The Washington Supreme Court became the fifth state supreme court to rule in insurers’ favor Thursday in COVID-related business interruption litigation when it unanimously ruled against a dental practice.
But a California appeals court on Thursday overturned a lower court ruling and held that a nail salon was entitled to business interruption coverage under its Lloyd’s policy.
The Washington case, which affirmed a lower court ruling, was filed by a dental practice with offices in Oak Harbor and Anacortes, Washington against Enumclaw, Washington-based Mutual of Enumclaw Insurance Co. according to the ruling in Hill and Stout PLLC v. Mutual of Enumclaw Insurance Co.
As with comparable rulings, the Olympia-based supreme court held there was no direct physical loss, as required for by its coverage. “It is unreasonable to read ‘direct physical loss of …property’ in a property insurance policy to include constructive loss of intended use of property,” the ruling said.
The dental practice “was still able to physically use the property at issue.” It was in the practice’s possession and “still functional and able to be used, and HS was not prevented from entering the property,” it said.
The ruling also held that coverage was precluded by the coverage’s virus exclusion.
The decision follows similar rulings by state supreme courts in South Carolina, Wisconsin, Iowa and Massachusetts.
Plaintiff attorney Mark A. Wilner, a partner with Gordon Tilden Thomas & Cordell LLP in Seattle, said in a statement, “We were obviously disappointed in seeing the ruling. But we appreciate that our state high court has been able to chime in quickly and decisively on this important question of state insurance law – especially when so many federal courts were issuing decisions guessing at what the state supreme court would do.
“Now they don’t have to. Also, it’s important to remember what the court decided and what it didn’t decide. The court’s decision was narrowly tailored to the facts before it. The decision wouldn’t apply to cases with materially different facts, such as virus-on-the-premises cases, many of which do not even involve virus exclusions.”
The insurers’ attorneys did not respond to a request for comment.
The ruling by the Los Angeles-based state appeals court in Butter Nails and Waxing Inc. v. Underwriters at Lloyd’s, London, which focused on the Los Angeles nail salon’s property policy, cited a provision in its coverage that insured against business interruption due to “Civil Authority Action” that requires evacuation of the insured property.
While the case law governing insurance contracts and COVID-19 is relatively new, it is already “widely established that temporary loss of use of property due to pandemic-related closure orders without more does not constitute physical loss or damage,” the ruling said.
“This ‘widely-established’ rule, however, has developed in the context of insureds seeking coverage under policy provisions requiring property loss or damage.
“Here, plaintiff does not seek coverage under any portion of the policy that requires any type of property loss or damage,” but under a Civil Authority Endorsement which “with very little explanation or qualification” says it will pay for loss caused by business interruption because of “Civil Authority Action” that requires evacuation.
The ruling also held the policyholder was entitled to coverage under its policy’s Mold Exclusion, which, it said, does not clearly “exclude losses stemming from public health orders addressing a viral pandemic, particularly where the insured does not allege the virus was present on the business premises.”
Butter Nails attorney Robert S. Gerstein, of the Law Office of Robert S. Gerstein in Santa Monica, California, said the evacuation coverage in the nail salon’s policy is unusual. “I don’t think there’s been another case around the country involving this evacuation language,” he said.
However, that is not the case with the mold exclusion, “which was basically similar to the coverage language in other instances, which just about universally has been found” to apply, to pandemic-related cases where there has been a loss of business because of government orders. “This was a very well-reasoned” ruling to the contrary, he said.
Lloyd’s attorneys did not respond to a request for comment.