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Co-Chair, Insurance Services Practice

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Portrait of Todd J. Leon

Defense Digest

In Twin Decisions on Insurance Coverage for COVID-19 Closure Claims, Superior Court of Pennsylvania Makes Clear that Policy Language Matters

Defense Digest, Vol. 28, No. 12, December 2022

December 1, 2022

by Todd J. Leon

Key Points:

  • Pennsylvania’s appellate courts weigh in on the question of whether insurance coverage is to be afforded for COVID-19-related business losses and came to different results in two cases involving different policy language.
  • In determining the coverage issues presented, the courts emphasized that policy language matters.
  • The question now is whether the Supreme Court of Pennsylvania will weigh in on the subject.

In a pair of decisions handed down on November 30, 2022, the Superior Court of Pennsylvania came to very different results in cases stemming from the same essential facts. In the first decision, MacMiles, LLC v. Erie Insurance Exchange, 2022 WL 17332910 (Pa. Super. Nov. 30, 2022), a unanimous panel concluded that the insured (a bar/restaurant) was not entitled to coverage for COVID-19-related business losses under its policy. On the other hand, in Ungarean v. CNA and Valley Forge Insurance Company, 2022 PA Super 204 (Pa. Super. Nov. 30, 2022), a 5–4 panel concluded that the insured (a dentist and his practice) was entitled to coverage under his policy for a similar claim. A look inside the opinions and, specifically, the policies at issue, explains why the same judges came to different conclusions on similar issues.

Judge Victor Stabile wrote the unanimous opinion in MacMiles. Critical to the outcome of the decision was the fact that the policy at issue was a commercial property policy, which provided coverage limited to “direct physical loss of or damage to covered property.” Indeed, Erie’s policy included coverage for buildings, coverage for business personal property and personal property of others, income protection coverage, and coverage for losses resulting from certain actions of civil authorities.

The Superior Court evaluated MacMiles’ claim that its “loss of use” of its covered property (the building in which the bar was located) constituted a covered loss. In rejecting that argument, the court noted that other courts around the country have construed similar policy language and held that the language does not provide coverage under a commercial property insurance policy for “economic loss unaccompanied by a physical alteration to the property.” The MacMiles court rejected the insured’s argument that the Erie policy’s coverage for “direct physical loss or damage to covered property” could be read in the disjunctive, so that purely economic damage would be covered. In so holding, the panel referenced the fact that the Erie policy never indicated that it intended to cover stand-alone economic damages; that the policy repeatedly referenced the word “damage”; that the policy referenced the need to “repair, replace or rebuild” damaged property, which implied that physical damage was required to trigger coverage; and that MacMiles failed to allege that the restaurant suffered any physical damage. The judges also rejected MacMiles’ contention that it was entitled to coverage under the civil authority language of the Erie policy, as that language required that there be physical damage to property other than the insured property.

In contrast, in Ungarean, Superior Court President Judge Jack Panella, writing for a five-judge majority, decided that the insured was entitled to coverage under the terms of his policy with CNA. In so holding, the majority opinion construed the “Business Income and Extra Expense” coverage of the policy issued by CNA—which coverage was apparently not included in the Erie policy that was at issue in MacMiles. To be clear, the CNA policy included both the commercial property coverage that was considered in MacMiles and business income and extra expense coverage. However, the majority’s determination was focused upon the “Business Income and Extra Expense” coverage.

The “Business Income and Extra Expense” provisions of the CNA policy provided “coverage for loss of business income and extra expenses incurred due to the suspension of an insured’s operations caused by a ‘direct physical loss of or damage to’ the covered property.” The CNA language was thus similar to what was included in the Erie policy at issue in MacMiles, except that the CNA language was specifically contained within the business income and extra expense provisions of its policy. The Erie language had been contained within its policy’s commercial property provisions.

At any rate, the key dispute in Ungarean was whether, as CNA contended, a physical alteration to the insured property was required to trigger coverage or whether, as the insured claimed, coverage should be allowed for the loss of use of the property, even in the absence of actual physical harm. In evaluating this issue, the majority emphasized that the CNA policy did not define the terms “direct,” “physical,” “damage,” or “loss.” Ordinary dictionary definitions were needed to construe the policy language.

Looking to those definitions, the court indicated that “at least one” definition of “loss” included “deprivation.” Understood in that context, it held that “loss” could be interpreted to mean “deprivation,” while damage—which needed to be considered in the disjunctive—would mean “destruction or ruin.” Because CNA had drafted the policy, its terms were construedagainst it, and it was determined that “loss of property includes the act of being deprived of the physical use of one’s property.” In a similar fashion, the court 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 court concluded that “[a]ny economic losses were secondary to the businesses’ physical losses.”

After finding that Ungarean’s claims related to his practice’s COVID-19 closures were covered under the “Business Income and Extra Expense” coverage of the CNA policy, the Superior Court went on to reject CNA’s argument that the period of restoration provisions functioned to defeat coverage. In this regard, the court held that “period of restoration provisions are most reasonably construed as time limits for coverage, and do not otherwise alter the definition of ‘physical loss or damage.’”

In finding that CNA owed coverage for Ungarean’s loss, the court also rejected the insurer’s argument that the claim did not qualify as a covered cause of loss. The analysis in this regard focused upon the policy’s definition of “covered causes of loss,” which provides that risks of direct physical loss are covered unless excluded.

In short, the majority found that CNA failed to meet its burden of showing that any of the exclusions applied. It held that the manner in which the CNA policy presented its exclusions was ambiguous. Specifically, the CNA policy included four categories of exclusions, the fourth of which was denominated “Business Income and Extra Expense Exclusions.” Given this title, the panel held that Ungarean could reasonably conclude that only the “Business Income and Extra Expense Exclusions” applied to the “Business Income and Extra Expense” coverage claims, and that the other three categories of exclusions were not applicable. The court then found that none of the “Business Income and Extra Expense Exclusions” applied under the facts of the case and that, even if the other exclusions were to be considered, they were ambiguous in the context of the claims presented.

Judge Stabile, who wrote the unanimous opinion in MacMiles, wrote a dissenting opinion in Ungarean in which three other judges joined. The dissent emphasized its view that the majority opinion violated rules of insurance policy interpretation by construing individual terms in isolation rather than reading the policy as a whole, and that the majority decision was at odds with the “near unanimous conclusions reached by all state and federal courts to have considered the meaning of substantially similar language.”

With the decisions in MacMiles and Ungarean now handed down, the 30-day clock is running for the losing parties to seek additional review before the Supreme Court of Pennsylvania. Time will tell whether the Supreme Court takes up the issue, and we will continue to monitor the situation closely.

*Todd, a shareholder, works in both our Philadelphia, Pennsylvania, and Mount Laurel, New Jersey, offices. He can be reached at 215.575.2605, 856.414.6029 or tjleon@mdwcg.com.

 

Defense Digest, Vol. 28, No. 12, December 2022, is prepared by Marshall Dennehey to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2022 Marshall Dennehey. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.

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The Search-Incident-to-Arrest Doctrine Does Not License Strip Searches

In Beatty v. Gardner, No. 25-2860 (3d Cir. Sept. 16, 2026), Kyle Beatty sued police officers Clinton Gardner and Calvin Irvin under 42 U.S.C. § 1983 after they stopped, arrested, and searched him three times during a drug investigation in Williamsport, Pennsylvania. The officers initially smelled marijuana coming from the car in which Beatty was sitting and observed marijuana residue, giving them probable cause to arrest him. Beatty consented to the first pat-down, and the second search was conducted incident to his lawful arrest; neither search uncovered weapons or contraband. The officers then transported Beatty to the police station solely to strip-search him, but the strip search also revealed nothing. The District Court granted the officers summary judgment, concluding that the initial stop, arrest, and first two searches were reasonable and that qualified immunity protected the officers from liability for the strip search. The Third Circuit affirmed, but held that the strip search itself violated the Fourth Amendment. The court concluded that the search-incident-to-arrest doctrine does not automatically permit officers to strip-search an arrestee outside the jail or prison setting. Because strip searches are highly intrusive and the traditional justifications for searches incident to arrest (officer safety and preservation of evidence) did not justify the search of Beatty, the officers generally needed either the arrestee’s consent, exigent circumstances, or a warrant supported by probable cause to believe that a search beneath the clothing would reveal weapons, contraband, or evidence. Here, the officers had none of those justifications. Nevertheless, the court held that qualified immunity barred damages liability because, at the time of the search, the right against a warrantless strip search of an arrestee outside the institutional setting was not clearly established by Supreme Court or Third Circuit precedent. The court likewise upheld qualified immunity on Beatty’s First Amendment retaliation claim and affirmed summary judgment for the officers.

Thought Leadership

Pennsylvania Supreme Court to Review Whether Legal Malpractice Claims May Be Recast as Breach of Contract Claims

The Pennsylvania Supreme Court recently granted allowance of appeal to consider whether a plaintiff may pursue a breach of contract claim against an attorney based on allegations that the attorney failed to provide competent legal services. The issue is significant in professional liability litigation because it concerns whether a plaintiff may avoid the statute of limitations applicable to professional negligence claims by characterizing the alleged misconduct as a breach of contract. Antoine Poteat retained attorneys Gary Asteak and Nino V. Tinari to represent him in a criminal matter. After his conviction was subsequently overturned through a Post Conviction Relief Act proceeding, Poteat filed suit against his former attorneys alleging that they breached their retainer agreements by failing to provide competent legal services. The attorneys argued that the claims sounded in professional negligence, rather than breach of contract, and were therefore time-barred. The trial court dismissed Poteat’s complaint, but the Superior Court, sitting en banc, reversed. The Superior Court held that the gist-of-the-action doctrine did not bar Poteat’s breach of contract claim because the alleged failure to provide competent legal services could constitute a breach of the parties’ agreement. The Court further held that a legal-services agreement contains an implied duty requiring an attorney to provide competent legal services, even where the agreement does not contain an express provision requiring such services. The Pennsylvania Supreme Court granted review in July 2026 and will consider whether the Superior Court’s decision conflicts with Pennsylvania precedent distinguishing contract and tort claims, including Bruno v. Erie Insurance Co. The Supreme Court will also address whether a plaintiff may maintain a breach of contract claim based on an implied duty to provide competent legal services without identifying a specific contractual provision that was breached. The Supreme Court’s decision could have significant implications for professional liability litigation in Pennsylvania, particularly where plaintiffs seek to characterize claims arising from alleged professional negligence as contractual claims.

Thought Leadership

Two Tracks, No Preclusion: Ohio Supreme Court Preserves Separate Damages Claims After Chapter 2506 Appeals

The Supreme Court of Ohio has clarified that an administrative appeal under Ohio Revised Code Chapter 2506 does not bar a separate action for damages and declaratory relief that could not have been pursued in the administrative appeal. The Ohio Supreme Court considered Sheetz, Inc. v. Centerville (2026-Ohio-3531) as a result of a certified question from the Southern District of Ohio. The question was whether Sheetz, the gas station/convenience store brand, was barred from seeking damages in a separate action since damages were not sought in their administrative appeal. Ultimately, the Ohio Supreme Court ruled that res judicata does not bar a separate action for damages after ruling on an administrative appeal because R.C. Chapter 2506 is limited to judicial review and cannot grant affirmative relief. The case arose after Centerville’s city council rejected a site plan proposed by Sheetz, Inc. that had received unanimous approval from the City’s planning commission. Sheetz filed an administrative appeal pursuant to R.C. 2506 in the Montgomery County Court of Common Pleas, and two months later filed a complaint for damages and declaratory relief under 42 USC § 1983 as a takings action with the city, city council, and other objectors as improper takings and a violation of due process, as well as interference with business and contractual relationship. The city and city council removed the § 1983 action for damages to federal court. Montgomery County Court of Common Pleas reversed the city council’s denial, and allowed the Sheetz project to move forward. Upon that ruling, the federal court issued a show-cause order questioning whether the § 1983 action was barred by the doctrine of res judicata via claim preclusion (which includes all theories of recovery).  Sheetz argued that Ohio courts of common pleas do not have authority to award damages or declaratory relief as party of the R.C. Ch. 2506 appeal, therefore res judicata could not be triggered to apply to the § 1983 action. Additionally, Sheetz moved to certify the issue to the Ohio Supreme Court, citing differing results between the second and sixth districts on this same issue. Centerville approached the question, not from a claim preclusion standpoint, but from the holding in Grava v. Parkman, Twp which states that a final judgment rendered on the merits bars all subsequent action based on the same transaction or occurrence.  In yet another approach, an objector argued that claim preclusion was satisfied because Sheetz could have raised its damages claims in the administrative appeal – Sheetz disagrees. In their analysis, the Supreme Court of Ohio broke down the elements of a claim preclusion analysis: 1) a prior final, valid decision on the merits by a court of competent jurisdiction; (2) a second action involving the same parties, or their privies, as the first; (3) a second action raising claims that were or could have been litigated in the first action; and (4) a second action arising out of the transaction or occurrence that was the subject matter of the previous action. The Court held that R.C. Ch. 2506 does not permit a party to argue damages as R.C. Ch. 2506 limits the common pleas jurisdiction as if it were sitting on appeal, and therefore can only affirm, reverse, vacate, or modify the appealed order, or can remand the case to the administrative body. Further, the Court held that Grava’s conclusion that a final judgment precludes additional litigation for different relief is inapplicable under this fact pattern because it was meant only to apply to those matters in which the plaintiff brings the exact same case twice, but for new relief. The Court found Grava was inapplicable because Sheetz could have requested damages or declaratory relief in the R.C. 2506 appeal. Therefore, Grava would be nothing more than dicta if it even did apply. Going further, the Ohio Supreme Court disavowed Sixth Circuit precedent which, in reliance on Grava and other district court decisions, permitted an owner to seeking relief under 42 U.S.C. § 1983 alongside an administrative appeal. See Moore v Hiram Twp., 988 F.3d 353 (6th Cir.2021). The Ohio Supreme Court found that the Sixth Circuit had disregarded a critical decision in Community Concerned Citizens, Inc. v. Union Twp. Bd. of Zoning Appeals, 1993-Ohio-115, which clearly held that a R.C. Ch. 2506 appeal cannot be combined with a complaint seeking other claims for relief. Id. at ¶ 11. To that end, the Ohio Supreme Court has determined that the decisions Moore relied on (outside of Grava) are no longer good law, and that Moore was wrongly decided. The decision draws a clear procedural boundary: Chapter 2506 provides judicial review of an administrative decision, not a forum for independent claims seeking affirmative relief. Although Grava may place claims arising from a single transaction within the potential scope of claim preclusion, those claims are not barred unless the complete claim-preclusion test is satisfied. Because Sheetz could not have pursued damages or declaratory relief in its Chapter 2506 appeal, the separate action was not precluded. The remaining question for practitioners looking to apply or defend against this exception is when does the statute of limitations begin to run on damages and declaratory relief claims related to an administrative decision on appeal? A takings action in federal court has a 2-year statute of limitations, or as a state claim, 4 years (like the other tortious claims raised therein). Correlating this case with others, an administrative appeal will not likely toll the statute of limitations on claims based on a final decision by a municipal authority. Therefore, practitioners should look for these cases to be brought simultaneously.