INSURANCE LAW
Supreme Court of Alaska (2024)
Abby Murray
In responding to two certified questions from the U.S. District Court, the supreme court in Baxter Senior Living, LLC v. Zurich American Insurance Co. held as a matter of first impression that neither the presence of the COVID-19 virus at an insured property, nor operating restrictions imposed on an insured property by pandemic-related governmental orders, constitutes “direct physical loss of or damage to” that property for the purposes of a commercial insurance policy. (Id. at 758). Rather, “direct physical loss or damage to” property requires a tangible or material alteration of property. (Id. at 763). In this case, as a result of COVID-19 and resulting restrictions, Baxter suffered “loss of use” of its facility. (Id. at 761). It filed an insurance claim with Zurich to recover the loss of business income, but Zurich denied the claim. (Id.). Baxter then filed a breach of contract complaint, alleging that “direct physical loss or damage to” property includes the “loss of use” of the property. (Id.). In its decision, the supreme court notes that “loss” may, by itself, encompass the loss of use. (Id. at 765). However, the modifying adjectives––“direct” and “physical”––narrow its meaning. (Id. at 765–66). Specifically, the court states that there must be some physical alteration of property, or a deprivation of possession––mere loss of use is insufficient. (Id. at 766). Similarly “direct physical damage” also requires physical alteration to property. (Id.). And since neither the presence of COVID-19, nor pandemic-related operating restrictions, physically altered or damages Baxter’s facility or deprived Baxter of possession, they did not cause “direct physical loss or damage to” to the property. (Id.).
