The Washington Supreme Court has ruled in insurers' favor in COVID-19 business interruption litigation, becoming the fifth state supreme court to do so. Alternately, a California appellate court recently overturned a lower court ruling and held that a nail salon was entitled to business interruption coverage under its policy. The cases are Hill & Stout, PLLC v. Mut. of Enumclaw Ins. Co., No. 100211-4, 2022 Wash. LEXIS 434 (Aug. 25, 2022), and Butter Nails & Waxing v. Underwriters at Lloyd's, Bo. B311455, 2022 Cal. App. Unpub. LEXIS 5264 at *1 (Aug. 25, 2022), respectively.
The Butter Nails case in front of the Los Angeles-based state appeals court focused on the salon's property policy and cited a provision that insured against business interruption due to "Civil Authority Action" requiring evacuation of the insured property.
According to the ruling, it is already "widely established that temporary loss of use of property due to pandemic-related closure orders without more does not constitute physical loss or damage." Most cases revolving around this issue involve insured seeking coverage under policy provisions requiring property loss or damage, but in this case the "plaintiff does not seek coverage under any portion of the policy that requires any type of property loss or damage." Instead, the plaintiff here seeks coverage under a Civil Authority Endorsement which says it will pay for losses caused by business interruption because of "Civil Authority Action" requiring evacuation.
According to the ruling, the policyholder was also entitled to coverage under its policy's 'Mold Exclusion" which did not clearly "exclude losses stemming from public health orders addressing a viral pandemic, particularly where the insured does not allege the virus was present on the business premises.
Alternately, in Hill & Stout, the Washington Supreme Court, affirming a lower court ruling, held that there was no direct physical loss, as is required for coverage to be applicable. According to the ruling, "it is unreasonable to read 'direct physical loss of . . . property' in a property insurance policy to include constructive loss of intended use of property."
Many businesses that were affected by the government closures in response to COVID-19 were still able to physically use the property, as was the case for the dentist in Hill & Stout. The property was still in the possession of the practice and was "still functional and able to be used, and HS was not prevented from entering the property."
Editor's note:
From the beginning of the pandemic, whether the closure of property because of civil authority requirements has been an issue. While the Butter Nails case focused on the civil authority issue, it's important to remember that the civil authority coverage in most policies requires there to be damage to neighboring property that caused the civil authority to restrict access. As many courts have determined, COVID-19 does not damage physical property.
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