When policyholders purchase insurance protection against loss or damage to their property, they can be covered when they are denied access to their property — even if it has not been structurally damaged. That’s true for businesses nationwide today as governors responding to the coronavirus pandemic impose statewide shelter-in-place orders that close all but essential businesses.
Policyholders should keep this fact in mind while a chorus of insurance industry voices proclaims the opposite. For example, in a letter to New York State policyholders posted on the web, insurance firm Chubb advises in bold type: “The presence of an infectious agent or communicable disease at a location where there is covered property generally will not mean that property has suffered ‘physical loss or damage’ under your policy.” But Chubb misses the point that “physical loss or damage” is not limited to structural harm.
In short, the walls do not need to be falling down for property damage to be found. Invisible, nonstructural harm — such as property becoming inaccessible due to the coronavirus pandemic — can trigger coverage under property policies.
Insurance companies need “physical” to mean “structural” because they otherwise would have a serious problem. Most property policies are “all risks” policies, meaning that they cover all risks that are not specifically excluded. Once a policyholder proves that its property has been damaged or injured, it can be hard for insurance companies to avoid paying the claim.
At that point, the burden shifts to insurance companies to prove that coverage is barred by exclusions. The recent insurer articles rarely mention that the burden of proof on exclusions is high — but it is. Coverage cannot be defeated with a simple analysis of particular exclusions. It also requires a substantial showing of actual facts proving that the exclusions apply.
The fact that physical loss or damage is not limited to structural harm starts with the plain language of the insurance policies. The word “structural” is almost never used. Instead, words like “direct physical injury” appear in the boilerplate, preprinted forms that the insurance companies drafted themselves. If “structural” damage is what they meant, that is what they should have said.
Since they did not, the most basic principles of contract drafting makes clear that structural damage is not required.
The argument that physical loss or damage actually is limited to structural harm is far from new. Insurance companies have tried to assert it in many different contexts for years.
Many courts, however, have disagreed. Across the country, courts have long interpreted property policies as providing coverage for damage that is not structural. This issue was paramount during the decades of asbestos litigation. Courts nationwide were forced to evaluate whether the release of asbestos fibers into buildings constituted property damage. Many courts found that it did.
In Sentinel Mgt. Co. v. New Hampshire Ins. Co. (Ct. App. Minn. 1997), for example, the court took this issue head-on. It held expressly that physical injury or loss “may exist in the absence of structural damage to the insured property.”
Courts have held the same with regard to odors and other types of invisible, nonstructural harm. For example, in Farmers Ins. Co. v. Trutanich (Or. 1997), an appellate court in Oregon found that an odor from “cooking” methamphetamine “was ‘physical’ because it damaged [the insured property].” The court deemed the cost of removing the odor to be a “direct physical loss.” Similar holdings have been reached around the country with regard to carpet fumes, gasoline odors, carbon monoxide leaks, paint dust and the like.
In this crisis, insurance coverage can mean the difference between bankruptcy and staying afloat. It can mean the same, on a personal level, for each policyholder’s employees. Thus, policyholders have no choice but to pursue all insurance coverage to which they are, or may be, entitled. That process starts with seeing straight through the insurance company argument that, as a threshold matter, property policies cannot possibly apply.
Rhonda D. Orin, Daniel J. Healy and Stephen Palley are partners in the D.C. office of law firm Anderson Kill PC, which represents policyholders in insurance disputes.
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