The Supreme Court of Washington found that the interruption of a dental office's business operations, caused by the COVID-19 shutdown and restrictions, did not constitute a physical loss under the property insurance policy. Although the dentists' argument that they should succeed under the "loss of functionality" theory was considered by the court, it still found in favor of the insurer because the dental office premises were not physically harmed and, in fact, the office was still functional and being used for emergency dental procedures. The policy also contained a virus exclusion. The efficient proximate causation theory did not assist the plaintiffs because the initial peril in the causation chain (the COVID-19 virus) was excluded under the policy.

Background Facts

Dr. Sarah Hill and Dr. Joseph Stout operate their dental offices together as Hill and Stout PLLC (HS). HS purchased a property insurance policy from Mutual of Enumclaw Insurance Company (MOE) The policy states that it covers "business income lost due to direct physical loss or damage to the property." Like many policies, it also included a virus exclusion. This section provides that, "(MOE) will not pay for loss or damage caused directly or indirectly by any virus that induces or is capable of inducing physical distress, illness, or disease." HS claimed that it was entitled to coverage under the policy due to the Washington Governor's proclamation requiring that they cease business operations during the early stages of COVID-19.

On March 16, 2020, HS made the decision to close its dental practice due to the spread of coronavirus and the Governor's upcoming proclamation that closure would be mandated for their business. On March 18, 2020, HS ceased all routine dental procedures and performed only emergency procedures as needed. This was in accordance with the Proclamation issued by Governor Inslee on March 19, 2020. HS filed a claim with MOE to cover their losses due to their inability to use its offices for normal dental procedures. MOE denied the claim stating that HS had not suffered any "direct physical loss or damage" to the property. HS brought a lawsuit against MOE contesting the denial and later amended the action to include a putative class action.

After some discovery in the case, MOE filed a motion to dismiss based on the argument that HS had not suffered a direct, physical loss and the virus exclusion applied. HS asserted that the direct, physical loss resulted from the interruption of business caused by the Governor's Proclamation and other orders requiring them to close their doors to their bread and butter patients. The trial court ultimately found that the business interruption caused by COVID, and all of the restrictions and closures caused by it, did not constitute a "direct, physical loss" within the parameters of the policy so as to require coverage. The court also found that the virus exclusion applied. HS appealed.

The issue of efficient proximate cause was not reached by the trial court, but it is an issue that is likely to reoccur throughout the state, so the Supreme Court here addressed it in its decision.

The Insurance Policy

HS secured property insurance from MOE to cover both properties. One policy covered the period from January 1, 2019 to December 31, 2019 and the other from January 1, 2020 to December 31, 2020. Under “Section I – Property” HS had coverage for “direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.” The policy also provided coverage for business interruption and loss of income. It said that MOE would pay for the actual loss of business income sustained due to the "necessary suspension of operations during the period of restoration."

Even given this, however, the suspension of operations had to be a result of direct, physical loss or damage to the property. The policy also contained a Washington specific portion which lists specific exclusions. It stated, "Loss or damage will be considered to have been caused by an excluded event if the occurrence of that event:

  • Directly and solely results in loss or damage; or
  • Initiates a sequence of events that results in loss or damage, regardless of the nature of any intermediate or final event in that sequence. The most pertinent exclusion to this case is the Virus or Bacteria exclusion, which excludes coverage for loss or damage due to any virus.," Hill and Stout v. Mutual of Enumclaw Insurance, No. 100211-4

Does Business Interruption Caused by the Impact and Consequences of COVID-19 Policies Qualify as a Direct, Physical Loss Under the Insurance Policy?

Generally, an insured has the burden of proof as to the existence of coverage and the insurer bears the burden of showing that a valid exclusion precludes coverage. Mut. of Enumclaw Ins. Co. v. T & G Constr., Inc., 165 Wn.2d 255, 268, 199 P.3d 376 (2008). In examining the meaning of an insurance agreement between parties, the court will look to the "plain, ordinary and popular meaning." Zhaoyun Xia v. ProBuilders Specialty Ins. Co. RRG, 188 Wn. 2d 171, 182, 400 P.3d 1234 (2017). If any ambiguity is found, it will be construed in favor of the insured. Vision One, LLC v. Phila. Indem. Ins. Co., 174 Wn.2d 501, 512, 276 P.3d 300 (2012).

The main question before the court in the current action is whether the interpretation of "direct physical loss or damage to the covered property" includes business interruption caused by the COVID-19 pandemic. HS contends that physical loss should include the shuttering of its doors during the pandemic, which it was forced to do by order of the Governor and for the safety of themselves and their patients. MOE disagrees arguing that coverage is only triggered when something physically happens to the property by an external physical force and results in some physical change to the property such as damage to the roof, etc.

In looking at the provision, the court noted that all of the key terms in the policy are undefined so it looked to dictionary definitions. “Physical” is defined as “of or belonging to all created existences in nature” and “of or relating to natural or material things as opposed to things mental, moral, spiritual, or imaginary.” WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY 1706 (2002). “Loss” is defined most pertinently as “the act or fact of losing : failure to keep possession : DEPRIVATION” and “the state or fact of being destroyed or placed beyond recovery.” Id. at 1338. HS relies heavily on the definition of deprive, which is defined as “to take away : remove; destroy, to take something away from, and to keep from the possession, enjoyment, or use of."

Although the court noted that the definition of "deprive" does provide the best argument in favor of HS's point of view, when considered in conjunction with the context of the policy language as a whole, it is not sufficient to overcome the clear requirement that the loss of use or enjoyment of use, etc., must be caused by an outside physical force that physically damages the property. Even though the dentists were prohibited from physically using their work space, the property itself was not physically damaged. Therefore, the court found that the claim for loss of intended use and loss of business income is not a physical loss of property because HS was still able to physically use the property, even if in a limited capacity, and which it still did for emergency treatment.

HS also urged the court to consider the applicability of the "loss of functionality test." The loss of functionality test requires a physical loss of usage to the property. The cases HS quoted all contained instances of physical ramifications such as contamination by a substance, or imminent physical danger to a property. Here the Proclamation did not cause a loss of functionality because the offices could still be used for their purpose, as evidenced by the emergency procedures that took place there even during the restrictions. The property was never declared physically unsafe or uninhabitable. Through it all, the offices continued to be functional.

HS also claims that the suspension of operations should be covered by the portion of the policy that call for a "period of restoration" due to "physical loss or damage to the property." The restoration time under the policy begins 72 hours after the time of direct physical loss or damage and “[e]nds on the earlier of:

  • "The date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality; or
  • The date when business is resumed at a new permanent location.” CP at 381-82

The court concluded that if there were no physical changes or danger to the property, there would be nothing to repair, rebuild, or replace. Thus, HS also failed in their argument on this front. As discussed above, the intended use of the property does not qualify as a direct, physical loss to the property and coverage is not triggered. HS shows no physical loss to their dental offices, or evidence that the offices are no longer in their possession.

Efficient Proximate Cause and the Virus Exclusion

The court chose to take up this issue not because they needed to reach it in the current case, but because it is an issue of a recurring nature in the State of Washington and around the country.

The efficient proximate clause rule applies when two or more independent forces operate to cause the loss. Kish v. Ins Co. of N. Am., 125 Wn.2d 164, 170, 883 P.2d 308 (1994). In other words, "the efficient proximate cause rule states that where a peril specifically insured against sets other causes into motion which, in an unbroken sequence, produce the result for which recovery is sought, the loss is covered, even though other events within the chain of causation are excluded from coverage.” McDonald v. State Farm Fire & Cas. Co., 119 Wn.2d 724, 731, 837 P.2d 1000 (1992). The opposite proposition, however, is not a rule of law. "When an excluded peril sets in motion a causal chain that includes covered perils, the efficient proximate cause rule does not mandate exclusion of the loss.” Vision One, 174 Wn.2d at 519.

Even given those provisions potentially favoring the insured, courts have permitted insurance companies to write exclusions that deny coverage as a whole when an excluded condition or peril initiates the damage in an unbroken causal chain. “It is perfectly acceptable for insurers to write exclusions that deny coverage when an excluded occurrence initiates the causal chain and is itself either the sole proximate cause or the efficient proximate cause of the loss.” Xia, 188 Wn.2d at 183. Put more simply, the efficient proximate cause doctrine will require that insurers extend coverage when the initial peril that started the chain of causation was a covered peril contemplated by the agreement. On the other hand, when the initiating peril was not a covered danger or condition, the insurer does not have to offer coverage for those losses. Findlay v. United Pac. Ins. Co., 129 Wn.2d 368, 380, 917 P.2d 116, 122 (1996).

The causal chain in the case at hand is easy to decipher. The emergence of COVID-19 caused the government to issue closures and restrictions on businesses, including the insureds' dental offices. Therefore, the initial peril- a virus spreading quickly through the city- was not covered by the policy because of the virus exclusion. The virus, which was an excluded peril, initiated the chain of causation in this case. Therefore, HS cannot use the theory of efficient proximate cause to establish an avenue to trigger coverage under their policy with MOE. Although HS claims that MOE invalidly tried to contract around the efficient proximate cause rule, the court finds this argument faulty due to the fact that the policy clearly covers later excluded perils if they came about by an initial covered peril that set the wheels in motion for later loss to the property.

Although HS asserts that a material issue of fact remains on this issue, the court disagreed. It is plain and clear that COVID-19, already established as an excluded peril, initiated the causal chain in this case and that the policy excludes the causal chain of losses initiated by an excluded peril. As the causal chain was initiated by an excluded peril, the efficient proximate cause rule does not trigger coverage and the virus exclusion applies.

Thus, the court affirmed the lower court's grant of the motion for summary judgment in favor of MOE. The plaintiffs failed to show a direct, physical loss to their property and the proximate cause rule will not apply because the initial peril was not covered pursuant to the virus exclusion contained in the policy.

Key Takeaways

  • Business interruption caused by COVID-19 does not constitute a direct, physical loss of property.
  • Without a showing of direct, physical loss, an insured may not recover for damages under the policy.
  • Restoration occurs after a physical loss and getting back to business after a forced government closure due to COVID-19 was not contemplated as a coverage-triggering event.
  • The efficient proximate cause doctrine does not apply in situations where the initial peril was excluded from the policy, as COVID-19 as a virus, was in the instant case.
  • Policies that exclude coverage for later perils when the initial peril was an included danger under the policy, are attempts to contract around the efficient proximate rule, and will not be upheld.
  • In this case, MOE's policy covered any resulting losses initiated by a covered peril so it was not guilty of trying to contract around efficient proximate cause.
  • Since the initial peril was not covered by the policy pursuant to the virus exclusion, MOE was within its rights in denying coverage to the insured.

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