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April 15, 2021

Pennsylvania State Court Grants Summary Judgment to Dental Practice Against Insurer for COVID-19 Business Interruption Coverage

During the last year, numerous companies that were forced to shut down due to COVID-19 restrictions filed claims with their own insurance companies in an effort to recover their business interruption losses. Litigation has ensued throughout the country; the majority of court decisions have been rendered in favor of insurers, finding that there is no coverage for such losses. However, a few recent trial court decisions in favor of policyholder businesses illustrate that some courts may rule that insurance coverage for business interruption losses sustained during the COVID-19 pandemic may be available, depending on the exact language used in the policies.

Recently, a Pennsylvania state court granted a Pittsburgh-based dental practice’s request for coverage from its property insurance company, CNA Financial Corp., for its financial losses caused by being forced to shut down due to the COVID-19 pandemic. The dental practice, Smile Savers Dentistry, PC, was forced to shut down as a result of an emergency order by the Pennsylvania Governor Wolf, who mandated nonessential businesses to close in March 2020. Smile Savers, which remained open temporarily for emergency dental procedures, experienced a  substantial decrease in business income, furloughed some of its employees, and submitted a claim for coverage under its business insurance policy, which was denied. As a result, Smile Savers filed a complaint against its insurer, CNA, in the Allegheny County Court of Common Pleas in Pennsylvania.

In granting summary judgment to Smile Savers, the court addressed whether Smile Savers was entitled to coverage for losses that the business suffered under the Business Income and Extra Expense provisions of its insurance contract. The court reasoned that to state a reasonable claim for coverage, the insured had to show that it suffered “direct physical loss of or damage to” the property. CNA argued that “direct physical loss of or damage to” the property required “physical alteration of or demonstrable harm to Plaintiff’s property,” whereas the insured argued that physical loss also includes the loss of use of the property. The court rejected CNA’s argument and stated that the loss of the property was both direct and physical, because the pandemic mandates had a direct effect on how the dental practice used its property and physical office space. Further, the court ruled that the loss was direct and physical because COVID-19-related social distancing measures caused the insured to physically limit the use of the property and the number of people that could enter the building. As a result of these measures, the court ruled the spread of COVID-19 did not just “impose economic limitations” and any “economic losses were secondary to the businesses’ physical losses.”

The court further rejected CNA's other arguments and found that Smile Savers was entitled to business interruption coverage.

Although this was a lower court ruling, this decision is somewhat significant because, as noted above, most courts in Pennsylvania and other states have ruled in favor of insurers with respect to business interruption coverage for COVID-19 losses. The fact that at least one insured has successfully established entitlement to summary judgment (i.e., a legal victory without the need for a trial and not just survival of the insurer’s early motion to dismiss) means that other businesses may raise similar arguments as those made by Smile Savers in the hopes of establishing coverage. Policyholders and insurers must continue to monitor how courts interpret the particular policy language at issue in deciding these COVID-19 business interruption loss cases.

If you have any questions regarding the content of this alert, please contact Elizabeth Vulaj, associate, at evulaj@barclaydamon.com, or another member of the firm’s Insurance Coverage & Regulation Practice Area.

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