Articles & Updates

Eastern District Holds No Claim for “Pandemic-Related Losses” Without “Direct Physical Loss or Damage”

Aug 29, 2023 | Articles & Updates

Article by Adam Murdock, Esq.

The United States District Court for the Eastern District of Pennsylvania recently granted an insurer’s motion to dismiss with prejudice where the insured was unable to recover for pandemic-related losses that were not caused by “direct physical loss or damage to” the insured property. Brandywine Valley Premier Hospitality Group v. Fireman’s Fund Ins. Co., 2023 WL 5044991 (E.D. Pa. Aug. 8, 2023).

In Brandywine, the insured owned inn and restaurant businesses in Pennsylvania and insured the properties via a commercial property through the insurer.  The policy included a Business Income and Extra Expense Coverage provision that covered losses and expenses incurred “due to the necessary suspension of . . . operations during the period of restoration arising from direct physical loss or damage to property at a location.”  The policy also provided Civil Authority Coverage for expenses sustained when access to the insured location is impaired due to “direct physical loss or damage to property.”  In March 2020, non-essential businesses were closed to prevent further spread of COVID-19.  The insured submitted a claim for economic losses and extra expenses, which was denied by the insurer because “the economic losses were not caused by a direct physical loss of or damage to” the insured property.

The insured filed suit and an amended complaint, alleging breach of contract and bad faith.  The District Court dismissed the complaint with prejudice, finding that the insured had failed to allege any plausible facts to support a finding that there was a direct physical loss or damage to its insured property and that allowing further amendment would be futile.

In reaching its decision that the insured failed to establish coverage, the District Court noted that the burden of establishing coverage falls on the insured and that each policy provision at issue required a direct physical loss or damage to property as a triggering element.

The District Court also held that even if direct physical loss or damage had been alleged, the insured could not establish that the virus made its properties uninhabitable and unusable for all purposes; rather, the properties were merely rendered temporarily unsuitable for their pre-pandemic use.

The District Court next undertook an evaluation of the Communicable Disease Coverage provisions, finding that the insured failed to demonstrate coverage due to the insured’s failure to show direct physical loss or damage or to allege that an outbreak event occurred at the properties.

The District Court also concluded that the insured failed to allege sufficient facts to support a claim of bad faith, as the District Court held that the amended complaint was replete with conclusory statements and failed to allege that the insurer acted unreasonably.  To the contrary, the District Court found that the clear and unambiguous terms of the policy served as a reasonable basis for the insurer’s denial of the claim.