The South Carolina Supreme Court on Wednesday became the fourth state high court in the nation to rule that the virus that causes COVID-19 cannot cause a direct physical damage or loss covered by a commercial property insurance policy.
The state Supreme Court decided the issue by answering a certified question asked by a US District Court judge who is deciding a lawsuit filed by a chain of sports bars that were forced to close because of state public health orders.
“The contention that a government shutdown order caused direct physical loss or damage is meritless,” the court’s 5-0 opinion says. “While the order prohibiting indoor dining certainly affected Sullivan’s financial well-being, the order itself was not directly physical.”
High courts in Iowa, Massachusetts and Wisconsin have issued similar rulings, as have all of the regional US Circuit Courts of Appeal.
Sullivan Management operates six Carolina Ale House establishments in South Carolina and one in Georgia. The company had to shut down in-person drinking and dining to comply with a March 17, 2020 order by South Carolina by Gov. Henry McMaster. The mayor of Augusta, Georgia issued a similar order on March 21, forcing the closure of its establishment there.
The company filed a claim for the income it lost because of the shutdowns with Fireman’s Fund, which is a unit of Allianz Global Corporate and Speciality Insurance Co. The insurer rejected the claim, saying there was no physical loss or damage that was covered under the policy.
Sullivan filed a lawsuit in Richland County, South Carolina, which was removed to federal court. Last October, US District Judge Mary Geiger Lewis issued an order sending five certified questions to the South Carolina Supreme Court.
The Supreme Court answered only one of them, the threshold query as to whether SARS-CoV-2 can cause a direct physical loss or damage covered by the policy. Sullivan argued that it did because the virus was physically present on its property.
The opinion notes that the same question has been asked in state and federal courts across the country and the vast majority have concluded a virus cannot cause a direct physical loss or damage. Those rulings, however, do not establish precedent in South Carolina courts.
The court said a “slim minority” of courts elsewhere have ruled that the term “direct physical loss or damage” is ambiguous, but it agrees with the majority of jurists who found that there must be some “tangible or material component to loss or damage.” The court said policy language that describes a “period of restoration” shows that the insurer contemplated coverage for lost income only during periods when the property was under repair or being rebuilt.
“While Sullivan took steps to mitigate the spread, such as increasing cleaning or installing plexiglass, these acts are different than restoring damaged or lost property,” the opinion says. “In other words, Sullivan had nothing to ‘repair, replace, or rebuild,’ thus further demonstrating that direct physical loss or damage requires something material and tangible.”
At least one issue remains unresolved as the state Supreme Court’s answers are returned to the district court: Sullivan’s insurance policy had a provision that offered up to $250,000 in coverage for any “communicable disease event.” However, another provision in the policy excludes from coverage any loss or damage caused by “mortality, death by natural causes, disease, sickness, any condition of health, bacteria, or virus.”
Judge Lewis had asked the Supreme Court to help resolve that conflict. But the high court said in a footnote to its decision that it declined to answer four of the five questions put to it because they require contract interpretation, which is best left up to the trial court.
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