It is the Oregon Supreme Court's turn to answer the question addressed in many courts across the country. Do losses related to COVID-19 constitute direct physical loss or damage to property under a commercial general liability insurance policy? Oregon Clinic PC v. Fireman's Fund Insurance Co. No. 22-35047 (9th Cir. 2023) tackled this question after the U.S. District Court in Portland granted the insurer's motion to dismiss finding that COVID did not qualify as physical loss under the insurance policy. On appeal, the court determined that it needed further guidance before coming to a final decision.
Certified Question to the Supreme Court:
"Can the actual or potential presence of COVID-19 virus on an insured's premises constitute direct physical loss or damage to property for purposes of coverage under a commercial property insurance policy?
Facts of the Underlying Case
Oregon Clinic, the insured, is a medical provider that owns and operates fifty-seven locations in the Portland area. Oregon Clinic purchased a commercial property insurance policy from Fireman's Fund that includes coverage for business income loss due to direct physical loss or damage to the property. It also secured additional specialty coverage from Fireman's Fund.
Oregon Clinic reported that between March and November 2020 about 22 patients and employees were infected with COVID-19 while on the premises. They argue that because of this the virus was present and continuously dispersed throughout their facilities during the time the specialty coverage as well as the regular policy were in place. They also argued that people congregated in and near the Oregon Clinic locations seeking medical care and given the high level of contagion, the virus was also statistically present at all times during the policy period. They contended that this rendered all attempts at cleaning and sanitizing the clinics virtually ineffective. This caused Oregon Clinic to "make physical and other changes to its property and practices." It also alleged that on top of these difficulties it was forced to stop performing non-urgent medical procedures, which are a significant source of their income.
Oregon Clinic sued the insurance company for breach of contract and the breach of the implied duty of good faith after it denied coverage for lost business income sustained from the repercussions of closures and other extraordinary measures that they were required to take during COVID. It asserted that the virus was present on its business premises and as a result it was unable to operate its business and suffered significant business income losses. The insurer countered arguing that the policy only covered "direct physical loss or damage to property." Due to the fact that there was no overt physical damage to the property, coverage was never triggered under the parameters of the policy. The district court dismissed the insured's suit for failure to state a claim. It reasoned that Oregon Clinic's losses were all economic in nature and did not constitute physical loss.
Interpretation of the Word "Physical"
Although the Oregon Supreme Court has not yet answered the certified question presented to it, the Ninth Circuit attempted an analysis based on current state appellate court opinions. "We ordinarily accept the decision of an intermediate appellate court as the controlling interpretation of the state law, but here we do not have an intermediate appellate court opinion that has interpreted the term direct physical loss in the context of COVID-19."
The Oregon Supreme Court, has however, interpreted the word "physical" in a commercial liability insurance policy. In that decision it concluded that "the policy excluded coverage for consequential or intangible damages." Wy. Sawmills, Inc. v. Trans. Ins., 578 P.2d 1253, 1256 (Or. 1978). Over a decade later, the Oregon Court of Appeals distinguished the Wyoming Sawmills case in interpreting the term "direct physical loss" in an all-risk homeowner's policy. In Farmers Ins. Co. v. Trutanich, 858 P.2d 1332, 1335 (1993), the court found that a pervasive odor did qualify as direct physical loss under the policy. It said that the odor caused physical damage to the house that the policy holders owned.
Because the Wyoming Mills and Trutanich cases are the only clear authority on this issue, the Ninth Circuit felt it prudent to request that the Oregon Supreme Court clarify the meaning of "direct physical loss" in a claim stemming from COVID-19. Their interpretation would be instructive as well as determinative in the case at hand. The Ninth Circuit stayed any further proceedings until Oregon Supreme Court renders its answer.
The attorneys at WSHB will continue to monitor the progress of this case and provide updates when available.