South Carolina has become the most recent state whose Supreme Court has refused to allow property insurance coverage for COVID-19 losses. The case is Sullivan Mgmt. v. Fireman's Fund Ins. Co., No. 28105, 2022 S.C. LEXIS 90 (Aug. 10, 2022).
Sullivan Management operated restaurants in South Carolina and filed suit to recover for business interruption losses during the COVID-19 pandemic under a commercial property policy issued by Fireman's Fund and Allianz Global Risks US Insurance Company, (Fireman's). The South Carolina Supreme Court accepted five certified questions from the federal district court stemming from the litigation but elected to only answer one of the five questions.
Does the presence of COVID-19 in or near Sullivan's properties, and/or related governmental orders, which allegedly hinder or destroy the fitness, habitability or functionality of property, constitute "direct physical loss or damage" or does "direct physical loss or damage" require some permanent dispossession of the property or physical alteration to the property?
Sullivan argued that the presence of COVID-19 and associated government orders prohibiting indoor dining constituted "direct physical loss or damage." The insured asserted the definitions of "physical", "loss", and "damage" either by the plain language of the policy or because the terms are ambiguous and should be construed in favor of the insured. Sullivan also argued that other policy provisions, including the communicable disease coverage extension, demonstrated that the phrase had a broad interpretation and is not limited to situations involving permanent dispossession of property. Sullivan further contends that pre-COVID-19 jurisprudence supports its interpretation of the phrase, as do decisions from other jurisdictions.
Fireman's argues that neither the presence of the coronavirus nor the government shut-down orders constitute "direct physical loss or damage" because that phrase requires "actual" or "discernable" physical damage. So, to trigger coverage, the loss or damage must be more than mere loss of use or economic loss; instead there must be a "physical alteration, destruction, or permanent dispossession of property." Supporting this claim is the policy provision affording coverage during the "period of restoration" or the time it takes to repair, replace, or rebuild the property. The insurer noted that the significant majority of decisions from state and federal courts are in its favor. The court agreed with Fireman's.
The court said that the answer to the certified question above was no because the presence of COVID-19 and corresponding government orders prohibiting indoor dining do not fall within the applicable policy's trigger language of "direct physical loss or damage."
Editor's Note: A consortium of North Carolina restaurants has recently asked that state's Supreme Court to weigh in on whether COVID-19-related business interruption claims are covered. Read more about COVID-19 related business interruption claims in our article published here, Business Interruption Cases Head to State High Courts.