Virus’ Presence a Reason for Case Against Ohio Insurer to Proceed: Judge

July 22, 2021

A gym and fitness center in Pennsylvania won a minor victory on July 13 in a dispute with an Ohio-based commercial property insurer over business interruption coverage claims stemming from closures caused by the COVID-19 pandemic.

Judge Terrance R. Nealon with the Court of Common Pleas in Pennsylvania’s Lackwanna County rejected Cincinnati Insurance Co.’s request for dismissal of Brown’s Gym Inc.’s claims against it for denial of coverage, as well as the insured’s allegations of bad faith and insurer breach of contract.

The case is Brown’s Gym Inc. v. The Cincinnati Insurance Co. and C.C. Young and Henkelman Insurance. In its claim for coverage under the “all risk” commercial property policy it purchased from Cincinnati, Brown’s Gym asserted that the presence of coronavirus on its premises and that of neighboring properties constituted damage that prohibited access to its property. The judge agreed that argument was compelling enough for the case against Cincinnati Insurance to go forward.

Brown’s Gym sought and purchased its coverage from Cincinnati Insurance through insurance broker C.C. Young and Henkelman Insurance (C.C. Young), a defendant in the case.

The policy purchased by Brown’s does not include a virus exclusion, therefore, the court wrote that Brown’s expected that the policy would cover “property damage and business interruption losses caused by viruses.” The policy states the insurer will “pay for direct ‘loss’ to Covered Property at the ‘premises’ caused by or resulting any Covered Cause of Loss.” The policy identifies “loss” as being accidental physical loss or damage but it does not define “direct,” “physical” or “damage,” the court noted.

The policy period for Brown’s Gym’s policy from Cincinnati extended from May 5, 2019, to May 5, 2020. Pennsylvania Gov. Tom Wolf on March 6, 2020, declared a disaster emergency due to the coronavirus pandemic and on March 19, 2020, mandated the closure of all non “life sustaining” businesses. Brown’s Gym did not fall into the category of “life sustaining.”

In its denial of coverage, Cincinnati Insurance maintained that no direct physical loss occurred as a result of the governmentally forced closures brought on by the coronavirus pandemic. Brown’s Gym, however, “gym specifically alleged that the COVID-19 virus was actually present on its covered premises and the neighboring properties, and that all access to the insured property was prohibited as a result,” which resulted in a loss, the court document states.

Because of its assertion its virus-related losses are covered by the policy, Brown’s Gym asked not only for coverage promised under the policy but because of Cincinnati’s denial, the gym said was premature, it also sought “compensatory damages for breach of insurance agreement and extra-contractual damages for insurer bad faith.”

Brown’s Gym also asserted claims against C.C. Young for negligence and negligent representation. C.C. Young filed preliminary objections to the claims against it, arguing that: the broker did not owe a duty to the gym; the “reasonable expectations” doctrine does not apply to a commercial insured; and that the broker was not a named party to the insurance contract. In an order dated Dec. 18, 2020, however, the court rejected C.C. Young s argument for removal from the case.

In the current pleading Cincinnati maintains, among other things, that the gym’s claims for declaratory judgement, breach of conduct and bad faith claims are “insufficient,” due to the lack of direct or physical loss to the property, a condition of coverage under the policy.

But the court found that because the gym specifically attested to the fact that the “virus was a continuous presence on its property … it sufficiently alleged ‘direct physical loss’ under the ‘physical contamination'” theory as a necessary condition to coverage.

Judge Nealon also took Cincinnati to task regarding Brown’s Gym’s allegations that the carrier prematurely dismissed the insured’s business interruption claim, misrepresented the terms of the policy, and invoked an irrelevant “pollutant exclusion” as a reason to deny the claim.

“Equally troubling is Brown’s contention that, instead of investigating and evaluating its claims based upon the facts and governing law, Cincinnati’s denial of coverage was motivated by its desire to preempt its own financial exposure to the economic fallout resulting from the COVID-19 crisis,” Nealon wrote.

“In light of the gym’s assertions that the insurer misrepresented the policy terms and monetary limits to the gym and denied the gym’s coverage request based on the insurer’s own economic considerations, rather than the merits of the claim, the insurer’s demurrer to the gym’s declaratory judgment, breach of contract, and bad faith claims will be overruled,” Judge Nealon wrote.

Judge Nealon gave Cincinnati Insurance 20 days to file a “responsive pleading to the complaint.”