South Carolina Supreme Court Finds Presence of COVID-19 is Not "Direct Physical Loss or Damage"

    Answering a certified question, the South Carolina Supreme Court determined that the presence of COVID-19 and/or government shutdown orders did not constitute “direct physical loss or damage” to property. Sullivan Mgmt. v. Fireman’s Fund Ins. Co., 2022 S.C. LEXIS 90 (S.C. Sup. Ct. Aug. 10, 2022).

    Sullivan Management, LLC operated restaurants in South Carolina. After government shutdown orders were issued, Sullivan filed a claim for business interruption with Fireman’s Fund. The claim was denied and Sullivan filed suit. The federal district court certified the following question to the South Carolina Supreme Court:

Does the presence of COVID-19 in or near Sullivan’s properties, and/or governmental orders, which allegedly hinder or destroy the fitness, habitability or functionality of property, constitute “direct physical loss or damage” or does “direct physical loss or damage” require some permanent dispossession of the property or physical alteration to the property.

    Fireman’s relied upon policy language affording coverage during the “period of restoration,” which was the time it took to repair, replace, or rebuild the property. The restoration provision would be mere surplusage if the phrase in question were construed as broadly as Sullivan requested. The court agree with Fireman’s. 

    The mere loss of access to a business was not the same as direct physical loss or damage. Although the government orders affected business operations, these restrictions did not cause any direct physical loss or damage. Loss connoted destruction, meaning it was broader than the term damage. A property that suffered physical loss was damaged, but the converse was not necessarily true because a property could suffer damage without enduring destruction or loss. 

    Moreover, the policy’s restoration period provision limited business interruption coverage during the period of restoration, or put differently, the time for the physical loss or damage to be repaired, rebuilt, or replaced with reasonable speed and like kind and quality. Without a physical alteration to property, there would be nothing to repair, rebuild or replace. This further demonstrated that direct physical loss or damage required something material and tangible.