Court Opinion

ID: 7799451
Source: CourtListenerOpinion
Date Created: 2022-08-10 14:09:42.033117+00
Date Added: 2024-06-11T16:28:57.286266
License: Public Domain

THE STATE OF SOUTH CAROLINA
               In The Supreme Court

   Sullivan Management, LLC, Plaintiff,

   v.

   Fireman's Fund Insurance Company, and Allianz
   GLOBAL Risks, US Insurance Company, Defendants.

   Appellate Case No. 2021-001209

                 CERTIFIED QUESTION

ON CERTIFICATION FROM THE UNITED STATES DISTRICT
    COURT FOR THE DISTRICT OF SOUTH CAROLINA
        Mary G. Lewis, United States District Judge

                    Opinion No. 28105
         Heard June 8, 2022 – Filed August 10, 2022

          CERTIFIED QUESTION ANSWERED

   Justin O'Toole Lucey, Anna McCann, Sohayla R. Townes
   and Amanda Nicole Funai, all of Justin O'Toole Lucey,
   P.A., of Mt. Pleasant, for Plaintiff.

   D. Larry Kristinik, A. Mattison Bogan, and Blake Terence
   Williams, all of Nelson Mullins Riley & Scarborough, of
   Columbia; Brett Ingerman, of Baltimore, MD, and Brett
             Solberg, of Houston, TX, both of DLA Piper LLP (US),
             all for Defendants.

             Harmon L. Cooper, of Crowell & Moring LLP, of
             Washington, D.C., for Amicus Curiae American Property
             Casualty Insurance Association, National Association of
             Mutual Insurance Companies, and South Carolina
             Insurance Association.

             G. Murrell Smith, Jr., Jonathan M. Robinson, and Shanon
             N. Peake, of Smith Robinson Holler Dubose & Morgan,
             LLC, of Columbia; Amy Mason Saharia and Kaitlin J.
             Beach, of Williams & Connolly, LLP, of Washington,
             D.C., all for Amicus Curiae Selective Insurance Company
             of America.

             Mark Billion, of Billion Law, of Bluffton; Rhonda D.
             Orin, Marshall Gilinsky, and Jason E. Kosek, of Anderson
             Kill P.C., of New York, NY, all for Amicus Curiae United
             Policyholders.

JUSTICE HEARN: Sullivan Management, LLC operates restaurants in South
Carolina and filed suit to recover for business interruption losses during COVID-19
under a commercial property insurance policy issued by Fireman's Fund and Allianz
Global Risks US Insurance Company (Fireman's). This Court accepted five
questions from the federal district court stemming from the litigation but we elect to
answer only the following question:

      Does the presence of COVID-19 in or near Sullivan's properties, and/or
      related governmental orders, which allegedly hinder or destroy the
      fitness, habitability or functionality of property, constitute "direct
      physical loss or damage" or does "direct physical loss or damage"
      require some permanent dispossession of the property or physical
      alteration to the property?
The answer to this question is no because the presence of COVID-19 and
corresponding government orders prohibiting indoor dining do not fall within the
policy's trigger language of "direct physical loss or damage."
                   FACTS/PROCEDURAL BACKGROUND

       On March 17, 2020, Governor Henry McMaster issued an executive order
prohibiting on-site consumption of food and beverages at restaurants. This order
followed the governor's declaration of a public health emergency and coincided with
the issuance of "stay-at-home" orders by many localities across the state. Sullivan,
which operates several Carolina Ale House establishments in South Carolina, sought
coverage from its property insurance carrier for the loss of income as a result of both
the presence of the coronavirus in its restaurants and the government-ordered
prohibition of indoor dining. Fireman's denied the claim for failure to trigger
coverage, and Sullivan filed suit in state court. Fireman's subsequently removed the
case to federal court and then filed a motion to dismiss. After the parties submitted
briefs on the motion to dismiss, the court certified five questions, which this Court
accepted.

                            STANDARD OF REVIEW

       Our standard of review when answering a certified question depends on the
context of the case. Typically, when a novel issue of law is raised, we are "free to
decide the question based on [our] assessment of which answer and reasoning would
best comport with the law and public policies of the state as well as the Court's sense
of law, justice, and right." Thomerson v. DeVito, 430 S.C. 246, 249, 844 S.E.2d 378,
380 (2020). However, this question derives from contract interpretation, limiting our
review to ascertaining the intent of the parties based on the language used in the
policy.

                                   DISCUSSION

       Sullivan contends the presence of COVID-19 and associated government
orders prohibiting indoor dining constitute "direct physical loss or damage." It
asserts the definitions of "physical", "loss", and "damage" warrant coverage here,
either by the plain language of those terms or alternatively, because the terms are
ambiguous and the Court must construe them in favor of the insured. Additionally,
Sullivan argues other provisions in the policy, including the communicable disease
coverage extension, demonstrate the phrase has a broad interpretation and is not
limited to situations involving permanent dispossession of property. Further,
Sullivan contends pre-COVID-19 jurisprudence supports its interpretation of the
phrase as well as several decisions from other jurisdictions.
       Conversely, Fireman's asserts neither the presence of the coronavirus nor the
government shut-down orders constitute "direct physical loss or damage" because
that phrase requires "actual" or "discernable" physical damage. In other words, in
order to trigger coverage, the loss or damage must be more than mere loss of use or
economic loss; instead there must be a "physical alteration, destruction, or
permanent dispossession of property." Fireman's supports its interpretation by
highlighting the policy provision affording coverage during the "period of
restoration", which is the time it takes to repair, replace, or rebuild the property.
Fireman's, noting the significant majority of decisions from state and federal courts
in its favor, contends the restoration provision would be mere surplusage if the
phrase in question were construed as broadly as Sullivan requests. We agree with
Fireman's.
       The policy does not expressly define "direct physical loss or damage";
therefore, those terms must be interpreted under their common meaning. See Fritz-
Pontiac-Cadillac-Buick v. Goforth, 312 S.C. 315, 318, 440 S.E.2d 367, 369 (1994)
("We must enforce, not write, contracts of insurance and we must give policy
language its plain, ordinary, and popular meaning. We should not torture
the meaning of policy language to extend or defeat coverage that was never intended
by the parties."). Physical is defined as "(a) having material existence: perceptible
especially through the senses and subject to the laws of nature; (b) of or relating to
material things." See Physical, Merriam-Webster, https://www.merriam-
webster.com/dictionary/physical (last visited Jul. 13, 2022). Loss means
"destruction; ruin" and can also be "the disappearance or diminution of value,
usually in an unexpected or relatively unpredictable way." Loss, Black's Law
Dictionary (8th ed. 2004). Another definition for loss is "deprivation, the failure to
keep possession, and a "decrease in amount, magnitude, value, or degree." Loss,
Merriam-Webster, https://www.merriam-webster.com/dictionary/loss (last visited
Jul. 13, 2022). Finally, damage means "loss or harm resulting from injury to person,
property, or reputation." Damage, Merriam-Webster, https://www.merriam-
webster.com/dictionary/damage (last visited Aug. 9, 2022).

      Unsurprisingly, many courts across the country have been asked to answer
similar questions concerning whether losses due to the presence of the coronavirus
and/or resulting government closure orders are covered under commercial property
insurance policies. While it is helpful for the Court to be aware of the tidal wave of
litigation, we rely on South Carolina law to answer this question. In other words, the
vast amount of persuasive authority is just that, merely persuasive. Nevertheless, we
agree that the alleged losses here do not constitute "direct physical loss or damage."

        The triggering language for coverage under an all-risks policy—direct
physical loss or damage—is the "North Star" of a property insurance policy. Santo's
Italian Cafe LLC v. Acuity Ins. Co., 15 F.4th 398, 402 (6th Cir. 2021) (noting the
triggering language is the "North Star" of the policy in ascertaining what is covered
and concluding "[i]t pays little heed to these omnipresent words in the policy, if not
erases them, to construe them to cover business losses generated by a statewide shut-
down order. All in all, the cause of the suspension of operations—the prohibition on
in-person dining—did not arise from a physical loss of property or physical damage
to it.").1 The contention that a government shut-down order caused direct physical
loss or damage is meritless. While the order prohibiting indoor dining certainly
affected Sullivan's financial well-being, the order itself was not directly physical.
See, e.g., Estes v. Cincinnati Ins. Co., 23 F.4th 695, 700 (6th Cir. 2022) (concluding
that "COVID-19 and the government shutdown orders caused only . . . intangible or
economic harms"); Colectivo Coffee Roasters, Inc. v. Soc'y Ins., 974 N.W.2d 442,
448 (Wis. 2022) (noting that although the governor's order closing indoor dining
restricted the use of the property, "loss of use is distinct from physical loss of or
damage to property"); Visconti Bus Serv., LLC v. Utica Nat'l Ins. Grp., 142 N.Y.S.3d
903, 915 (N.Y. Sup. Ct. 2021) ("The words 'direct' and 'physical,' which modify the
phrase 'loss or damage,' require a showing of actual, demonstrable physical harm of
some form to the insured premises — the forced closure of the premises for reasons
exogenous to the premises themselves is insufficient to trigger coverage."). It is clear
that mere loss of access to a business is not the same as direct physical loss or
damage. Although the government orders affected business operations, these
restrictions did not cause any direct physical loss or damage.

       Sullivan contends it asserted more by also pleading that the presence of virus
particles in its facilities constituted physical loss or damage. In doing so, it contends

1
  Santo's Italian Café concerned only the issue that a government's shut-down order
may trigger coverage because the restaurant did not plead that the presence of
COVID-19 also constituted direct physical loss or damage. Nevertheless, we find
the Sixth Circuit's analysis helpful in this case.
loss and damage cannot mean the same thing, as the policy would be redundant if it
did. While Sullivan is correct to note that the terms should not be read as
synonymous, we fail to see how that is the case here. Loss connotes destruction,
meaning it is broader than the term damage. Stated differently, a property that has
suffered physical loss has been damaged, but the converse is not necessarily true
because a property can suffer damage without enduring destruction or loss. Overall,
while we acknowledge a small number of federal district courts have denied an
insurance company's motion to dismiss,2 the "overwhelming majority of the other
courts that have addressed the same issue have concluded[] the presence of COVID-
19 does not constitute a physical loss of or damage to property because it does not
'alter the appearance, shape, color, structure, or other material dimension of the
property.'" Colectivo Coffee Roasters, 974 N.W.2d at 447; see also Kim-Chee LLC
v. Philadelphia Indem. Ins. Co., 535 F. Supp. 3d 152, 159 (W.D.N.Y. 2021) ("Courts
commonly require proof of a change or alteration of the insured structure or property
to establish that it suffered damage or loss."). 3 Indeed, as one court has noted, "the

2
  A slim minority of courts has construed "physical loss or damage" as ambiguous
when the policy does not specifically exclude loss of use and denied a motion to
dismiss noting that the arguments were better reserved in a motion for summary
judgment. See, e.g., Salon XL Color & Design Grp., LLC v. W. Bend Mut. Ins. Co.,
517 F. Supp. 3d 725, 729-30 (E.D. Mich. 2021). Sullivan relies on Elegant Massage,
LLC v. State Farm Mut. Auto. Ins. Co., 506 F. Supp. 3d 360, 373 (E.D. Va. 2020),
but we do not find that case persuasive, as its reasoning has been rejected by many
courts. See Hamilton Jewelry, LLC v. Twin City Fire Ins. Co., Inc., 560 F. Supp. 3d
956, 968 (D. Md. 2021) (noting that Elegant Massage and a similar federal district
court case from North Carolina represent "clear outliers that do not meaningfully
weigh against the overwhelming authority that supports the conclusion that 'direct
physical loss or direct physical damage' requires a showing of 'actual or tangible
harm to or intrusion on the property itself'") (internal citation omitted).
3
  We refer the reader to the federal district court's decision for a survey of cases
across the country concerning contamination caused by substances such as gasoline
particles, toxic torts, odors, smoke, and other similar substances versus exposure
from the coronavirus. Kim-Chee LLC, 535 F. Supp. 3d at 159 ("Because the
presence of the virus does not alter the covered property, it is different from
radiation, chemical dust and gas, asbestos and other contaminants which may persist
and damage the covered property."). We agree that the presence of the coronavirus
is different than traditional contamination cases where coverage may exist.
pandemic impacts human health and human behavior, not physical structures."
Uncork & Create LLC v. Cincinnati Ins. Co., 498 F. Supp. 3d 878, 884 (S.D. W. Va.
2020).
       Moreover, other policy provisions bolster our contention that "direct physical
loss or damage" contemplates a tangible or material component to loss or damage.
The policy's restoration period provision limits business interruption coverage
during the period of restoration, or put differently, the time for the physical loss or
damage to be "repaired, rebuilt, or replaced with reasonable speed and like kind and
quality." See, e.g., Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 15 F.4th 885, 892
(9th Cir. 2021) ("That this coverage extends only until covered property is repaired,
rebuilt, or replaced, or the business moves to a new permanent location suggests the
Policy contemplates providing coverage only if there are physical alterations to the
property. To interpret the Policy to provide coverage absent physical damage would
render the 'period of restoration' clause superfluous."); Sandy Point Dental, P.C. v.
Cincinnati Ins. Co., 20 F.4th 327, 333 (7th Cir. 2021) ("[T]he Policy provides
coverage for losses sustained during a 'period of restoration,' which is defined by
reference to '[t]he date [by which] the property ... should be repaired, rebuilt, or
replaced.' (Emphasis added.) Without a physical alteration to property, there would
be nothing to repair, rebuild, or replace."). While Sullivan took steps to mitigate the
spread, such as increasing cleaning or installing plexiglass, these acts are different
than restoring damaged or lost property. In other words, Sullivan had nothing to
"repair, replace, or rebuild[,]" thus further demonstrating that direct physical loss or
damage requires something material and tangible.

                                   CONCLUSION
       Because neither the presence of the coronavirus nor the government order
prohibiting indoor dining constitutes "direct physical loss or damage," the policy's
triggering language is not met. Regarding the remaining questions,4 we respectfully

4
  We decline to answer the following questions, most of which turn on whether the
insured has suffered a direct physical loss or damage: do the Policy's Business
Access and/or Civil Authority coverage require a complete prohibition of all access
to Sullivan's properties; has there been a "communicable disease event" as that term
is used in the Communicable Disease Coverage Extension; does Sullivan's alleged
expenditures to mitigate COVID-19 qualify for Loss Avoidance or Mitigation
Coverage; does the Mortality and Disease Exclusion bar all coverage or is it
decline to answer them as they present an issue of contract interpretation that is best
reserved for the federal district court.

BEATTY, C.J., KITTREDGE, FEW, JJ., and Acting Justice Blake A. Hewitt,
concur.

ambiguous and/or is it in conflict with the Communicable Disease Coverage
Extension?