On January 6, 2023, the Third Circuit affirmed lower court rulings in 14 consolidated appeals from orders dismissing claims for property damage and business interruption losses resulting from the coronavirus and/or COVID-19. Policyholder lawyers can (and will) find fault with many parts of Wilson v. USI Ins. Service LLC, Case No. 20-3124, in which the Third Circuit tries to predict how the state supreme courts of New York and Pennsylvania would interpret the phrase “physical loss of or damage to property.”
The Wilson court distills the issue presented as, “whether the businesses’ inability to use their properties for their intended business purposes constitutes ‘physical loss of’ property.” In answering this question “no,” the Wilson court interpreted physical loss of property to require a “complete (or near complete) dispossession of the property, regardless of the purpose for which that property is used,” for there to be physical loss.
What this conclusion means to businesses that lease premises
This conclusion does little for business policyholders who rent space and commit resources towards a particular endeavor. According to Wilson, as long as the property has some function or use, there is no physical loss, even where the policyholder cannot, in whole or in part, conduct its chosen business due to the presence of a deadly virus or disease. In other words, as long an insured restaurant space can be used to, for example, store auto parts, in the court’s view, the policyholder has not been dispossessed of the property, and is not entitled to coverage. This interpretation is neither commercially reasonable nor in keeping with the expectations of policyholders who are tenants operating businesses in the buildings.
Reasonable expectations of policyholders ignored
In fact, nowhere in Wilson does the court address (or even mention) that in New York and Pennsylvania, insurance contracts must be interpreted consistent with the reasonable expectations of the actual (not hypothetical) policyholder of the insurance policy at issue. Matter of Viking Pump, Inc., 27 N.Y.3d 244, 257 (2016) (when construing insurance policies, the language of the “contracts must be interpreted according to common speech and consistent with the reasonable expectation of the average insured”); Dibble v. Security of America Life Ins. Co., 404 Pa. Super. 205, 210(1990), citing Collister v. Nationwide Life Ins. Co.,479 Pa. 579, 388 A.2d 1346 (1978), cert. denied, 439 U.S. 1089, 99 S.Ct. 871, 59 L.Ed.2d 55 (“Our Supreme Court has indicated that the proper focus regarding issues of coverage under insurance contracts is the reasonable expectation of the insured”). This oversight is critical because many business owners do not own the building in which their businesses operate.
The intended use of the property is written in the policy
While acknowledging that when interpreting a policy it must read it as a whole, the Wilson court makes the curious statement that “the businesses’ intended purposes is nowhere in the text.” This ignores the fact that insurers consider how the premises will be used in pricing their policies. Further, it is likely that the policies at issue in Wilson identify the premises insured and indicate that the policyholder was leasing part or all of the building. Many if not all will have business-specific endorsements intended for the type of business insured, such as restaurant and bar-specific endorsements or coverages; it would not take much imagination for a court to determine what business the insured is conducting and what interest it is seeking to protect by purchasing commercial property insurance. Thus, if a court is to read and construe the entire policy to meet the reasonable expectations of the policyholder, it cannot pretend that the intended purpose of the business cannot be found within the policy.
All uses of space are not interchangeable
The policyholders in Wilson represent a variety of businesses, including a lawyer and her law office, a salon and spa, restaurants and bars, an art gallery, and eye care services. Though not mentioned in the decision, it is likely that most if not all of the policyholders are renters in buildings owned by others. As such, the policyholders’ interest in the buildings is limited to a right to use the space, as tenants, and to conduct a particular business upon the premises. Presumably, each invested in improving the space to suit the needs of the particular business and they cannot simply swap occupations or business improvements because the presence or threatened presence of a deadly virus prevents them from operating their businesses as intended. Yet that absurd result seems to be what the Wilson court is suggesting: if space built out for a nail salon could be used as a server farm, then there has been no compensable loss because the building is still “usable.”
The policyholders’ expectations of coverage in Wilson were reasonable
Lessees insuring against loss of property can reasonably expect coverage where the presence of a deadly virus limits or eliminates their intended use of the space, which use an insurer understands by virtue of agreeing to write the policy covering the risk it is insuring, and to accept premium for doing so. In fact, the concept of “property itself, in a legal sense, is nothing more than the exclusive right ‘of possessing, enjoying and disposing of a thing,’ which, of course, includes the use of a thing.” Chicago & W. Ind. R.R. v. Englewood Connecting Ry., 115 Ill. 375, 385, 4 N.E. 246, 249 (1886). Having leased space in a building or structure, or the structure itself, a tenant has the right, subject to limitations in the lease, to exercise that right “in any manner they desire, providing that such use does not interfere with the welfare of the people generally.” Ave. State Bank of Oak Park v. Village of Oak Park, 99 Ill. App. 2d 329, 337, 241 N.E.2d 630, 634 (App. 1st Dist. 1968). Losing the only property right business—but not building—owners have is what they insure against. The Wilson court lost sight of that.
In concluding that until the presence of a dangerous substance is in “such form or quantity as to make the building unusable,” the Wilson court overlooks that (1) tenants purchasing property insurance reasonably expect their property right in the building, i.e., the right to use, would be protected against interruption when they cannot exercise that right as intended due to the presence of a tangible, deadly virus in and around the leased space, and (2) that the insurer understood what interest it was insuring by virtue of the application and as reflected in the policy documents as a whole. Where the tenant does not lease the entire building, it is not reasonable to require the building itself to be unusable for any purpose before there is a physical loss covered by the policy.