Anderson Kill Attorney: Property Insurers Misconstruing Physical Damage With Structural Damage

AM Best

  • March 26, 2020

As commercial property and business interruption disputes related to COVID-19 coverage make their way into the courts, insurers are likely to argue that businesses did not suffer "physical" damage or loss. Attorney Rhonda Orin of Anderson Kill, which represents policyholders, takes a different view. "Insurance companies are taking the word physical and reading it to mean structural," she said. "But that ignores history." Orin, managing partner at the firm's Washington, D.C., office discussed the issue with Best's News Service.

Q: Standard property policies require physical damage or loss to property. What issue do you see with that language?

A: If the insurance companies meant structural damage, they should have said structural damage. And they didn't. These were standard forms written by the insurance industry. They're not negotiated contracts with each party contributing their input. These are one-way contracts. And they didn't say structural, they said physical. They are treating the word physical as a euphemism for structural. When we talk about words meaning what they mean, there can be physical injury that is not structural.

Q: Can you give me an example?

A: Odors from a methamphetamine lab that someone was doing improperly in a rented property. That is physical injury because the odors make the property unusable without being cleaned. It's not structural. The walls aren't falling down, but the walls don't have to be falling down for there to be physical injury or for there to be, accordingly, coverage. I'm so busy reading all kinds of insurance company statements that would be different if the word were "structural" and not "physical," but the word is physical. So odors can be physical injury. Lead paint dust can be physical injury. Asbestos in walls can be physical injury. And in all of these cases, you look at the building and it's fine. If you look at liability policies, if they come into play, they expressly have provisions saying the second clause of the standard form definition of property damage is loss of use in the absence of physical damage. So it's expressed in a lot of liability policies, even though no one is talking about that.

Q: How might this affect business interruption claims?

A: You don't buy a business interruption policy in a vacuum. You buy a property policy that covers business interruption when you have property damage. The threshold is direct physical injury. There are plenty of cases that state invisible things are property damage. Of course they are! Look at carbon monoxide leaks. Do you think any insurance company is going to convince a court that a carbon monoxide leak that forces a building to be evacuated isn't injury? That you didn't buy coverage for that? Of course you did. If the virus is in your property or your building, you have one set of facts that I believe would prove direct physical injury.

Q: Will that be challenging to prove?

A: That's going to be a big factual dispute going forward. People will need to meet the burden of proving that. There will be a whole factual debate about whether my claim results from actual physical injury and whether there is evidence of the coronavirus getting into your building.
There's a whole other part of the policy about a civil authority.

Q: How will civil authority factor in?

A: If the government passes an edict that you can't use your office, that's civil authority.A lot of policies have extensions for orders of civil authority, and it's an extension addressing a situation where the government says you can't use your property. That's another thing that has to be looked at.

Q: Big picture: What's your takeaway on this coverage issue?

A: The threshold concept that there can't be physical injury from the coronavirus situation is flat-out wrong because it's confusing physical with structural. As a threshold, there can be coverage for this situation under property policies because this situation can constitute direct physical injury. Invisible harm can be direct physical injury. The walls don't have to be falling down for there to be potential coverage under the policy. That raises the question, under the idea of 'included unless specifically excluded,' of: Is there an exclusion? That's question No. 2.

Question No. 3 is: Let's read that exclusion carefully and let's read it in the context of the whole policy. Also let's also read it in the context of what the policyholder was being covered when they bought the policy. Because remember, they had no hand in the drafting. Insurance companies take forms that have been approved for sale from state insurance departments, about which they made statements about the coverage. They wrote the language. And they picked physical over structural.

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