Pandemic policy questions continue to arise in courts across the country. Recently, a three-judge panel of the Ninth Circuit reviewed a case on business interruption and issued an order certifying the following question to the Oregon Supreme Court: “Can the actual or potential presence of the COVID-19 virus on an insured’s premises constitute ‘direct physical loss or damage to property’ for purposes of coverage under a commercial property insurance policy?”[i]
The Oregon Clinic, PC (“Oregon”) is a medical provider with fifty-seven locations in Portland, Oregon.[ii] Pre-pandemic, Oregon purchased a commercial property insurance policy and additional specialty coverage, (collectively referred to as “the policy”) which provided it with coverage for business income lost because of “direct physical loss or damage to property.”[iii]
During the COVID-19 pandemic, Oregon lost business income as a result of the virus being physically present on its property, which caused employees and patients to become sick and required the clinic to make “physical and other changes” to its property and practices to protect against the virus.[iv] In addition to these changes, state governmental order required the clinic to stop performing non-urgent health care procedures, which limited or entirely restricted Oregon’s use of its facilities.[v] The pandemic and government orders resulted in a sharp drop in patients seen—e.g., from 1,800 to 300 daily patients—and required Oregon to spend money altering its business property to mitigate the suspension of its operations pursuant to government orders and to protect the property itself from the virus.[vi] Oregon alleged its net revenue decreased by $20,170,000.[vii]
Oregon submitted a claim to its carrier for the loss in revenue and was denied coverage.[viii] Oregon sued in the U.S. District Court of Oregon requesting a declaration of coverage and asserted claims for breach of contract and breach of the implied duty of good faith and fair dealing.[ix] Oregon claimed coverage was warranted under ten policy provisions requiring “direct physical loss or damage” to property.[x] The clinic alleged the direct physical loss or damage to property was due to COVID-19 or, in the alternative, the government orders.[xi]
The carrier filed a motion to dismiss without leave to amend, which was granted.[xii] The district court relied on a long line of cases from district courts in the Ninth Circuit and from federal appellate courts in which the courts held “neither COVID-19 nor the governmental orders associated with it cause or constitute property loss or damage for purposes of insurance coverage.”[xiii] Relying on these cases, the district court concluded Oregon Clinic did not properly allege the virus or government orders resulted in “direct physical loss or damage” to its property because the clinic was not required to suspend operations to conduct repairs.[xiv] The court concluded the Oregon Clinic’s losses were purely economic.[xv]
The case was reviewed by Chief Judge Mary H. Murguia, and Circuit Judges Danielle J. Forrest and Jennifer Sung (the “panel”).[xvi] The panel determined no intermediate state appellate court had interpreted the phrase “direct physical loss or property” as it pertains to COVID-19 and a commercial property insurance policy, which was required for the panel to come to a decision.[xvii] However, the panel reviewed interpretations of other, related phrases, which could be of significance in this case.[xviii]
First, the panel reviewed the Oregon Supreme Court’s interpretation of the word “physical” as it relates to a liability insurance policy.[xix] In Wyoming Sawmills, a lumber manufacturer sold defective studs that were used in the building of a structure.[xx] Before any damage resulted, the manufacturer replaced the studs and covered the cost of the associated labor.[xxi] The manufacturer then attempted to recover the cost of the labor under its general liability insurance.[xxii] The policy defined property damage as “physical injury . . . to tangible property.”[xxiii] The Oregon Supreme Court concluded that the manufacturer was not entitled to coverage under the policy because no physical damage was caused to the building by the defective studs.[xxiv] In order to recover under the policy, the manufacturer would have been required to show that the labor cost was for repairing damage resulting from the defective studs.[xxv]
Second, the panel reviewed the Oregon Court of Appeals’ interpretation of the phrase “direct physical loss” in an all-risk homeowner’s policy.[xxvi] In Farmers Insurance Company v. Trutanich, the Oregon Court of Appeals construed an all-risk homeowner’s policy to find that a pervasive odor was a “direct physical loss” because the house was “physically damaged” by an order that persisted in it.[xxvii]
The panel noted that, although most federal district courts in Oregon tasked with interpreting the phrase “direct physical loss or damage” have relied on Wyoming Sawmills and Trutanich, “no Oregon appellate court, state statute, or treatise has interpreted the phrase ‘direct physical loss or damage’ in the context of a commercial property insurance policy dispute involving COVID-19 allegations.”[xxviii] Accordingly, it is prudent to allow the Oregon Supreme Court to do so.[xxix] If Oregon Clinic’s allegations are sufficient to show “direct physical loss or damage to property,” the district court erred in dismissing the complaint for failure to state a claim, and the panel would remand.[xxx] If Oregon Clinic’s allegations are not sufficient to show “direct physical loss or damage to property,” the panel would affirm the district court.[xxxi]
Although the Ninth Circuit punted the case back to the Oregon Supreme Court, its review of the Oregon state courts’ decisions relating to similar words/phrases can be helpful in extrapolating what the Oregon Supreme Court may end up deciding, should it accept review. Both cases highlight how the word “physical” must relate to direct effects on property itself.[xxxii] In Wyoming Sawmills, there was no “physical” damage because there was no direct effect on the property.[xxxiii] The studs were defective, but the defects had no negative physical effect on the building.[xxxiv] In contrast, in Trutanich, the odor did directly physically affect the property because it was pervasive, persisted, and required remediation to remove.[xxxv] It is highly likely that, because the “damage” here was the virus’s physical presence on the premises, as opposed to the virus physically damaging the premises (e.g., by destruction of a building), the Court will determine Oregon’s allegations are insufficient to show “direct physical loss or damage to property.” However, an interpretation by the Oregon Supreme Court that COVID-19’s impact on business continuity qualifies as “direct physical loss or damage to property” will significantly impact insurance carriers, and thus the outcome of this case should be monitored closely.
[i] Oregon Clinic v. Fireman’s Fund Ins. Co., 64 F.4th 1143 (9th Cir. 2023)
[ii] Id. at 4.
[iv] Id. at 4-5 (citing Oregon Clinic, PC v. Fireman’s Fund Ins. Co., No. 3:21-CV-00778-SB, 2021 WL 5921370, at *1 (D. Or. Dec. 15, 2021).
[vi] Id. at 5.
[x] Id. (citing Oregon Clinic, PC v. Fireman’s Fund Ins. Co., No. 3:21-CV-00778-SB, 2021 WL 5921370, at *1 (D. Or. Dec. 15, 2021).
[xi] Id. at 5.
[xiii] Id. at 6; see Out W. Rest. Grp. Inc. v. Affiliated FM Ins. Co., 527 F. Supp. 3d 1142, 1148 (N.D. Cal. 2021), appeal filed No. 21-15585 (9th Cir. Apr. 1, 2021); see also Nguyen v. Travelers Cas. Ins. Co. of Am., No. 2:20-cv-00597, ––– F. Supp. 3d ––––, ––––, 2021 WL 2184878, at *1 (W.D. Wash. May 28, 2021) (“Like the overwhelming consensus that has formed, this Court determines that COVID-19 does not cause the physical loss or damage to property required as a condition precedent to trigger coverage in all the relevant policies.”), appeal filed No. 21-35523 (9th Cir. June 30, 2021).
[xvi] Id. at 1.
[xvii] Id. at 6.
[xviii] Id. at 7.
[xx] Wy. Sawmills, Inc. v. Transp. Ins., 578 P.2d 1253, 1254-55.
[xxi] Id. at 1255.
[xxiii] Id. at 1256.
[xxv] See id.
[xxvi] Oregon Clinic, supra, at 7.
[xxvii] Id. at 7-8; Farmers Ins. Co. v. Trutanich, 858 P.2d 1332, 1334-35 (1993), distinguishing Wy. Sawmills, Inc. v. Transp. Ins., 578 P.2d 1253, 1256 (Or. 1978).
[xxviii] Oregon Clinic, supra, at 8.
[xxx] Id. at 8-9.
[xxxi] Id. at 9.
[xxxii] See, Wy. Sawmills, supra, and Trutanich, supra.
[xxxiii] See, Wy. Sawmills, supra at 1256.
[xxxv] See, Trutanich, supra at 1334-35.