A tale of two opinions: The meaning of “physical loss” in the context of commercial property policies for Covid-19-related losses in Pennsylvania
With the onset of the Covid-19 pandemic in 2020, businesses across the country were forced to shut their doors and turn to their commercial property insurance companies to seek coverage. With their properties having been rendered useless for their intended (and insured) business purposes, these insureds reasonably expected their “all risk” policies would provide the promised “business income” protection due to the “physical loss” of their properties. The insurance industry, however, near-universally denied coverage, leading to a proliferation of lawsuits around the country – including in Pennsylvania.
On November 30, 2022 the Pennsylvania Superior Court issued a pair of decisions that ostensibly addressed the same legal question posed in the vast majority of these cases – whether the term “physical loss” in a commercial property policy can reasonably be construed to mean the loss of use of property for its intended business purpose. Curiously, the Superior Court’s decisions in Ungarean v. CNA & Valley Forge Insurance Co., Nos. 490 WDA 2021, No. 948 WDA 2021, 2022 Pa. Super. LEXIS 467 (Pa. Super. Ct. Nov. 30, 2022) and MacMiles, LLC v. Erie Insurance Exchange, No. 1100 WDA 2021, 2022 Pa. Super. LEXIS 469 (Pa. Super. Ct. Nov. 30, 2022) reached opposite and seemingly contradictory conclusions, leaving the question far from settled within Pennsylvania.
Background
In March of 2021, Judge Ward of the Pennsylvania Court of Common Pleas for Allegheny County issued two detailed opinions granting summary judgment to separate business owners (dentist Ungarean and pub owner MacMiles) for Covid-19-related losses, reasoning that the term “physical loss” as used in their commercial property policies was reasonably susceptible to an interpretation that included “loss of use” of property, resulting in coverage for the insured’s business income losses. See Ungarean v. CNA & Valley Forge Ins. Co., No. GD-20-6544, 2021 Pa. Dist. & Cnty. Dec. LEXIS 2 (Pa. Com. Pl. March 22, 2021); MacMiles, LLC v. Erie Ins. Exch., No. GD-20-7753, 2021 Pa. Dist. & Cnty. Dec. LEXIS 4377 (Pa. Com. Pl. May 25, 2021). The insurers appealed to the Pennsylvania Superior Court, which consolidated the two cases for an en banc hearing in April, 2022.
On November 30, 2022, the same nine-judge en banc panel issued polar opposite decisions in Ungarean and MacMiles. In Ungarean, a five-judge majority affirmed that “physical loss” of property can include deprivation of use of property of the type brought about by the pandemic, with four judges dissenting. In MacMiles, however, a five-judge majority adopted the dissent in Ungarean, holding that “physical loss” of property necessarily requires physical alteration of the property’s structure or some other condition rendering the property unusable or uninhabitable.
Discussion
In Ungarean, the Superior Court affirmed the Court of Common Pleas’ ruling, explaining that it was in “full agreement” with that court’s “conclusions” and “reasoning,” and held that “coverage is owed to Ungarean for his COVID-related business losses under the specific terms” of the policy. 2022 Pa. Super. LEXIS 467, at *2. Finding the Court of Common Pleas’ analysis of the meaning of “direct physical loss” both “straightforward” and “compelling,” the Superior Court was “convinced the trial court’s reasoning is correct, and results in a reasonable interpretation of the CNA Policy,” and specifically, “direct physical loss.” Id. at *11. Quoting the trial court, the Superior Court explained that “the most reasonable definition of ‘loss’ is one that focuses on the act of losing possession and/or deprivation of property instead of one that encompasses various forms of damage to property, i.e., destruction and ruin.” Id. at *10. “Specifically, whereas the meaning of the term ‘damage’ encompasses all forms of harm to [Ungarean’s] property (complete or partial), this [c]ourt conclude[s] that the meaning of the term ‘loss’ reasonably encompasses the act of losing possession [and/or] deprivation, which includes the loss of use of property absent any harm to [the] property.” Id. Thus, the Superior Court concluded, “it is, at a minimum, reasonable to find that Ungarean’s loss of the use of his dental practice due to COVID-19 and the governmental orders equated to a direct physical loss of his property.” Id. at *13 (citations omitted).
In MacMiles, just like the policy at issue in Ungarean, the policy provided coverage for “direct physical ‘loss’ of or damage to Covered Property at the premises,” including the loss of income due to “‘interruption of business’ resulting directly from ‘loss’ or damage to property on the premises.” 2022 Pa. Super. LEXIS 469, at *6. Speaking to Pennsylvania’s rules of insurance policy construction, but relying principally on decisions from outside of Pennsylvania, the MacMiles majority stated that, the term “physical loss” “does not cover mere loss of use of commercial property unaccompanied by physical alteration or other condition immanent in the property that renders the property itself unusable or uninhabitable.” Id. at *2. In arriving at this conclusion, the majority looked to what it described as “the near-universal majority of courts to have addressed this issue,” which had “reach[ed] the same result.” Id. Without identifying any distinguishing policy language, four of the judges who had been in the majority for Ungarean concurred in the holding in MacMiles, noting that the differing decisions were based “solely” on the policy language at issue in the respective cases. See id. at *21-22 (Panella, J., concurring).
Analysis
First, for the reasons already discussed, it is difficult to reconcile the Superior Court’s decision in Ungarean with its decision in MacMiles.
Second, the majority’s analysis in MacMiles, like the dissent in Ungarean, appears to skip a critical step in applying Pennsylvania’s principles of insurance policy construction. Under Pennsylvania law, when a policy is subject to more than one reasonable interpretation, it is ambiguous and must “be construed in favor of the policyholder and against the insurer.” Kurach v. Truck Ins. Exch., 235 A.3d 1106, 1116 (Pa. 2020). Whether a policy term is ambiguous, does not turn on “which [interpretation] is ‘right’ or ‘wrong.’” Prudential Prop. & Cas. Ins. Co. v. Sartno, 903 A.2d 1170, 1177 (Pa. 2006). Rather, the focus is on whether the policy could be construed to provide coverage. See id. The fact that a proposed construction against coverage “is not unreasonable” does not preclude a finding of ambiguity – unless it is “the only reasonable interpretation of the language used.” Betz v. Erie Ins. Exch., 957 A.2d 1244, 1254 (Pa. Super. Ct. 2008) (emphasis added). Yet the MacMiles majority did not address the obvious import of the Ungarean majority’s opinion. In order to decide as it did, the Superior Court necessarily concluded that its own opinion issued the same day in Ungarean was an unreasonable interpretation.
Third, as a result of this split, it seems very likely (and necessary) that the Pennsylvania Supreme Court will take up the cases on certification for review. Should it do so, the Ungarean opinion, with its cogent analysis of and exclusive reliance on Pennsylvania insurance principles, should guide the Court in realizing the reasonable expectations of Pennsylvania’s policyholders. Indeed, there may be no better evidence that the policy language is at the very least ambiguous (and thus, under Pennsylvania law, construed in favor of the insured) than nine Superior Court judges reaching opposite conclusions in Ungarean and MacMiles. For businesses around the country, and especially in Pennsylvania, a favorable ruling would provide welcome relief.