Can a business claim COVID-19 losses on insurance? (Washington No. 100211-4)

Have you ever felt helpless when your insurance company denied your claim for losses you thought were covered? Many people are finding themselves in this predicament, especially with the rise of issues related to business interruptions during the COVID-19 pandemic. Fortunately, the case of Hill and Stout PLLC v. Mutual of Enumclaw Insurance Company provides clear guidance on how courts may interpret insurance policy language in such situations, so read on to find the insights you need.

Case 100211-4 Situation

Case Overview

Specific Situation

In Washington State, a dispute arose between a dental practice, operating under the name Hill and Stout PLLC, and their insurance provider, Mutual of Enumclaw Insurance Company. The conflict centered around the interpretation of an insurance policy following the issuance of a government proclamation that restricted non-emergency dental procedures. The dental practice claimed that the proclamation resulted in a loss of business income, which they believed should be covered under their property insurance policy. The policy in question offered coverage for “direct physical loss of or damage to” the property, but specifically excluded any loss caused by a virus.

Plaintiff’s Argument

The plaintiff, Hill and Stout PLLC, argued that the insurance policy should cover the financial losses incurred due to the inability to use their dental offices for routine procedures as a result of the governor’s proclamation. They claimed that the proclamation caused a “direct physical loss” because it deprived them of the full use of their property, essentially resulting in a financial deprivation that should be indemnified by the insurance policy.

Defendant’s Argument

The defendant, Mutual of Enumclaw Insurance Company, contended that the insurance policy did not cover the claimed losses because there was no “direct physical loss or damage” to the properties as defined by the policy. They argued that the inability to use the property due to the proclamation did not constitute a physical loss, as the properties themselves were not physically altered or damaged. Furthermore, they highlighted the policy’s virus exclusion, asserting that since the proclamation was a response to the COVID-19 pandemic, any related losses were excluded from coverage.

Judgment Outcome

The court ruled in favor of the defendant, Mutual of Enumclaw Insurance Company. The judgment determined that the insurance policy did not cover the financial losses claimed by Hill and Stout PLLC because such losses did not stem from a “direct physical loss of or damage to” the property. The court found that the proclamation did not physically alter the property, and therefore, did not trigger the insurance coverage. Additionally, the court upheld the virus exclusion, concluding that the COVID-19 pandemic initiated the causal chain leading to the proclamation, which meant the exclusion applied to this case.

Case 100211-4 Relevant Statutes

Direct Physical Loss Clause

The court examined the term “direct physical loss of or damage to Covered Property” as stipulated in the insurance policy. This clause was pivotal in the case, as it determined whether the inability to use the dental offices due to government proclamations qualified as a “direct physical loss.” The court emphasized that for a loss to be considered “physical,” there must be a tangible alteration or destruction of the property. In this context, the restriction on the use of the property due to COVID-19 proclamations did not meet the criteria of a direct physical loss, as the properties remained physically intact and functional.

Virus Exclusion Clause

This clause specifically excluded coverage for any loss or damage caused by viruses that induce or are capable of inducing physical distress, illness, or disease. The court found this exclusion applicable since the COVID-19 pandemic was the root cause of the governmental restrictions that led to the claimed loss. The clause was crafted to prevent coverage in scenarios where a virus initiates a causal chain leading to loss, reinforcing the insurer’s position that the policy did not cover losses related to the pandemic.

Efficient Proximate Cause Rule

The efficient proximate cause rule was considered to determine whether coverage was mandated when a chain of events included both covered and excluded perils. This rule applies when independent forces contribute to the loss. The court concluded that COVID-19 was the initiating factor in the causal chain that resulted in the government proclamations and subsequent losses. As the virus was an excluded peril under the policy, the efficient proximate cause rule did not mandate coverage. The court also noted that the insurance policy language was structured to exclude coverage when an excluded peril initiated the causal chain, aligning with Washington state law that allows insurers to draft policies with such exclusions.

Case 100211-4 Decision Criteria

Principle Interpretation

Direct Physical Loss Clause

The phrase “direct physical loss of or damage to” property is interpreted to require a tangible, physical alteration or destruction of the property. This means that for an insured to claim coverage, there must be a significant physical change to the property, not just a loss of use or access. The average person purchasing such a policy would understand this to mean that the property itself must be physically affected.

Virus Exclusion Clause

This clause explicitly excludes coverage for any loss or damage directly or indirectly caused by a virus. The interpretation assumes that if a virus initiates the chain of events leading to the loss, coverage is excluded. The exclusion is clearly stated and is understood to apply when a virus is the root cause of the claimed loss.

Efficient Proximate Cause Rule

The rule determines coverage based on the initial cause in a sequence of events leading to a loss. If a covered peril initiates the chain, coverage is mandated, even if an excluded peril is part of the sequence. However, if an excluded peril, such as a virus, initiates the chain, coverage is not mandated. This rule is applied unless explicitly contracted around within the policy.

Exceptional Interpretation

Direct Physical Loss Clause

In exceptional cases, the clause might be interpreted to include loss of functionality if there is a tangible threat that renders the property unusable or uninhabitable. This goes beyond mere loss of use and requires evidence of an imminent physical threat to the property.

Virus Exclusion Clause

There is little room for exceptional interpretation here unless the policy language explicitly allows for coverage in certain virus-related scenarios. Typically, the exclusion is straightforward and comprehensive.

Efficient Proximate Cause Rule

Exceptions might occur if the policy language is ambiguous or if an excluded peril indirectly causes a covered peril to trigger a loss. This would require a nuanced reading of the policy terms and factual circumstances.

Applied Interpretation

In this case, the principle interpretation was applied. The court found that Hill and Stout PLLC did not experience a “direct physical loss” because their properties were not physically altered or destroyed. They simply could not use the properties due to government proclamations, which does not meet the clause’s physical requirement. The Virus Exclusion Clause was also applied as COVID-19 was the initiating cause of the loss, thus excluding coverage. The Efficient Proximate Cause Rule did not mandate coverage because the virus was the initial cause of the chain of events leading to the loss, aligning with the policy’s exclusionary terms. The interpretations were based on the clear language of the policy and a consistent understanding of similar cases nationwide.

Key Term Resolution Method

Case 100211-4 Resolution Method

In the case of Hill and Stout PLLC v. Mutual of Enumclaw Insurance Company, the court’s resolution hinged on the interpretation of “direct physical loss of or damage to” property in the insurance policy. The court determined that the phrase did not cover the loss of intended use of the property due to government proclamations, as the property itself was not physically altered. Therefore, the plaintiffs, Hill and Stout, were found to have pursued an incorrect method by seeking recovery through litigation based on this insurance claim. The court ruled in favor of the insurer, Mutual of Enumclaw, highlighting the significance of the virus exclusion clause in the policy. Given these circumstances, Hill and Stout might have been better served by exploring alternative solutions outside of litigation, such as negotiating policy terms beforehand or seeking a different type of insurance coverage that explicitly covers government-mandated shutdowns.

Similar Case Resolution Methods

Different Insurance Policy Terms

Imagine a scenario where the insurance policy explicitly covers government-mandated closures without a virus exclusion clause. In such a case, a plaintiff would likely benefit from pursuing litigation, potentially with the assistance of an expert attorney, to assert their claim for coverage. The absence of a virus exclusion and clear policy terms supportive of coverage would significantly enhance the chances of a favorable outcome.

Absence of Virus Exclusion

Consider a situation where the policy does not include a virus exclusion clause, but the policyholder still faces denial of coverage for losses due to a government shutdown. Here, the plaintiff should engage in litigation with robust legal representation to challenge the insurer’s denial. The lack of a virus exclusion strengthens the policyholder’s position, making a legal challenge more viable.

Physical Property Damage Present

Suppose there was actual physical damage to the property caused by a covered peril occurring concurrently with the government shutdown. In such instances, the policyholder should pursue litigation, as the presence of physical damage provides a strong basis for claiming coverage. Consulting with an insurance law expert would be beneficial to navigate the complexities of such a case.

Government Order Not Virus-Related

In a situation where the government order is unrelated to a virus but still results in business closure, a policyholder might be better off negotiating with the insurer outside of court. If the policy language is ambiguous regarding such non-virus-related closures, mediation or arbitration could offer a more cost-effective and quicker resolution than litigation, especially if the policyholder can demonstrate a reasonable expectation of coverage.

FAQ

What Is Direct Physical Loss

Direct physical loss refers to a tangible, physical alteration or destruction of property. It means the property must be physically damaged or lost to trigger insurance coverage.

What Is Virus Exclusion

Virus exclusion is a provision in an insurance policy that denies coverage for losses caused directly or indirectly by viruses, such as COVID-19.

What Is Efficient Proximate Cause

Efficient proximate cause is a legal doctrine that determines coverage based on the primary cause of a loss when multiple causes exist. It applies when a covered peril sets off a chain of events leading to a loss.

Does COVID-19 Trigger Coverage

COVID-19 does not trigger coverage under policies requiring “direct physical loss” since the virus does not cause tangible physical damage to property.

Why Was Coverage Denied

Coverage was denied because the loss was not due to direct physical damage to the property, and the virus exclusion clause applied, excluding losses initiated by COVID-19.

What Is Loss of Functionality

Loss of functionality refers to a situation where property becomes unusable or unsafe, even without physical damage. This can sometimes trigger coverage, but not in this case, as the dental offices remained functional.

Does Policy Cover Business Loss

Business loss is covered if it results from direct physical damage to the property. In this case, the inability to use the property was not considered a direct physical loss.

What If No Virus Exclusion

Without a virus exclusion, coverage might depend on whether the loss can be shown to result from a covered cause, potentially allowing claims related to COVID-19.

When Is Efficient Proximate Cause Applied

The efficient proximate cause rule is applied when determining coverage for losses caused by multiple perils, identifying the primary cause to establish if coverage applies.

Can Policy Terms Be Negotiated

Yes, policy terms can often be negotiated at the time of purchase. It’s essential to review and understand exclusions and coverage limits before finalizing an insurance policy.

Filed for tax refund in Washington but still denied Why