The Washington Supreme Court recently issued an important decision that provides guidance on coverage for Covid-related claims and the application of Washington’s efficient proximate cause rule in Hill & Stout, PLLC v. Mut. of Enumclaw Ins. Co., 515 P.3d 525 (2022). In Hill & Stout, the Washington Supreme Court held that (1) Covid-related damages are not a “direct physical loss” and thus are not subject to property coverage, (2) the Virus Exclusion also precludes coverage, and (3) the efficient proximate cause rule does not mandate coverage.
The Hill & Stout case involved a dentist office (“HS”) that was insured under a property insurance policy (the “Policy”) issued by Mutual of Enumclaw Insurance Company (“MOE”). The Policy covered lost business income caused by a “direct physical loss of or damage to” the dentist office properties. The Policy also contained a Virus Exclusion that barred coverage “for loss or damage caused directly or indirectly by [a]ny virus … that induces or is capable of inducing physical distress, illness or disease.” The Virus Exclusion was amended by the Washington Changes Endorsement which, in relevant part, requires that in order for the exclusion to apply, the virus must “directly and solely result in [the] loss or damage,” or “initiate a sequence of events that result in loss or damage, regardless of the nature of any intermediate or final event in that sequence.”
HS tendered a claim to MOE for lost business income due to Governor Jay Inslee’s proclamation that prohibited non-emergency dental care for several months because of Covid (the “Covid Proclamation”). Notably, HS had actually ceased all non-emergency dental procedures several days before Governor Inslee issued the Covid Proclamation, and HS continued to have receptionists in its offices while the Covid Proclamation was in effect. MOE denied HS’s claim on the grounds that HS had not suffered a “direct physical loss” and that any alleged damages were barred by the Virus Exclusion. HS commenced a declaratory judgment class action lawsuit against MOE, and alleged that HS’s loss of business income due to Covid was covered since it was a “direct physical loss or damage as a result of the [Governor’s] proclamation[.]”
The primary issue in the case involved the meaning of the phrase “direct physical loss of or damage to” the insured properties, and whether HS’s inability to use its dentist offices due to the Covid Proclamation fell within this grant of coverage. Because the terms “physical” and “loss” were not defined in the Policy, the Supreme Court turned to a standard English dictionary to determine their meanings, and concluded that “physical loss of property” means “property that has been physically destroyed or that one is deprived of in that the property is no longer physically in their possession.” Hill & Stout, 515 P.3d at 532. The Supreme Court noted that the Covid Proclamation did not physically prevent HS from using its dental offices, especially given that HS’s offices remained open for emergency services and administrative staff continued to work there. As a result, the Supreme Court held that HS’s claim was not covered because there was no “direct physical loss of or damage to” its dental offices, holding as follows:
Accordingly, under the facts of this case we hold that the claim for loss of intended use and loss of business income is not a physical loss of property. HS was still able to physically use the property at issue. The property was in HS’s possession, the property was still functional and able to be used, and HS was not prevented from entering the property. Under the Proclamation, HS was not able to use the property in the way that it wanted, but this alleged “loss” is not “physical.” It is more akin to an abstract or intangible loss than a “physical” one.
Hill & Stout, 515 P.3d at 532.
The Washington Supreme Court also rejected HS’s request to apply the “loss of functionality test” for determining whether there had been a direct physical loss, as opposed to requiring that there be a physical alteration of the property. The Supreme Court recognized that the loss of functionality test had been applied in asbestos cases where the release of asbestos fibers contaminates property to such a degree “that its function is nearly eliminated or destroyed[.]” Hill & Stout, 515 P.3d at 532-33 (quoting Port Authority of New York & New Jersey v. Affiliated FM Insurance Co., 311 F.3d 226, 236 (3d Cir. 2002)). However, the Washington Supreme Court found that the “loss of functionality test” was inappropriate with respect to the subject claim “because there is no physical loss of functionality to the property.” Id. at 533 (emphasis original). The Washington Supreme Court held that the Covid “Proclamation did not physically cause a loss of functionality of the property because it continued to be functional.” Id. (emphasis original). Moreover, the Supreme Court held that “even under a loss of functionality test there must be some physical effect on the property” in order for there to be coverage under a property insurance policy. Hill & Stout, 515 P.3d at 534 (emphasis original).
The Washington Supreme Court further held that coverage was barred by the Policy’s Virus Exclusion and that the efficient proximate cause rule did not restore coverage. The Supreme Court noted that “the efficient proximate cause rule applies to mandate coverage when an initial covered peril sets a causal chain in motion and that causal chain includes later excluded perils.” Hill & Stout, 515 P.3d at 535. However, the rule does not operate in reverse, such that it does not “mandate exclusion [of coverage] when the casual chain is initiated by an excluded peril.” Id. Nonetheless, the Supreme Court noted that in its prior decisions “[w]e have left open the possibility that an insurer may draft policy language to deny coverage when an excluded peril initiates an unbroken causal chain.” Id. (quoting Vision One, LLC v. Phila. Indem. Ins. Co., 276 P.3d 300, 309 (2012)). The Washington Supreme Court found that the Virus Exclusion did in fact contain policy language that barred coverage when an excluded peril initiated the loss, because the Virus Exclusion had been amended by the Washington Changes Endorsement which, in relevant part, stated as follows:
We will not pay for loss or damage caused by any of the excluded events described below. Loss or damage will be considered to have been caused by an excluded event if the occurrence of that event:
b. Initiates a sequence of events that results in loss or damage, regardless of the nature of any intermediate or final event in that sequence.
Hill & Stout, 515 P.3d at 536.
The Washington Supreme Court held that “insurers can [include language in the insurance policy] contract to say that coverage is excluded for a causal chain initiated by an excluded peril. The exclusionary language in the policy does just that.” Id. The Supreme Court further found that it could not be reasonably disputed that Covid-19 caused Governor Inslee to issue the Covid Proclamation and HS’s loss. Accordingly, the Supreme Court held that the Virus Exclusion barred coverage, and reasoned as follows:
There is no issue of material fact needed to determine that COVID-19, an excluded peril, initiated the causal chain in this case and that the policy excludes the causal chain of losses initiated by an excluded peril. As the causal chain is initiated by an excluded peril, the efficient proximate cause rule does not apply to mandate coverage, and, under the language of this policy, the virus exclusion applies.
Hill & Stout, 515 P.3d at 537.
The Hill & Stout decision provides important guidance on coverage for Covid-related claims. However, the Washington Supreme Court’s holding regarding the efficient proximate cause rule is of even greater significance beyond just Covid-related claims because as the Supreme Court stated, “this issue will likely repeat in other cases regarding the interpretation of similar insurance policies[.]” Id. at 535.