unambiguously precludes coverage on other grounds), but noted exclusion would independently bar coverage if reached |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (plausibility standard for Rule 12(b)(6))
- Port Authority of New York & New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226 (contamination can be "physical loss" when property rendered unusable)
- Kvaerner Metals Civ. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006) (ambiguities in insurance policies construed for insured)
- Meyer v. CUNA Mutual Ins. Soc., 648 F.3d 154 (avoid constructions that render contract terms superfluous)
- Nationwide Mutual Ins. Co. v. Buffetta, 230 F.3d 634 (choice-of-law/substantive-law governing insurance coverage in diversity cases)
- Allstate Property & Casualty Ins. Co. v. Squires, 667 F.3d 388 (give effect to clear, unambiguous policy language)