In Twin Decisions on Insurance Coverage for COVID-19 Closure Claims, Superior Court of Pennsylvania Makes Clear that Policy Language Matters
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, 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, 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 at the policies at issue, reveals the rationale of 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, business personal property and personal property of others, and income protection, as well as for losses resulting from certain actions from civil authorities.
With this scope of coverage in mind, 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 appellate panel noted that courts around the country construing similar policy language have held that “economic loss unaccompanied by a physical alteration to the property does not trigger coverage under a commercial property insurance policy.” Indeed, the MacMiles court spurned 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 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 implies the need for physical damage; and that MacMiles failed to allege 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 those provisions required that there be physical damage to a property other than the insured property.
In contrast, in Ungarean, Superior Court President Judge Jack Panella, writing for a five-judge majority, held to the contrary and found 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.
Of note, 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 the coverage was specifically afforded in the context of business income and extra expense, rather than commercial property.
At any rate, the key dispute in Ungarean was whether, as CNA contended, a physical alteration to the insured property was required or, as the insured claimed, a reasonable interpretation of the coverage afforded was that 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,” such that ordinary dictionary definitions were needed in order to construe the policy language. With this broad interpretation in place, the panel noted that “at least one” definition of “loss” included “deprivation.” Understood in that context, the majority held that “loss” could be interpreted to mean “deprivation,” while damage—which needed to be considered in the disjunctive—would mean “destruction or ruin.” The majority thus concluded that, since CNA was responsible for drafting the policy, construing its terms against CNA was appropriate and 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 panel 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 panel 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 panel 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. In so concluding, the panel 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 were not applicable. The court then found that none of the “Business Income and Extra Expense Exclusions” were triggered under the facts of the case and, 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.
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