The University of Washington filed suit against its insurer, Employers Insurance Company of Wausau for the insurer’s failure to provide coverage under several policies arising out of the university’s loss of use of various properties due to the COVID-19 pandemic. The university’s complaint seeks declaratory relief and alleges the insurer is liable for damages for breach of contract, insurer bad faith, and violations of Washington’s Consumer Protection Act.[i]

The university’s complaint alleges its policies cover “property…against all risks of direct physical loss or damage.”[ii] The university advances the theory physical loss or damage includes the loss of use or functionality of property due to a physical condition affecting the property, namely the COVID-19 virus.[iii] The court recently addressed the loss of use or functionality theory in Hill and Stout, PLLC v.Mutual of Enumclaw Insurance Company.

Does Physical Loss or Damage Encompass Loss of Use or Functionality of Insured Property?

In Hill, a dental clinic closed its practice for all routine dental procedures in light of the COVID-19 pandemic.[iv] The clinic still performed urgent dental procedures, and still had receptionists in the offices to answer calls and reschedule appointments.[v] Shortly after, Washington State’s governor issued a proclamation prohibiting non-emergency dental care due to the COVID-19 pandemic.[vi] The clinic had obtained an insurance policy which covered lost business income for “direct physical loss of or damage to [c]overed [p]roperty.”[vii] The clinic sued its insurer when it did not provide coverage for its losses in closing its business due to the proclamation.[viii] The clinic argued the court should apply the “loss of functionality” theory, rather than requiring coverage arise only when there is a physical alteration to the property.[ix]

The court recognized the validity of the “loss of functionality” theory, noting “there are likely cases in which there is no physical alteration to the property but there is a direct physical loss under a theory of loss of functionality.”[x] However, this theory did not apply in Hill because there was no physical loss of functionality to the property – “there was no alleged imminent danger to the property, no contamination with a problematic substance, nothing that physically prevented use of the property or rendered it useless” – and the clinic’s offices were not rendered unsafe or uninhabitable because of a dangerous physical condition.[xi] The governor’s proclamation “did not physically cause a loss of functionality of the property because it continued to be functional.”[xii]

Rectifying Hill’s Deficiencies

Both Hill and the university’s current lawsuit centrally concern COVID-19. However, the university’s current suit enjoys the benefit of the court’s analysis in Hill. To that end, the university appears to address the very deficiencies identified by the Hill court.

The university’s lawsuit stresses the physicality of the COVID-19 virus itself, alleging “the presence of COVID-19 was a physical condition that impacted the properties, rendering them unfit…for their intended purposes and/or uninhabitable resulting in loss of use.” Contrary to Hill, the lawsuit does not identify governmental proclamations as causing its loss.

Notably, the claimant in Hill urged the court to be wary of out-of-state COVID-19 insurance cases because Washington insurance law can be different and strongly favors the insured in ways other jurisdictions may not. The court responded, noting, “[w]hile we must keep in mind any differences in Washington law, the national consensus is that COVID-19 and related governmental orders do not cause physical loss of or damage to a property and do not trigger coverage under similar policy language.”[xiii]

Takeaway

In Hill, the governor’s proclamation regarding COVID-19 was highlighted. Further, the claimant in Hill made physical, partial use of is property. Can the university overcome the court’s general recognition in Hill that “the national consensus is that COVID-19 and related governmental orders do not cause physical loss of or damage to a property?”[xiv] by stressing the physicality of the virus itself?

That is the question posed by the university’s lawsuit. Should the court reach resolution of this issue, the opinion will have statewide consequences on future claimants’ recovery for loss of use and functionality of property as a result of COVID-19.

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Sources

[i] Complaint, ¶ 1.

[ii] Complaint, ¶ 15.

[iii] Complaint, ¶ 2; the University’s policy also includes clauses for providing coverage for communicable disease decontamination. However, this article addresses solely the issue of whether the University’s claim for physical loss or damage to property includes loss of use or functionality of that property as a result of COVID-19.

[iv] Hill and Stout, PLLC v. Mutual of Enumclaw Insurance Company, 200 Wn.2d 208, 214 (2022).

[v] Hill, 200 Wn.2d at 215.

[vi] Hill, 200 Wn.2d at 214-15.

[vii] Hill, 200 Wn.2d at 211-12.

[viii] Hill, 200 Wn.2d at 212.

[ix] Hill, 200 Wn.2d at 220.

[x] Hill, 200 Wn.2d at 221.

[xi] Hill, 200 Wn.2d at 221-22.

[xii] Hill, 200 Wn.2d at 222.

[xiii] Hill, 200 Wn.2d at 224.

[xiv] Hill, 200 Wn.2d at 224.