In a landmark ruling on Friday, the Alaska Supreme Court determined that the COVID-19 pandemic does not meet the criteria of “physical loss” or “damage” as defined in common commercial insurance policies. This decision is significant as it implies that most business insurance claims related to losses incurred due to the pandemic are likely to be denied by insurers.
Background of the Case
The ruling stemmed from a request for clarification made by Alaska’s U.S. District Court regarding a lawsuit filed by Baxter Senior Living against its insurance provider, Zurich American. Baxter, which operates a senior living facility in Anchorage, had incurred costs to implement COVID-19 safety measures and faced operational restrictions due to local health mandates. After filing a claim in 2020, Zurich American denied it, arguing that the policy’s language regarding “direct physical loss of or damage to” property was not satisfied by the mere presence of the COVID-19 virus.
Court’s Findings
Justice Susan Carney, writing for the court, stated that even an “insured-friendly” interpretation of insurance contracts could not redefine the presence of the COVID-19 virus or related governmental restrictions as “direct physical loss or damage.” The court maintained that such loss necessitates a tangible alteration of the property itself.
In a detailed analogy, the court compared the virus’s presence on property to water on a plastic sheet, explaining that while water may remain on the surface, it does not alter the plastic. Similarly, the COVID-19 virus does not transform or materially change the properties of the surfaces it contacts.
“We conclude that ‘direct physical damage’ requires physical alteration of property. But because COVID-19 does not physically alter property and merely attaches to it, the presence of COVID-19 on property does not constitute ‘direct physical damage,’” Carney wrote.
Implications of the Ruling
This unanimous decision carries significant financial ramifications for businesses across Alaska. Had the court ruled differently, it could have opened the floodgates for businesses to collect substantial amounts from their insurance providers for COVID-related operational disruptions. The American Property Casualty Insurance Association noted in an amicus brief that requiring insurers to pay such claims would likely lead to higher insurance premiums.
The case now returns to federal court for further proceedings, following the resolution of the certified questions posed to the Alaska Supreme Court.
Conclusion
The Alaska Supreme Court’s ruling underscores the challenges businesses face in securing insurance payouts for losses attributed to the COVID-19 pandemic. With this decision marking the first time Alaska has addressed such a question since the onset of the pandemic, it aligns with similar rulings from other states, reaffirming the notion that the pandemic does not equate to physical property damage in the context of commercial insurance policies.
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