Covid-related business losses are not ‘physical loss’

Where a West Virginia business closed two of its art studio locations because of the governor’s Covid-19 executive order, its claim for lost business income and other expenses was denied because there was no material destruction or harm to its covered premises.

Background

In March 2020, Uncork and Create LLC operated a “creative events” business at two art studio locations, in Barboursville, West Virginia and in Charleston, West Virginia. On March 23, 2020, the West Virginia governor issued an executive order requiring that non-essential businesses in West Virginia “temporarily cease operations.”

In compliance with the closure order, Uncork closed its two art studios. These closures caused Uncork to suffer “a substantial loss of business income” and other unspecified financial losses. When permitted to do so, Uncork re-opened its Charleston studio on June 11, 2020. However, Uncork permanently closed its Barboursville studio on April 24, 2020.

Uncork sought coverage for lost business income and other expenses resulting from The Cincinnati Insurance Company. In response, Cincinnati issued a letter denying Uncork’s claim, stating that there was no evidence showing a “direct physical loss or damage” at Uncork’s covered property.

Following this denial of coverage, Uncork filed a class action complaint against Cincinnati on behalf of itself and similarly situated plaintiffs. The district court granted Cincinnati’s motion to dismiss, reasoning that neither the closure order nor the Covid-19 virus caused a “physical loss or physical damage” to the covered property under the terms of the policy. The court concluded that although the pandemic and the closure order adversely affected businesses, “the unambiguous terms of the [p]olicy do not provide coverage for solely economic losses unaccompanied by physical property damage.”

Uncork later filed a motion to amend the judgment, or alternatively, certify the issue to the Supreme Court of Appeals of West Virginia. The district court denied the motion and the certification request. Uncork now appeals.

Analysis

Uncork contends that, pursuant to West Virginia law, Uncork’s inability to operate its art studios as intended due to the closure order and the Covid-19 virus qualifies under the policy as a “physical loss” to the covered property. Relying on Murray v. State Farm Fire & Casualty Co., 509 S.E.2d 1, 17 (W. Va. 1998), Uncork asserts that “physical loss” can “exist in the absence of structural damage to the insured property.” According to Uncork, the district court misapplied the decision in Murray, erroneously concluding that the policy language unambiguously requires that the loss result from a physical alteration to the covered property. The court disagrees with Uncork’s position.

The policy language is plain and unambiguous. The need to repair, rebuild, replace or expend time securing a new, permanent property is a precondition for coverage of lost business income and other expenses. Any alternative meaning of the terms “physical loss” or “physical damage” that does not require a material alteration to the property would render meaningless this precondition to coverage for business income loss.

Contrary to Uncork’s contention, this plain understanding of the terms “physical loss” or “physical damage” is consistent with the West Virginia court’s decision in Murray. Nothing appearing in that court’s analysis suggests that a “physical loss” to property can occur without existing or impending “material destruction” or “material damage” to the covered property. To the extent that the state court addressed the plaintiffs’ inability to use their homes, that loss inextricably was tied to the impending physical damage to all three homes.

Here, neither the closure order nor the Covid-19 virus caused present or impending material destruction or material harm that physically altered the covered property requiring policy’s coverage for business income loss and other expenses does not apply to Uncork’s claim for financial losses in the absence of any material destruction or material harm to its covered premises. The court notes that this holding is consistent with the unanimous decisions by other circuits, which have applied various states’ laws to similar insurance claims and policy provisions.

Affirmed.

Uncork and Create LLC v. The Cincinnati Insurance Company, Case No. 21-1311, March 7, 2022. 4th Cir. (Keenan), from SDWVA at Charleston (Berger). James Christopher Martin for Appellant. Daniel G. Litchfield for Appellees. VLW 022-2-066. 14 pp.