January 2022: Pennsylvania - Property Coverage - COVID-19 Physical Loss or Damage

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The Middle District of Pennsylvania in State Street Restaurant Group v. Cincinnati Cas. Co., 2021 U.S. Dist. LEXIS 220028 (M.D. Pa. Nov. 15, 2021) “join[ed] the rising tide of caselaw” finding that “losses resulting from COVID mandated closings and restrictions… are not encompassed by the terms of most commercial insurance policies.”


State Street purchased a commercial property insurance policy from Cincinnati Casualty Company. The policy lacked a virus exclusion, and it provided business income and extra expense coverage in the event of closures by a civil authority. The policy also provided coverage for direct loss to covered property, with “loss” defined as “accidental physical loss or accidental physical damage.”

State Street sought coverage for losses related to closure of its premises during the pandemic. Cincinnati disclaimed, and then State Street filed suit, seeking a declaration of coverage and a finding of policy breach in bad faith. Cincinnati in response filed a motion to dismiss. The Middle District of Pennsylvania decided the motion, setting forth its task as “join[ing] other courts in examining the degree to which insurance covers business losses resulting from COVID mandated closings and restrictions.”

The Parties’ Arguments

State Street argued that Pennsylvania’s March 19, 2020 order directing restaurants to close their dine-in facilities caused it to incur business income losses and furlough its employees. It also contended that the COVID-19 virus maintained a continuous presence at its restaurant, rendering the property unsafe and unfit for its intended use. In response, the insurer argued that COVID-19 does not cause physical loss or damage under either the direct loss or civil authority provisions of the policy at issue and so coverage is unavailable.

The District Court’s Decision

The Court evaluated whether “direct loss coverage” or civil authority coverage was available to State Street. It found no coverage on either ground, and so granted Cincinnati’s motion to dismiss, including in relation to State Street’s bad faith claim.

Direct Loss Coverage

After setting forth in detail the motion to dismiss standard, the Court first considered whether COVID-19 causes “direct physical loss.” It concluded it does not. The Court reasoned that the policy’s definition of “loss” included “physical damage” and “physical loss,” and it evaluated the meaning of those two items.

The opinion noted the definitions of “physical damage” and “physical loss” are established and unambiguous “within the Third Circuit.” In particular, the Court cited Port. Auth. v. Affiliated FM Ins. Co., 311 F.3d 226, 235-36 (3d Cir. 2002) for the proposition that the “Third Circuit has held that physical damage to a property means a distinct, demonstrable, and physical alteration of its structure such that its function is nearly eliminated… or the structure is made useless or uninhabitable.”

The Court in turn observed, citing a string of cases, that “numerous holdings from courts in this district and those of neighboring districts have determined that the presence of the coronavirus does not constitute physical damage for insurance coverage purposes.” It reasoned that COVID-19 causes “losses of businesses, not property.” And without “physical damage or loss to the covered property,” there is no “direct loss coverage,” even if the policy promises to cover “all risks” and the policy lacks a virus exclusion.

Civil Authority Coverage

The Court then evaluated the civil authority portion of the policy. The applicable terms on this point focused on “the area immediately surrounding [a] damaged property” and involved whether access to the insured’s premises was “prohibited by civil authority as a result of damage” and “the action… is taken in response to dangerous physical conditions resulting from the damage…”

The Court reasoned that the “physical damage” and “physical loss” terms were just as important here as they were in relation to the “direct physical loss” analysis. It then reiterated that COVID-19 “does not render a building physically unusable or unsafe, and therefore does not constitute physical loss or damage.” It then found no coverage under this argument because COVID-19 no more caused “physical damage” or “physical loss” to adjacent properties than it did to State Street’s premises.


In granting Cincinnati’s motion to dismiss, the Court observed that its conclusions adhered to “the emerging majority rule in this field.” The Middle District of Pennsylvania’s State Street opinion is one more decision in the “rising tide of caselaw” finding no coverage in this context. 

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