513 F.Supp.3d 549
E.D. Pa.2021Background:
- Plaintiffs (Ultimate Hearing Solutions LLCs) operate hearing-aid stores and held all-risk commercial property policies from Twin City covering Business Income, Extra Expense, Civil Authority, and a Limited Fungi/Bacteria/Virus endorsement.
- Plaintiffs closed or curtailed operations under COVID-19 closure orders and sought coverage for pandemic-related lost business income and extra expenses.
- The parties stipulated that COVID-19 was not present at plaintiffs’ insured premises or in the immediate area of those premises.
- Twin City denied coverage; plaintiffs sued for breach of contract (Business Income, Extra Expense, Civil Authority, Limited Virus Coverage) and bad faith; cross-motions for summary judgment followed.
- District Court granted Twin City summary judgment on all counts, holding no covered "direct physical loss or damage," the Civil Authority and Limited Virus provisions did not apply, the Virus Exclusion barred coverage, and plaintiffs’ bad-faith claim failed.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs suffered "direct physical loss of or damage to" property sufficient to trigger Business Income/Extra Expense. | "Direct physical loss" includes loss of use; closure orders made premises unusable. | Requires distinct, demonstrable physical alteration or contamination that nearly eliminates utility; mere loss of use untethered to physical condition is not enough. | No — no physical loss/damage shown; virus absent and loss of use alone insufficient. |
| Whether Civil Authority coverage applies (order prohibiting access due to Covered Cause of Loss to nearby property). | Closure orders that barred access are a blockade and trigger Civil Authority coverage. | Orders were preventive public-health measures, not responses to a Covered Cause of Loss causing physical damage to nearby property. | No — orders did not result from covered physical loss to nearby property and did not meet policy prerequisites. |
| Whether Limited Virus Coverage applies or is illusory. | Even if limited, it should cover COVID losses or be deemed illusory if effectively meaningless. | Limited coverage only applies to virus-caused direct physical loss from a specified cause of loss; plaintiffs show no virus-caused physical loss. | No — plaintiffs did not show virus-caused physical damage; provision not illusory because it applies to fungi/rot/bacteria and conceivable covered scenarios. |
| Whether the Virus Exclusion bars coverage. | Exclusion ambiguous or inapplicable because plaintiffs’ losses stemmed from government orders, not the virus at insured sites. | Exclusion unambiguous: no coverage for loss caused directly or indirectly by virus; indirect causation suffices. | Yes — exclusion applies and bars coverage because the pandemic/virus was at least an indirect cause of the losses. |
| Whether insurer acted in bad faith. | Twin City denied claims without investigation and ignored reasonable interpretations. | Denial had a reasonable legal basis; where no coverage exists, bad-faith denial claim fails. | No — bad-faith claim fails: no coverage exists and plaintiffs did not show independent bad-faith investigatory conduct. |
Key Cases Cited
- Port Auth. of N.Y. & N.J. v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir. 2002) (for invisible contaminants, "physical loss or damage" requires contamination that nearly eliminates utility or renders premises unusable/uninhabitable).
- 401 Fourth St. v. Inv’rs Ins. Co., 879 A.2d 166 (Pa. 2005) (clear policy language must be given effect; ambiguity construed for insured).
- Kvaerner Metals Div. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006) (ambiguous policy language construed in favor of insured when reasonable).
- In re Old Summit Mfg., LLC, 523 F.3d 134 (3d Cir. 2008) (contract interpretation is a question of law requiring courts to give effect to parties’ intent embodied in the writing).
- Wolfe v. Allstate Prop. & Cas. Ins. Co., 790 F.3d 487 (3d Cir. 2015) (bad-faith claim requires insurer lacked a reasonable basis and knew or recklessly disregarded that lack).
- Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680 (Pa. Super. Ct. 1994) (bad-faith standards and examples of bad-faith conduct).
- Certain Underwriters at Lloyds v. Creagh, [citation="563 F. App'x 209"] (3d Cir. 2014) (upholding microorganism exclusion as precluding coverage).