Presented by the Insurance Service Practice Group

Third Circuit Holds that Commercial Property Policies Do Not Provide Coverage for Businesses’ COVID-19 Closure Claims

On January 6, 2023, the Third Circuit Court of Appeals handed down a unanimous opinion in Law Offices of Rhonda H. Wilson, et al. v. USI Insurance Service, et al., which was drafted by Judge Michael A. Chagares. The case is particularly notable as it involved consolidated claims for coverage by businesses located in Pennsylvania, New Jersey, New York, Maryland, and Delaware and holds that, under both New Jersey and Pennsylvania law, claims by businesses for COVID-19-related business losses are not covered under standard commercial property policies.

The businesses involved in the consolidated litigation spanned multiple industries, including the food service, medical, health and wellness, art, music and legal sectors. However, each of the insureds made the same essential arguments in favor of coverage; namely, that their policies’ business income, extra expense and civil authority provisions were triggered. The Third Circuit rejected each of these arguments and held that the insurers owed no such coverage.

The opinion framed the key issue as “whether the businesses’ inability to use their properties for their intended business purposes constitutes ‘physical loss of’ property as that phrase is used in the policies.” In concluding that the answer to the question was “no,” the Third Circuit focused upon the specific language of the policies at issue, which required that there be a “direct physical loss” in order for coverage to be triggered. In addition, at least some of the policies included “virus exclusions” that precluded coverage for losses caused by or relating to a virus.

The panel began its analysis by acknowledging that the phrase “physical loss of or damage” was not defined in the policies. The court, thus, looked to the plain meaning of the text and concluded that “loss” meant the “failure to keep or maintain possession” or “the state or fact of being destroyed.” “Damage,” in turn, was taken to mean “injury or harm to property.” Taking these two definitions together, the Third Circuit concluded that “the loss of damage must be physical, which means natural, tangible, concrete.”

In looking to its previous jurisprudence, the panel noted that physical damage to property has typically been defined to mean “a distinct, demonstrable, and physical alteration of its structure.” However, the court also recognized that there may be circumstances where a building suffers physical damage that is unnoticeable to the naked eye. On these occasions, insureds seeking to trigger coverage must show that the “contamination of the property [is] such that its function is nearly eliminated or destroyed, or the structure is made useless or uninhabitable.”

The Third Circuit concluded that, in the context of a COVID-19 business interruption claim, the Supreme Courts of both Pennsylvania and New Jersey would apply a similar standard in order to ensure that “any insured will have lost tangible possession of property sufficient to constitute physical loss or damage.” As such, the businesses were required to “show that the functionalities of their properties were nearly eliminated or destroyed, that the structures were made useless or uninhabitable, or that there was an imminent risk of either of those things happening.”

In an effort to meet that stringent test, the businesses argued that their loss of the ability to use their properties for their intended business purposes was sufficient. The Third Circuit rejected that position, holding that the “argument is completely divorced from the physical condition of the premises. The businesses lost the ability to use their properties for their intended business purposes because the governors of the states in which they operate issued orders closing or limiting the activities of nonessential businesses, not because there was anything wrong with their properties.”

The court continued by noting that “the loss of the ability to use property in certain ways does not render the properties useless or uninhabitable. The properties could certainly be used or inhabited, just not in the way the businesses would have liked. Restaurants remained open for carry out, and medical providers could perform emergency procedures…. No one was ‘physically restrained’ from entering the businesses’ properties.” Ultimately, the Third Circuit concluded that “loss of use caused by government edict and untethered to the physical condition of the premises is not a physical loss or damage to the properties.”

The Third Circuit also rejected arguments by those businesses that sought coverage under the civil authority coverage afforded by their policies. In so holding, the panel noted that coverage under civil authority provisions requires physical loss or damage to a property other than the insured premises and that an action of civil authority prohibited access to the insured premises because of that loss or damage. The opinion found that the businesses failed to meet both requirements, as there were no claims of damage or loss to other properties, nor did the closure orders prohibit access to the businesses’ properties.

The Third Circuit’s ruling is, thus, another strong pronouncement that COVID-19-related business losses are not covered under the standard language of commercial property policies. Of note, the panel acknowledged in a footnote the recent decisions by the Superior Court of Pennsylvania in MacMiles, LLC v. Erie Insurance Exchange and Ungarean v. CNA and Valley Forge Insurance Company and observed its belief that the Supreme Court of Pennsylvania, if called upon to decide the issue, would decide the coverage questions in a manner consistent with the opinion in Law Offices of Rhonda H. Wilson.

We will continue to monitor the various cases involving issues of COVID-19-related business losses as the various courts considering the issues weigh in on the question of whether coverage should be afforded for such claims.


The material in Legal Updates for Insurance Services – Florida Alert – January 9, 2023, has been prepared for our readers by Marshall Dennehey. It is solely intended to provide information on recent legal developments and is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. We welcome the opportunity to provide such legal assistance as you require on this and other subjects. If you receive the alerts in error, please send a note to ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2023 Marshall Dennehey. All Rights Reserved.