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Fourth Circuit holds first hearing on coronavirus insurance claim

While Wednesday marked the first time the Richmond-based appeals court heard oral arguments on a Covid-19 insurance claim, sister courts have unanimously sided with insurers.

RICHMOND, Va. (CN) — A West Virginia drink-and-draw business asked a Fourth Circuit panel Wednesday afternoon to look toward more forgiving state court precedent in its fight to claw money from an insurance company following state-ordered coronavirus closures.

The dispute involves Charleston-based Uncork and Create, one of the millions of small businesses forced to closed as the pandemic ravaged the world. It offers guided painting classes and customers can bring their own adult beverages.

Much like those millions of other businesses, Uncork and Create too was denied insurance coverage for their loss of business claim. It filed a federal lawsuit against The Cincinnati Insurance Company hoping for a different result.  

But the complaint met the fate of similar claims when U.S. District Judge Irene Berger sided with the insurer. 

“The court is not unsympathetic to the situation facing the plaintiff and other businesses,” the Barack Obama appointee wrote in her November 2020 ruling. “But the unambiguous terms of the policy do not provide coverage for solely economic losses unaccompanied by physical property damage.”

On appeal to the Fourth Circuit, Uncork and Create's Pittsburgh-based attorney James C. Martin with Reed Smith LLP argued specific case law in West Virginia should provide his client a win. 

“What needs to be settled is West Virginia law,” he said, pointing to the West Virginia Supreme Court of Appeals' 1998 decision in Murray v. State Farm Fire and Casualty Company. In that case, the state justices said losses covered by policies which render insured property “unusable or uninhabitable…  may exist in the absence of structural damage to the insured property.”

Further relying on state court precedent, Martin also said the Fourth Circuit judges could look to a state law which allows for a more liberal interpretation of what he called "ambiguous" contract language. Inside that ambiguity, Martin argued, they could find a direct link between the state-ordered business closures and the insurance contract’s physical damage clause.

“The property was physically lost to Uncork for its intended purpose,” he said. “If it was water, the closure order would take that water away; I can’t drink it.” 

“That would be a physical loss,” he added. 

But lawyers for Cincinnati Insurance said Uncork and Create's interpretation of Murray, as well as the alleged ambiguity in the contract, is incorrect.

“Uncork presents a number of techniques to eliminate the word ‘physical’ in the phrase ‘physical loss or damage,’ but the order at issue permitted the use and occupancy of the premises, just no customers on site,” Chicago-based attorney Daniel Litchfield said on behalf of the insurance provider. 

“This is a property insurance policy, so the damage has to be read in that manner,” he added, suggesting context matters even if Uncork and Create sought to argue ambiguity. "No buildings got rebuilt, no tables or chairs were replaced.”

On the Murray precedent, Litchfield argued the standard the ruling developed relied on “permanent dispossession,” not a temporary closure.

“Part of Murray involved whether the policy should cover the roofs that were actually damaged by [boulders], but the third home had no damage but was still closed by the fire department and they could never live there again,” he said. “You had the boulders, the reports of the engineers with their stamp saying [the homes would] continue to get hit with boulders.” 

U.S. Circuit Judge Pamela Harris , an Obama appointee, moved outside the specifics of the dispute and pondered on a claim other businesses had tried to push: that Covid-19 created a molecular issue. The surfaces inside the businesses, this theory argues, were covered with the virus and that should count as physical damage under the policy. 

But Litchfield pushed back on the argument, using examples of asbestos removal or even cleaning up a property after it's been used to cook methamphetamine. 

“They permeate the building, that’s a physical change to the property,” he said before reminiscing on his first job at a restaurant where he mopped the floor, suggesting Uncork and Create could do the same it wanted to remove the virus from its property. 

“The CDC has told us Covid can always be wiped up,” he said.  

Harris was joined on the panel by U.S. Circuit Judges Barbara Keenan, a fellow Obama appointee, and Allison Jones Rushing, a Donald Trump appointee. The judges did not indicate when they intended to rule.

Notably, the 11th Circuit, Eighth Circuit, and Sixth Circuit have all ruled on similar claims and each court sided with the insurance companies. They have universally pointed to the physical damage requirements in policies as grounds to side with insurers. 

“Gilreath has alleged nothing that could qualify, to a layman or anyone else, as physical loss or damage,” an Eighth Circuit panel wrote after Georgia-based Gilreath Family & Cosmetic Dentistry argued the aforementioned molecular damage claim. 

“Here, the shelter-in-place order that Gilreath cites did not damage or change the property in a way that required its repair or precluded its future use for dental procedures,” the judges wrote, echoing their sister circuits. “We do not see how the presence of those particles would cause physical damage or loss to the property.”

But where federal courts have been unsympathetic to businesses' claims, state courts have handed them a few victories.

In a blog post, attorneys at Covington and Burling suggested these state-level fights might be the best route to collect.

"Nearly all of the early cases involved property insurance forms issued to small businesses, which have language that differs in many respects from the higher-end forms used in policies issued to medium- and large-sized businesses in the United States," they wrote. "Whether these federal court rulings stand will depend on how the state court appeals proceed."

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