If your organization sustains COVID-19 losses, carefully examine your commercial property insurance policy for coverage. Although your insurer may deny coverage by claiming that your policy requires physical loss or property damage, do not accept that assertion. Adhesion or attachment of the coronavirus onto an insured’s property may constitute “direct physical loss” and trigger coverage under many property policies. A close reading of your policy and understanding of the law in your jurisdiction is essential to ensure that you do not forfeit coverage to which your organization may be entitled.
Despite the insurance industry’s mantra that the coronavirus cannot constitute physical loss, numerous courts have found that businesses suffered a “direct physical loss,” even when their properties sustained no visible damage. Indeed, a physical loss or damage “can occur at the molecular level and can be undetectable in a cursory inspection” (see Columbiaknit, Inc. v. Affiliated FM Insurance Company).
For example, damages caused by odors may constitute “direct physical loss.” Even cat urine odor – which presumably does not cause bodily injury or death like COVID-19 – could constitute “direct physical loss.” In Mellin v. Northern Security Insurance Company, the New Hampshire Supreme Court vacated the trial court’s holding in favor of the insurer, explaining that “physical loss may include not only tangible changes to the insured property, but also changes that are perceived by the sense of smell and that exist in the absence of structural damage.” The odor from cooking methamphetamine also physically damaged an insured’s house in Farmers Insurance Company v. Trutanich.
As we discussed in a previous post, whether E.coli bacteria on an insured’s property constituted “direct physical loss” in a homeowner’s policy raised a factual issue. In Motorists Mutual Insurance Company v. Hardinger, the Third Circuit focused on the reduced use of the property – even though the changes were “unnoticeable to the naked eye” – which made the property useless or uninhabitable. The court held a genuine issue of material fact existed as to whether the policy’s requirement of “physical loss” had been satisfied.
Likewise, numerous courts have held that other contaminants that are not visible or tangible, such as asbestos, mold, ammonia, smoke, and gasoline accumulation may constitute “physical loss.”
Even hail damage to a roof that was not visible to the naked eye was determined to be “direct physical loss” in Advance Cable Company, LLC v. Cincinnati Insurance Company. Contending that any damage was purely cosmetic and did not affect the roof’s performance, Cincinnati refused coverage for Advance’s losses. The Seventh Circuit, applying Wisconsin law, disagreed, explaining that non-visible physical alteration to the roof constituted “direct physical loss” as well.
Although policy language and governing law vary, do not assume that COVID-19 losses will not constitute “physical loss” and do not accept your insurer’s assertions to the contrary without professional advice.