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Law360 (May 10, 2021, 6:15 PM EDT) -- A California furniture business' suit against a Chubb unit for pandemic-related losses can continue, as there is ambiguity on the meaning of "direct physical loss or damage," a Pennsylvania federal judge ruled, saying the policy is "a labyrinth of pages, paragraphs and pronouncements."
Applying California law, U.S. District Judge Berle M. Schiller on Friday refused to toss Kern & Co.'s suit, finding the Golden State interior design company's inability to operate under California government shutdown orders could be a "direct physical loss" under the 113-page policy.
"The terms of the policy require the insured to fall down a rabbit hole and wander through a vast thicket of verbiage that would leave even the most careful reader mystified by the mazes of pages to be pieced together and deciphered in order to determine if there is coverage on the other side," he said.
Kern's suit alleges ACE Fire Underwriters Insurance Co., a Pennsylvania insurer, owes business income and civil authority coverage for losses from California's closure orders. The retail furniture company said the orders, not the presence of the coronavirus, caused its pandemic-related losses.
In Friday's ruling, Judge Schiller held that the phrase "direct physical loss of or damage" was ambiguous. Business income coverage could extend to Kern's inability to operate its retail business and make money, the judge said, calling the coverage "one of the sticks in the bundle of property rights protected."
ACE Fire had argued that "direct physical loss" under California law requires a "distinct, demonstrable, physical alteration." But Judge Schiller said the insurer can't use case law to overcome the policy's ambiguity. Kern's forced closure of in-person business is enough to allege a "direct physical loss," he ruled.
Judge Schiller also held that ACE Fire couldn't avoid coverage under the virus exclusion. Kern blames its losses on the shutdown orders, not the virus, the judge said. Kern's losses only began when it was ordered to close, the judge added, noting the coronavirus remained active even when businesses reopened.
"The virus remains a risk to business employees and customers, more than a year after the first such order went into effect, but businesses are no longer subject to the same operational restrictions," the judge wrote. "Regardless of what may have precipitated the closure order, the virus continues to exist."
Even if COVID-19 is the main cause of Kern's losses, Judge Schiller wasn't clear how the policy's anti-concurrent cause exclusions, which include the virus exclusion, applied to business income coverage.
Representatives for the parties didn't immediately respond to requests for comment Monday.
Kern is represented by Gary F. Lynch, Kelly K. Iverson and Todd Carpenter of Carlson Lynch LLP.
ACE Fire is represented by Eric D. Freed, Charles J. Jesuit and Stephen S. Kempa of Cozen O'Connor and Richard B. Goetz and Daniel M. Petrocelli of O'Melveny & Myers LLP.
The case is Susan Spath Hegedus Inc. et al. v. ACE Fire Underwriters Insurance Co., case number 2:20-cv-02832, in the U.S. District Court for the Eastern District of Pennsylvania.
--Editing by Vincent Sherry.
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