Property Damage & Business Interruption

Subscribe to Property Damage & Business Interruption

For insurance recovery attorneys, one of the more frustrating ways for a policyholder to lose coverage for a property loss is on the basis of late notice. Property insurance policies generally require the policyholder to give the insurance company “prompt notice” of claims and potential claims. Property policies may specify a timeframe in which the policyholder must give notice, but in many cases do not. New York courts routinely hold that short delays, even as little as one to two months, suffice as a basis to deny coverage where the policy has “prompt notice” requirements. Under New York law, however, an insurance company can waive its late notice defense by not raising it explicitly when it finally disclaims coverage. Indeed, recently, a federal court in New York court rejected the insurance company’s late notice defense, even where the policyholder conceded that it did not provide prompt notice as a matter of law, because the insurance company failed to explicitly deny coverage on that ground.

Summary of recent New York federal court decision

In Mave Hotel Investors LLC v. Certain Underwriters at Lloyd’s London, the plaintiffs (“Mave”) sought coverage for property damage at its hotel following the termination of its contract with a human services organization housing formerly homeless families with children at the hotel. No. 21-cv-08743 (JSR), 2023 U.S. Dist. LEXIS 62718 (S.D.N.Y. Apr. 10, 2023). Mave alleged that its rooms were damaged while the families were living there. The insurer, Certain Underwriters at Lloyd’s London (“Lloyds”), ultimately denied coverage the ground that any damage was caused by ordinary wear and tear, an excluded cause of loss. At trial, however, Lloyd’s moved for summary judgment, arguing among other things, late notice.Continue Reading An insurance company’s generic reservation of right can lead to a Waiver of a Late Notice Defense

When a loss event badly damages a key piece of equipment or machinery, an insured business often faces the complicated question: repair or replace? This is especially so when the extent of the damage is unclear because some may still be hidden.

A business presented with this dilemma is well advised to go through that decision-making process assuming that it is spending its own money.

In all likelihood, however, the business will have insurance for the loss event, and most commercial property policies are written on a “replacement cost” basis. Yet, those policies often define “replacement cost” as being the lesser of “the cost to repair, rebuild or replace” the damaged property with property of comparable size, material and quality. They commonly include coverage for the loss of business income sustained by the insured due to the suspension of the insured’s business during the “period of restoration,” and tie the length of that period to the date when the damaged property should be “repaired, rebuilt or replaced” with reasonable diligence. 

These standard commercial property provisions contain a trap for the unwary. Hidden within them lurks the opportunity for the insurance company to second guess the decisions that its insured is now forced to make under abnormal conditions and while facing financial distress.Continue Reading Too damaged to repair? How to maximize your insurance recovery

With the onset of the Covid-19 pandemic in 2020, businesses across the country were forced to shut their doors and turn to their commercial property insurance companies to seek coverage. With their properties having been rendered useless for their intended (and insured) business purposes, these insureds reasonably expected their “all risk” policies would provide the promised “business income” protection due to the “physical loss” of their properties. The insurance industry, however, near-universally denied coverage, leading to a proliferation of lawsuits around the country – including in Pennsylvania. 

On November 30, 2022 the Pennsylvania Superior Court issued a pair of decisions that ostensibly addressed the same legal question posed in the vast majority of these cases – whether the term “physical loss” in a commercial property policy can reasonably be construed to mean the loss of use of property for its intended business purpose. Curiously, the Superior Court’s decisions in Ungarean v. CNA & Valley Forge Insurance Co., Nos. 490 WDA 2021, No. 948 WDA 2021, 2022 Pa. Super. LEXIS 467 (Pa. Super. Ct. Nov. 30, 2022) and MacMiles, LLC v. Erie Insurance Exchange, No. 1100 WDA 2021, 2022 Pa. Super. LEXIS 469 (Pa. Super. Ct. Nov. 30, 2022) reached opposite and seemingly contradictory conclusions, leaving the question far from settled within Pennsylvania.Continue Reading A tale of two opinions: The meaning of “physical loss” in the context of commercial property policies for Covid-19-related losses in Pennsylvania

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.Continue Reading Physical loss and reasonable expectations of policyholders: The Third Circuit whiffs

In the past few months, in cases considering whether SARS-CoV-2/COVID-19 can cause direct physical loss or damage to property so as to trigger business income coverage, policyholders have secured three wins in state appellate courts: Ungarean in the Superior Court of Pennsylvania, Huntington Ingalls in the Vermont Supreme Court, and Cajun Conti in the Louisiana…

At $40-70 billion in estimated insured losses, Hurricane Ian is the nation’s second most expensive natural disaster for the insurance industry. Less than two months later, Hurricane Nicole made landfall in Florida. Securing insurance coverage for these losses will be an important part of rebuilding and recovery.

Recently, Reed Smith’s insurance coverage lawyers hosted a webinar, “Maximizing Insurance Recovery after Hurricane Ian,” to answer several frequently asked questions policyholders ask (or should ask) to ensure maximum recovery after these natural disasters. We summarize a few of those answers below.

What type of insurance coverage applies? Property Damage? Business Income? Ordinance and Law? Service Interruption? All of the above?

Put simply, the answer is: It depends on the facts and the language of the policy, but one or more types of coverage may apply. For example, a policyholder may have property damage coverage if they sustained physical damage to buildings, business property (e.g., machinery, equipment, raw materials, etc.), or property of others in the policyholder’s control. That same policyholder may also have service interruption coverage if they experienced dislocation of utility or telecommunications service and suffered business income losses as a result.

All types of common coverages are discussed during the webinar, which can be viewed on demand.Continue Reading Hurricane Ian and Hurricane Nicole: Answering questions policyholders frequently ask (or should ask) to ensure maximum recovery

This year, Hurricane Ian swept through the Southeastern United States, causing extensive damage to property in the affected areas. While obtaining insurance recoveries for any loss can be a complex endeavor, recovery for hurricane loss is particularly complex, as it typically involves a mix of covered and excluded perils. Most standard homeowners or other property insurance policies provide coverage for wind-related losses, but exclude coverage for loss caused by flood. While some policyholders may have purchased standard flood insurance policies that provide coverage for flood losses; many have not. Whether the policyholder has a homeowner’s or general property policy, a flood insurance policy, or both, the question of recovery for damage caused by mixed wind and flood forces requires a complex analysis as both covered and uncovered causes may contribute to the damage to insured property. 

Analyzing combined causes of loss

Where a loss stems from multiple causes, some covered and others excluded, coverage will depend on whether the causes are contributing, or separate and independent causes of loss. 

Where separate perils combine to create one indivisible loss, these will be considered combined or contributing causes of loss and courts will generally apply one of two tests:

  1. A majority of jurisdictions apply the efficient proximate cause test. This test permits recovery for loss caused by a combination of covered and excluded perils when the efficient proximate cause, i.e. the primary event producing the loss, is a covered cause of loss.
  2. The concurrent cause doctrine, the minority approach, provides coverage for combined-peril claims so long as a covered cause of loss is a contributing cause of the loss, regardless of whether it is the primary cause or not. 

Continue Reading Maximizing recovery for combined wind and flood damages in hurricane claims

On October 4, the California First Appellate District in Amy’s Kitchen, Inc. v. Fireman’s Fund Insurance Company, 2022 Cal. App. LEXIS 836, reversed a trial court’s order granting the insurer’s demurrer in a COVID-19 property damage claim, and remanded to allow the policyholder to amend its allegations of loss under a communicable disease coverage extension.  In so doing, the court applied correctly the pleading standards in California, and a process of careful evaluation of the policy language in context, existing physical loss or damage law in California, ultimately applying the clear language in the policy in a common sense manner.  The Amy’s Kitchen decision is important because it interpreted the policy in the way a reasonable layperson would read its language, focusing on the actual policy language, not terms of art defined by case law.  

The facts

Amy’s employs more than 2,500 people to manufacture meals at facilities in California, Oregon and Idaho.  As alleged in Amy’s complaint, COVID-19 was present at Amy’s locations because some of Amy’s employees had confirmed cases, prompting Amy’s to take measures to mitigate, contain, clean, disinfect, monitor and test for COVID-19.  Public health orders also required Amy’s to implement various measures, including decontamination, disinfection and sanitization of its facilities to continue operating.Continue Reading Amy’s Kitchen: A step in the right direction

It’s no secret that businesses of all shapes and sizes have suffered tremendous losses during the COVID-19 pandemic. From closures to the “Great Resignation” to ever-changing consumer demands, businesses have dealt with one problem after another. One of those problems is the denial of insurance coverage under  “all risk” commercial property policies. For the last two years, courts across the country have found in favor of insurers, ruling that SARS-CoV-2, the virus underlying the COVID-19 pandemic, does not cause physical damage to property.

Enter Marina Pacific Hotel, LLC, et al. v. Fireman’s Fund Insurance Company, 2022 Cal. App. LEXIS 608 (2nd Dist. 2022), a case in which the California Appellate Court looked beyond the preliminary question of whether SARS-CoV-2 causes damage to property and got back to legal basics in its analysis of the plaintiffs’ complaint. With Marina Pacific Hotel, policyholders landed a major victory, and the case may provide a winning framework for plaintiff-insureds facing similar legal battles in the future.

The Marina Pacific Hotel Case

The policy at issue in Marina Pacific Hotel contained much of the standard coverage language which has been heavily debated over the last two years, namely, that the insurer will pay for “direct physical loss or damage” caused by or resulting from a covered cause of loss. This language has proven problematic for policyholders dealing with COVID-19 losses as judges have been reluctant to find that a virus physically alters property when viewed through the lens of what is traditionally considered “property damage.”

However, the Marina Pacific Hotel plaintiffs set out detailed allegations of physical damage, including the fact that SARS-CoV-2 can bond with the surfaces of objects it touches altering the cells and surface proteins of that object. Like insurers around the country, Fireman’s Fund argued that SARS-CoV-2 cannot physically damage property, and that the insured’s loss of use of a piece of property does not constitute physical damage.Continue Reading Looking beyond “Physical Damage to Property”: Is Marina Pacific Hotel a winning framework for policyholders?

The well-established principle that a policyholder may assign benefits under an insurance policy following a loss was recently reaffirmed by state supreme courts in two jurisdictions:  South Carolina and Puerto Rico. These two jurisdictions join the majority rule, which holds that assignments following an insured loss are permissible because they do not change the scope of the insured risk.  The majority rule makes commercial sense, as it ensures the free alienability of property, while at the same time maintaining the benefit of the bargain that was struck when the insurance company underwrote the policy. 

San Luis Center Apartments v. Triple-S Propiedad, Inc., 2022 WL 611245 (P.R. Feb. 15, 2022)

In a February 2022 decision, the Supreme Court of Puerto Rico, addressing an issue of first impression, ruled that an insured property owner’s assignment of both the prosecution of its claim and a portion of claim proceeds to an investment company was proper, notwithstanding a non-assignment clause in the policy, because the assignment was made after the policyholder’s property sustained damage during Hurricane Maria.  The court rejected the insurance company’s argument that the suit against it could not proceed because the policyholder, in making the assignment, had purportedly breached the insurance policy’s non-assignment clause, which provided that “[y]our rights and duties under this policy may not be transferred without our written consent.”  In reaching its holding, the court reasoned that because the assignment was made after the property damage occurred, the change in the claimant’s identity did not alter the risk that had been underwritten, the scope of the policy’s coverage or the amount the insurance company would be obligated to pay. Therefore, the policyholder did not breach the contract by making the assignment. Continue Reading Two state Supreme Courts reach commercially reasonable results by permitting post-loss assignments