Does Covid-19 Trigger Coverage under a Property Insurance Policy?

Covid-19 created conflict and confusion in every aspect of our lives, including how we interpret insurance policies. And while Washington Courts are still parsing through Covid’s effect on every area of the law, this case represents a step toward clarity with insurance coverage cases.

Claims Pointer:

In this case, the Washington Supreme Court grappled with interpreting the language of an insurance policy through the lens of the 2020 Covid-19 restrictions. The Court ultimately held in favor of the insurance company, finding that the language of the policy was clear enough to defeat a challenge of ambiguity.  

Hill and Stout, PLLC v. Mutual of Enumclaw Insurance Company, 100211-4, 2022 WL 3651805 (Wash. Aug. 25, 2022).

Facts:

The Plaintiffs were dentists who operated two dental offices under their business name “Hill and Stout PLLC.” Plaintiffs had previously purchased property insurance from Defendant, Mutual of Enumclaw Insurance Company. Plaintiffs’ insurance policy covered lost business income due to “direct physical loss or damage to” the properties. The policy also included a virus exclusion that stated that Defendant would not “pay for loss or damages caused directly or indirectly by . . . [a]ny virus . . . that induces or is capable of inducing physical distress, illness, or disease.”

On March 18, 2020, in the wake of the Covid-19 pandemic, Plaintiffs decided to temporarily close their practice for all routine dental procedures. Plaintiffs stated that they chose to close their practice because they knew that the governor would soon be making a proclamation for closures, and Plaintiffs wanted to preemptively put safety measures in place.    

On March 19, 2020, Washington Governor Inslee issued Proclamation 20-24 (“Proclamation”) to help curtail the spread of the virus. The Proclamation prohibited non-emergency dental procedures and was effective until May 18, 2020.

While the Proclamation was in effect, Plaintiffs continued to perform emergency dental procedures in their offices and routinely had receptionists in the offices to answer calls from patients and reschedule appointments.

In April 2020, Plaintiffs filed a complaint against Defendant, asking that Defendant cover Plaintiffs’ “losses and expenses resulting from the interruption of [its] business.” Plaintiffs claimed that their property had sustained “direct physical loss or damage as a result of the proclamations and orders.”  Defendant moved to dismiss the complaint and argued that the Proclamation did not result in physical loss or damage to Plaintiffs’ property, and that the virus exclusion in the insurance policy precluded coverage for claims related to Covid-19.

The trial court found that there was no physical loss of property and that the insurance policy excluded coverage for claims related to Covid-19. Plaintiffs appealed

Law:

When a court interprets the language of an insurance policy, they give the language the same meaning that “an average person purchasing insurance” would give to the language of the policy. Woo v. Fireman’s Fund Ins. Co., 161 Wn.2d 43, 52, 164 P.3d 454 (2007). 

Undefined terms in an insurance contract are typically given their “plain, ordinary, and popular meaning.” Zhaoyun Xia v. ProBuilders Specialty Ins. Co. RRG, 188 Wn.2d 171, 182, 400 P.3d 1234 (2017) (quoting Key Tronic Corp. v. Aetna (CIGNA) Fire Underwriters Ins. CO., 124 Wn2d 618,627, 881 P.2d 201 (1994)). To this end, courts have held that if the language in a policy is “clear and unambiguous” then the court must “enforce [the language] as written” and may not “modify [the language] or create ambiguity where none exists.” Quadrant Corp. v. Am. States Ins. Co., 154 Wn.2d 165, 171, 110 P.3d 733 (2005). A clause will only be termed ambiguous when, “on its face, . . . it is susceptible to two different interpretations, both of which are reasonable.” Id.

However, when a court determines that an ambiguity does exist in an insurance policy, then the ambiguity is construed in favor of the insured. Vision One, LLC v. Phila. Idem. Ins. Co., 174 Wn.2d 501, 512, 276 P.3d 300 (2012).

Secondly, the “efficient proximate cause rule” states that when a risk that has been insured against occurs and sets off a chain of events that concludes in a risk that is excepted under an insurance policy, the excepted risk will not prevent recovery for losses stemming from the insured risk. McDonald v. State Farm Fire and Cas. Co.., 199 Wn.2d 724, 731, 837 P.2d 1000 (1992).

Analysis:

In this case, the Washington Supreme Court analyzed the phrase “direct physical loss or damage to Covered Property” in Plaintiffs’ insurance policy. Plaintiffs argued that the phrase could be interpreted to include the “loss of the ability to use property” and “deprivation” of the property. Defendant, on the other hand, argued that deprivation of use was not enough, and that coverage requires that something physically happen to the property: that some physical, external force cause direct, physical changes to the property.

The Court agreed with Defendant and ultimately ruled that because Plaintiffs were still able to physically use the property during the period of loss, the loss was not “physical” for purposes of the insurance policy. The Court reached this conclusion by viewing the phrase through the eyes of an “average person” purchasing insurance. The Court determined that an “average person” would take the phrase “direct physical loss or damage to Covered Property” to mean that the property must be “directly, physically lost to trigger coverage.” Based on this, the Court held that Plaintiffs’ alleged loss of use due to the Proclamation did not trigger coverage.

Further, though the bulk of the opinion discussed the interpretation of the “ambiguous” insurance policy language, the Court also briefly discussed efficient proximate cause and the policy’s virus exclusion. To that end, the Court held that Defendant’s virus exclusion in the policy was valid, meaning that any loss related to a virus, including Covid-19, was excluded from coverage under the policy. Therefore, the efficient proximate cause standard did not apply to mandate coverage for Plaintiffs’ loss of business income, because the loss stemmed from an excluded event.

Big Picture:

Even if two interpretations of a policy phrase are possible, clear and concise language will often win the day and help eliminate ambiguity that would otherwise lead to litigation. Washington Courts are typically tough on insurers when it comes to interpreting insurance policies, often favoring interpretations that make sense to the average person. However, insurers can avoid potential issues by ensuring that the terms of their policies are clear and comprehensive.