Washington Supreme Court: Deprivation of intended use following COVID-19 order is not physical harm | Cozen O’Connor


In a Thursday, Aug. 25, unanimous decision (slippery opinion), the Washington Supreme Court added its voice to the developing “strong, if not unanimous” national consensus that COVID-19 and related government shutdowns do not constitute a “loss physical property” within the meaning of property insurance policies.

Upholding Mutual of Enumclaw’s summary judgment against dental practice, Hill and Stout, PLLC, the Court held that the “claim for loss of anticipated use and loss of business income” occasioned by the March declaration of emergency 2020 by Washington Governor Jay Inslee temporarily limiting the practice of dentistry to emergency dental procedures “is not a physical loss of property. »1

Drs. Hill and Stout sued Mutual of Enumclaw under their commercial property insurance policy, which provided coverage for loss of business income due to “direct physical loss or damage” to dental practices Hill and Stout. In April 2020, Drs. Hill and Stout filed a complaint seeking a statement that their Mutual of Enumclaw policy covered “losses and expenses resulting from the interruption of [their] business” and that their “property has suffered direct physical loss or damage as a result of the [Governor’s COVID-19] proclamations and ordinances.

Enumclaw Mutual lost its original motion to dismiss — brought on the grounds that the proclamation did not result in “loss” or “damage” to the dentists’ covered property — before King County Judge Susan Amini. Judge Amini held that the term “direct physical loss” was ambiguous and could reasonably include the alleged “deprivation”.2 However, after the case was transferred to King County Judge Samuel Chung and a subsequent discovery revealed that the dentists continued to perform urgent dental procedures and maintained regular attendance by reception staff in their offices throughout the period covered by the Proclamation, Mutual of Enumclaw was successful in obtaining the summary judgment remand. Granting the motion, Judge Chung found that the wording of the cover at issue required an “external force” that “causes direct physical alteration or change” of the covered properties.3 Moreover, he argued, there could be no coverage under a civil authority clause in the policy because, similarly, such coverage is based on the requirement of “the same loss direct physics.4

The Washington Supreme Court unanimously agreed. Contrary to the dentists’ assertion that “direct physical loss” could reasonably be interpreted to include the loss of the ability to use property or the “deprivation” of such property, the Court instead interpreted the term “physical loss of . . . property” to require “property which has been physically destroyed” or property of which an insured “is deprived in that the property is no longer physically in their possession”. 5 Nevertheless, the Court agreed with the dentists that “direct physical loss” could include “physical deprivation of property which results immediately from a cause not excluded[,]” but found that it was not such a case. Although the dentists correctly alleged that they had been “precluded from using the property as [they] “the Proclamation had not”physically kept [them] to use [the] property,” noting that they had, in fact, continued to use it.6

Instead of requiring the occurrence of physical ‘alteration’ to the property, dentists urged the Court to use a ‘loss of functionality test’. Although the Court accepted that there may be patterns of occurrence resulting in “direct physical loss” without alteration of property, the Court cited three examples to distinguish the present case. seven Indeed, the Court concluded that while “there may be some flexibility to a physical modification requirement as part of a loss of functionality test[,]» « there must still be physical effect on property”. 8

In addition, the Court pointed to a recent federal ruling by Judge Barbara Rothstein of the U.S. District Court for the Western District of Washington and agreed with her finding that “direct physical loss” means an alleged peril must trigger events that result in an inability to physically own or handle the property, such as theft or total destruction. 9

Turning to the question of ambiguity, the Court concluded that “[a]Any ambiguity in politics is only to the extent that [“direct physical loss of”] could mean “one of three things: “the property is completely physically destroyed, is no longer physically in the insured’s possession, or the insured is physically unable to use the property”. ten “[T]The average person purchasing a property insurance policy would take this to mean that the property must be directly physically lost to trigger coverage. 11 Identifying no such physical loss here – noting that the dentists had at most alleged loss of their “intended use of the property—the Court found no coverage.12

Notably, in addition to the “direct physical loss” issue, the Washington Supreme Court addressed an important subsidiary issue: whether and how Washington’s “proximate effective cause” (EPC) rule might apply to light of the exclusion of viruses from politics. Although the Court concluded that the application of the rule was not central to its decision, it nonetheless addressed it. Because the parties had informed the EPC rule and because it was sure to resurface given the number of COVID cases currently before the courts in Washington, the Court took the opportunity to clarify its terms and limitations.

Washington’s EPC rule is involved when two or more independent forces operate to cause a loss.13 When an insured risk triggers a chain of causation in which the last step may have been an excluded risk, the EPC rule steps in to declare that the last excluded risk will not defeat recovery. It is important to note that, as noted by the Court, there is no “reverse EPC rule”. In other words, the doctrine not operate to mandate the exclusion of a loss when a excluded peril sets in motion a causal chain which then includes a covered peril.14 Nevertheless, insurers are free to include language in their policies to achieve the effect of such an inverse rule, namely “to deny cover where an excluded event triggers a chain of causation and is itself either the only proximate cause, i.e. the efficient proximate cause of the loss.”15 Here the Court approvingly quoted Mutual of Enumclaw’s language:

We will not pay for loss or damage caused by any of the excluded events described below. Loss or damage will be deemed to have been caused by an Excluded Event if the occurrence of that event:

  1. Directly and solely results in loss or damage; Where
  2. Initiates a sequence of events that results in loss or damage, regardless of the nature of any intermediate or final event in that sequence.

Because Mutual of Enumclaw included reverse EPC language, and because “there is no reasonable question as to whether COVID-19 caused the Governor to issue the proclamation[,]“The Court unanimously concluded that excluding the virus from the policy has the effect of excluding the causal chain of losses that were initiated by COVID-19, an excluded peril.

Readers can also check out the University of Pennsylvania Carey Law School’s COVID Coverage Litigation Tracker, which for more than a year has been diligently tracking national trends in state and federal courts on this issue. Likewise, for those with a subscription, LexisNexis’ Law360 publishes its own nearly up-to-the-minute COVID-19 insurance case tracker, accessible here.

1 Slip Op., 12 (emphasis in original).

2 Op. slip at 7 o’clock.

3 Glide Op. to 8.

4 ID.

5 Slip Op., at 12.

6 Slip Op. to 13 (emphasis in original).

seven Slide Op. at age 15 (citing W.Fire Ins. Co. c. First Presbyterian Church165 Color. 34, 437 P.2d 52 (1968) (conclusion of “direct physical loss” when a building was ordered closed because the presence of gasoline fumes made its use unsafe); Murray v. State Farm Fire & Case. Co., 203 W. Va. 477, 493, 509 SE2d 1 (1998) (finding “direct physical loss” when residential properties became unsafe for habitation due to obvious and imminent danger of falling rocks and boulders); and Graff c. Allstate Ins. Co., 113 Wn. App 799, 54 P.3d 1266 (2002) (finding cover for vandalism when, despite no “visible damage”, residue and fumes from a meth lab physically remained in a rental property)).

8 Slip Op. to 17 (emphasis in original).

9 Slide Op. at 17 (citing Nguyen c. Travelers Case. Ins. Co. of Am., 541 F. Supp. 3d 1200 (WD Washington 2021).

ten Slip Op. at 19 years old.

11 ID.

12 ID.

13 Slip Op. at 20.

14 Glide Op. to 21.

15 ID.


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