Do the phrases “physical loss” and “physical damage” have separate meanings when they appear in insurance policies covering “physical loss of or physical damage” or “physical loss or damage”?
That question might seem esoteric, but millions of dollars hang on the answer. The distinction is central to federal lawsuits brought by the Philadelphia Eagles and 76ers against Factory Mutual Insurance and Hartford Fire Insurance, respectively, after the insurers denied the teams’ claims over lost games and other financial harms attributable to the COVID-19 pandemic.
As summarized by Pennsylvania federal judge Michael Baylson, the two teams contend that “viral droplets expelled from infected individuals could have been present in the air on the properties, and landed on, attached, and adhered to surfaces, thereby physically changing the airspace and surfaces of the properties” therefore causing “physical damage.” The insurance companies denied coverage for multiple reasons, among them clauses that exclude coverage when a virus is present and when losses are caused by contamination or governmental orders. The companies have petitioned Judge Baylson to dismiss the lawsuits.
In a ruling issued last Thursday, Baylson took the atypical approach of postponing a decision on dismissal but authorizing the Eagles and Sixers to begin “limited” pretrial discovery. Discovery, which involves sworn statements, in-person depositions and sharing of sensitive evidence, ordinarily begins only after a motion to dismiss is denied. Here, the teams can proceed with an exchange of documents.
The judge explained that new precedent is key. “This legal landscape changed as of Nov. 30, 2022,” when the Pennsylvania Superior Court issued decisions in two pandemic-related insurance cases. The court, Baylson wrote, “concluded that exclusionary clauses in both policies in those cases (similar but not identical to the policies at issue in the Eagles and 76ers cases) do not prevent coverage.” Although those rulings aren’t binding on the Eagles’ and 76ers’ lawsuits, Baylson reasoned they are “worthy” of additional “consideration.”
Factory Mutual argues the Eagles can’t establish “physical loss or damage” since COVID-19 didn’t cause “tangible destruction” to covered premises, including the NovaCare Complex (the team’s corporate HQ and training facility). The Eagles, which play at Lincoln Financial Field, respond that their $1 billion policy covers “all risks of physical loss or damage.” The Eagles interpret that clause as extending to losses resulting from the “risks of” direct physical “loss” or “damage” to property, and they maintain it ought to apply even if their property did not, in fact, suffer actual damage. Baylson reasoned that under the Eagles’ interpretation, “limitations on the use of the property due to threat of contamination would trigger coverage.” But Factory Mutual insists the team is trying to invent a nuance that doesn’t exist. As the insurance company sees it, a loss of use is not a physical loss when there is no change to a property’s physical condition.
The 76ers and Hartford Insurance are mired in a similar standoff. Hartford argues that the 76ers can’t show they suffered “physical loss of or physical damage.” The team’s properties—the Wells Fargo Center and the team’s Candem, N.J.-based training complex—were still usable and economic loss doesn’t count as physical damage, Hartford says. The insurer also maintains that a virus exclusion clause applies. But the 76ers emphasize case law indicating that physical loss arises when a property’s use is diminished only by a “substantial degree” and assert the virus exclusion clause was intended for “wood diseases” rather than human afflictions. Hartford charges that the word “virus” has a clear, commonsense meaning and is not limited to “wood diseases.”
Baylson conceded his decision “may seem unusual” but stresses it is “fair” in a situation where “facts can be forgotten or mistaken, and human recollection is not infinite” and where limited discovery might “get some ‘beachhead’ of facts.”
Barring settlements, the two cases will continue into 2023. They are among several that involve pro teams, insurance companies and responsibility for pandemic-related losses. In October, a federal judge refused to dismiss a lawsuit brought by the Sacramento Kings against an insurance company the Kings insist wrongfully denied coverage. Earlier in the year a judge denied a motion to dismiss the Los Angeles Lakers’ lawsuit against an insurance company with whom they are in dispute over alleged virus-caused physical alterations to Crypto.com Arena and the UCLA Health Training Center, where the team practices.