“Physical Loss” and “Physical Damage” Are Still Being Debated—United Policyholders Is Still Fighting The Good Fight 

United Policyholders Executive Director Amy Bach and I discussed how difficult and disastrous the coverage battles have been for policyholders regarding business income losses involving the pandemic. Some of the best policyholder lawyers in the United States have volunteered considerable time to support United Policyholders Covid Loss Recovery Initiative.  

A letter to the United States Ninth Circuit Court of Appeals describes the work of United Policyholders as an advocate for policyholders in courts throughout the country: 

UP is a non-profit organization based in California that has served a respected voice for the interests of consumers and policyholders across the country for 30 years. Tax-exempt under Internal Revenue Code § 501(c)(3), UP is funded by donations and grants. It does not sell insurance or accept money from insurance companies. Individual policyholders across the country routinely call upon UP for help in the wake of large-scale national disasters such as hurricanes in the Gulf and across the Eastern Seaboard; floods and windstorms in the Midwest; wildfires, floods, hurricanes, windstorms, earthquakes, and other natural disasters); Roadmap to Preparedness (insurance and financial literacy education and disaster preparedness); and Advocacy and Action (advancing pro-consumer laws and public policy).

UP’s Executive Director, Amy Bach, has served as an official consumer representative to the National Association of Insurance Commissioners (‘NAIC’) since 2009. In that role, UP assists state regulators in monitoring policy language and claims practices and (NAIC) contributions to the development of model laws and regulations. Since the creation of the elected position in 1988, UP has worked closely with each California Insurance Commissioner, including now Ricardo Lara. UP is also a member of the Federal Advisory Committee on Insurance to the U.S. Treasury Department, and a regular participant before the National Conference of Insurance Legislatures (XCOIL). Public officials, regulators, legislatures, academics, and journalist regularly seek UP’s input on insurance related legal matters ‘effecting the dominant protective purpose of insurance . . . .’

As part of its Advocacy and Action initiative, UP is committed to assisting courts in upholding the fundamental purpose of insurance, which is loss indemnification. A diverse range of policyholders throughout California regularly communicate with UP, which allows UP to provide courts with topical information through the submission of amicus briefs. This Court recently relied on UP’s brief in Association of California Insurance Companies v. Jones (2017) 2 Cal.5th 376, 383. The U.S. Supreme Court has done the same. (E.g., Humana Inc. v. Forsyth (1999) 525 U.S. 299, 314.)

In connection with COVID-19 pandemic, UP has assisted business owners by maintaining a library of resources at uphelp.org/COVID. UP has also sought to counter the insurance industry’s attempt to use the pandemic to realize a dramatic narrowing of the historically broad ‘all risks’ property and business insurance. UP has filed amicus curiae briefs in state and federal courts around the country that push back against the insurance industry’s campaign to upend decades of carefully reasoned decisions – including California state court decisions such as Hughes v. Potomac Insurance Company of District of Columbia (1962) 199 Cal.App.2d 239 – regarding the meaning of words ‘physical loss’ and/or ‘damage’ when used in property insurance policies which are sold to businesses, small and large, and to hundreds of millions of individual policyholders across the country.

While I strongly suggest those wanting to have a deeper appreciation for the concepts of physical loss or damage read the entire letter, the introduction explains the argument of United Policyholders:

I write on behalf of Amicus Curiae United Policyholders (‘UP’) in support of the Court accepting the question certified by the U.S. Court of Appeals for the Ninth Circuit in the above-captioned case. In regard to this issue, UP particularly opposes the statements submitted by Vigilant Insurance Company (‘Vigilant’), and the American Property Casualty Insurance Association (‘APCIA’), as both statements rely on a ‘distinct, demonstrable physical alteration’ standard. As explained below, that was not the majority rule in the country before it first was formulated in Couch on Insurance Third (‘Couch Third’) in the 1990s. Given the significance of this issue, UP felt it was crucial to educate the Court on the narrow issue concerning the fallacy behind the formulated standard.

As shown in an in-depth, well-documented law review published in 2021,4 courts adopting many of the COVID-19 insurance decisions cited by Vigilant and APCIA nonetheless adopt this reformulation of the standard applicable to ‘direct physical loss’ as stated in Couch Third, and in so doing ignore the long-held majority rule which held that loss of use constitutes ‘direct physical loss.’ This issue is important for policyholders, large and small, under not just commercial property insurance policies but also under the hundreds of millions of homeowners insurance policies purchased every year by ordinary consumers across the country.

UP writes to underscore two points. First, arriving at the correct answer to the certified question is vital to the long-term health of the insurance market in California. Second, the federal courts have gotten the answer seriously wrong. In UP’s view, that is due in large part to an error made by Couch Third in the early 1990s. That error has snowballed, now into what some courts in the COVID-19 insurance context have begun to transform a ‘doctrine.’ However, doing so is contrary both to standard-form policy language and insurer underwriting expectations; and to policyholders’ reasonable expectations of coverage and the pre-COVID-19 majority rule on how to interpret the key term, ‘direct physical loss.’ 

The bottom line is that the vast majority of all decisions have not found coverage. Indeed, most cases are not getting past the initial stages of litigation before being dismissed. 

Regardless of these results, I am proud of the efforts of United Policyholders and those of my colleagues fighting these battles. These cases involve fundamental concepts of property insurance and are extremely important now and in the future.  

Thought For The Day

‘Damage’ is about taking risks, stepping into new territory regardless of the outcome.

—Mya