Thought Leadership

Earlier today, the Supreme Court of Pennsylvania handed down its heavily anticipated decisions in Ungarean v. CNA and Valley Forge Insurance Company and MacMiles, LLC v. Erie Insurance Exchange, holding that Pennsylvania, like the vast majority of federal and state decisions around the country, will not find coverage under a commercial property claim for economic loss unaccompanied by a physical alteration to the property. The twin cases were decided just shy of eleven months after the Superior Court of Pennsylvania came to very different results in the two matters, which include the same essential facts and legal issues, and now make clear the state of the law on what constitutes a “direct physical loss” in Pennsylvania.

By way of brief review, commercial property policies typically provide coverage for “direct physical loss of or damage to covered property.” In terms of the scope of coverage afforded, these policies extend coverage for buildings, business personal property and personal property of others, and income protection, as well as for losses resulting from certain actions from civil authorities.

In Ungarean, a deeply divided 5-4 panel of the Superior Court looked at the language of CNA’s policy and held that a dentist’s claims related to his practice’s COVID-19 closures were covered under the “Business Income and Extra Expense” coverage because the terms “direct,” “physical,” “damage” or “loss” were not defined and were, thus, ambiguous. The Superior Court looked to ordinary dictionary definitions of the terms and held that at least one definition of “loss” included “deprivation.” Understood in that context, the majority decision held that “loss” could be interpreted to mean “deprivation,” while damage—which needed to be considered in the disjunctive—would mean “destruction or ruin.” As such, the majority concluded that “loss of property includes the act of being deprived of the physical use of one’s property.” The appellate panel also rejected CNA’s claim that the terms “direct” and “physical” were being read out of the policy, since the dictionary definitions of those terms permitted a reasonable interpretation that the spread of COVID-19 had “a close, logical, causal and/or consequential relationship to the ways in which [Ungarean] materially utilized his physical space.” In short, the panel concluded that “[a]ny economic losses were secondary to the businesses’ physical losses.”

By contrast, in MacMiles the issue involved a claim by a bar owner that its “loss of use” of its covered property (the building in which the bar was located) as a result of the closures mandated by the governor during the height of the COVID-19 pandemic constituted a covered loss. In short, the panel that decided MacMiles concluded that the Erie policy’s coverage for “direct physical loss or damage to covered property” could not be read in the disjunctive and that the purely economic damages suffered by the bar owner were, therefore, not covered. 

Given this split in the outcomes of the twin cases, the Supreme Court of Pennsylvania took up the issues and heard argument on both cases. In a unanimous opinion drafted by Justice Kevin Brobson, the court reversed the Superior Court’s decision in Ungarean and opted to follow the lower court’s rationale in MacMiles. (In MacMiles, the court issued a simple order affirming the decision below and referencing its opinion in Ungarean). Simply put, the justices held that the meaning of the “operative phrase ‘direct physical loss of or damage to physical property’…was clear: There must be either (1) a direct physical disappearance, partial or complete deterioration, or absence of a physical capability or function of the property (loss), or (2) a physical harm or injury to the property (damage).” The requirement of direct physical loss or damage necessitating repairs, rebuilding or replacement of the property extends to all of the coverages afforded by a commercial property policy, including the building and business income and extra expense coverage claims asserted by Ungarean. 

In the Ungarean matter (as in most COVID-19 business closure cases), the Supreme Court found there was no evidence of any physical damage or loss to the bar. Indeed, Ungarean did not allege that the COVID-19 virus was on or at the property or that the virus caused any damage to the property during the shutdown. Rather, “the sole reason Ungarean’s business suffered financial losses during the period in question was due to the government-ordered shutdown, not any alleged physical condition of” the bar. As purely economic claims do not fall within the coverage afforded under a commercial property policy, the Supreme Court concluded that the Superior Court’s opposite conclusion was incorrect and reversed.

With Ungarean and MacMiles now decided, the state of the law on the question of whether COVID-19 closure claims are covered in Pennsylvania is now clear: such claims will not be covered absent a showing of actual, direct physical loss or damage to the property. In so holding, Pennsylvania now finds itself aligned with the predominant view of courts that have decided the issue nationwide.

We will, of course, continue to monitor this and other insurance coverage issues that percolate before courts in Pennsylvania, New Jersey, and throughout our firm’s geographic footprint and around the country. 

^{Legal Update for Insurance Services - September 26, 2024, has been prepared for our readers by Marshall Dennehey. It is solely intended to provide information on recent legal developments and is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. We welcome the opportunity to provide such legal assistance as you require on this and other subjects. If you receive the alerts in error, please send a note to tamontemuro@mdwcg.com. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2024 Marshall Dennehey. All Rights Reserved.}