Across the country, courts have almost universally held the opinion that COVID-19 does not cause “physical loss or damage” to property so as to trigger coverage under a commercial property insurance policy. Following the trend, the 10th Circuit recently held that under Colorado law, COVID-19 does not cause a destruction or deprivation of property sufficient to trigger coverage.
In Sagome, Inc. v. Cincinnati Ins. Co., 56 F.4th 931 (10th Cir. 2023), the 10th Circuit considered a typical fact pattern: during the height of the pandemic, a Colorado restaurant suffered significant financial loss due to reduced customer traffic. As a result, the restaurant submitted a claim to its insurer under a property insurance policy covering “physical loss or damage” to property, which was denied. After the insured filed suit, the District Court dismissed the case on the grounds that COVID-19 does not cause “physical loss or damage” to property. The 10th Circuit affirmed, holding that “a ‘direct physical loss’ requires an immediate and perceptible destruction or deprivation of property,” but COVID-19 causes no destruction of property and only a temporary loss of use.
Perhaps most notably, the 10th Circuit was dismissive of Colorado authority, arguably favorable to the insured. In a 1968 case, the Colorado Supreme Court held that an insured suffered physical loss to property when gasoline vapor permeated a church’s foundation, halls, and rooms, rendering it unusable, arguably similar to the effects of the presence of COVID-19. With little explanation, the 10th Circuit distinguished the case on the grounds that gasoline vapor rendered the church “uninhabitable” and “dangerous,” whereas COVID-19 “did not affect [the insured’s] property” in the same way. And it did so despite recognizing via footnote that a Colorado state trial court recently relied upon the 1968 opinion to hold that the presence of COVID-19 may plausibly constitute physical loss or damage to property.
The lesson of Sagome may be that courts are overwhelmingly likely to rule for insurers in a dispute over whether COVID-19 constitutes “physical loss or damage” to property. For an insured to be successful in bringing a claim for COVID-19-related loss under a property insurance policy, the insured likely needs something more, such as a communicable disease endorsement to the policy, a policy that defines “physical loss or damage” differently than its default meaning under state law, or the like. In such a case, the insured has a good case for coverage. Otherwise, prospects are dim.
If you have questions about whether a commercial insurance policy covers COVID-19 loss, please do not hesitate to contact Seslee Smith or Ryan Burke with the firm’s Insurance Coverage and Bad Faith Defense team.