In a unanimous decision, the Washington Supreme Court held in Hill and Stout, PLLC v. Mutual of Enumclaw Insurance Company, No. 100211-4 (August 25, 2022) that the phrase “direct physical loss of . . . property” in a property insurance policy does not include constructive loss of intended use of property, as such a loss is not “physical.” The Court also held that the virus exclusion applied to preclude coverage and that the efficient proximate cause rule did not mandate coverage.
The Plaintiff, Hill and Stout PLLC, commenced this action against its insurer alleging that its property insurance policy covered business income lost due to “direct physical loss of or damage to” the insured property. The policy also included a virus exclusion. Plaintiff alleged it was unable to use its offices for nonemergency dental practice due to gubernatorial proclamations issued by Governor Inslee. The trial court granted the insurer’s motion for summary judgment, finding that “direct physical loss of or damage to property” is not ambiguous and does not cover constructive loss of property under the Proclamation. The trial court also held that the virus exclusion applied, and that the efficient proximate cause rule did not apply in this case. Plaintiff appealed directly to the Washington Supreme Court.
The primary issue was the interpretation of the phrase “direct physical loss of or damage to Covered Property.” Plaintiff argued that “direct physical loss of” property can reasonably be interpreted to include the loss of the ability to use property. Mutual of Enumclaw argued that coverage requires that something physically happen to covered property, and that there was no coverage because Plaintiff admitted that nothing happened to its property. Hill and Stout argued it sustained a physical deprivation of property because it was physically deprived of the use of its business property as an immediate result of Governor Inslee’s proclamations, and urged the Court to apply a “loss of functionality” test instead of requiring that there be a physical alteration to the property. However, the Court found Plaintiffs loss to be more akin to an abstract or intangible loss than a “physical” one.
While the Court agreed that there are likely cases in which there is no physical alteration to the property but there is a direct physical loss under a theory of loss of functionality (such as contamination with a problematic substance), the Court found this was not such a case because Plaintiffs property continued to be functional. In so finding, the Court stated even under a loss of functionality test there must be some physical effect on the property. Furthermore, the Court found its interpretation of “direct physical loss” consistent with other policy provisions including the “period of restoration” during which business income coverage for the suspensions of operation applies. Thus, the Court held that deprivation of the full intended use of property is not sufficient to trigger coverage under the phrase “direct physical loss of or damage to” property where nothing “physical” has happened to the covered property.
Although the Court did not need to examine the issue of efficient proximate cause and the virus exclusion, the Court did so given that the issue was fully briefed and is likely to repeat in other cases regarding the interpretation of similar insurance policies. The Court found that the causal chain in this case was clear and that an excluded peril (the COVID-19 virus) initiated the sequence of events, causing the governor to issue the proclamations. As the causal chain was initiated by an excluded peril, the Court held that the efficient proximate cause rule did not apply to mandate coverage. The Court further held that the virus exclusion applied.
Disclaimer: The opinions expressed in this blog are those of the author and do not necessarily reflect those of Soha and Lang, P.S. or its clients.