MTDB Corp. v. Am. Auto Ins. Co., 2022 WL 18012348 (Ill. App. 1st Dist. 2022)
Some might say that subrogation and insurance coverage make strange bedfellows. But understanding the basics of insurance coverage is integral to an aggressive and holistic approach to subrogation across all lines of insurance. Without coverage there is no claim payment; and without a claim payment there is no subrogation. Understanding the cutting-edge issues in insurance coverage can help us prepare for an address subrogation issues and concerns when they should be addressed—immediately after a loss. This is especially true in cases involving environmental losses. It is for this reason that MWL has taken the time to research, write, and publish a book entitled “Fundamentals of Insurance Coverage In All 50 States.” Authored by Gary Wickert and Lee Wickert, the book is a compendium and overview of all aspects of insurance coverage law, in every state, with a special emphasis on some of the unique aspects of insurance coverage involving environmental claims.
According to the University of Pennsylvania Law School COVID Coverage Litigation Tracker, there have been 6,814 lawsuits filed by insurance carriers and policyholders litigating the question of whether property policies cover losses incurred by businesses that suffered business interruption and/or loss of profits due to the COVID-19 pandemic. The nearly universal issue is whether a “physical loss of or damage to property” (PLOD) has occurred sufficient to trigger coverage under all-risk commercial property insurance policies and other property policies. The current status of the issue in all 50 states is illustrated in the diagram below, courtesy of Insurance Law Analytics and the Covid Coverage Litigation Tracker (CCLT) website created by Professor Tom Baker at the University of Pennsylvania Carey Law School.
The issue of COVID-19 subrogation has up until now been met with shrugged shoulders or blank stares. Whether COVID-19 presents subrogation possibilities is as daunting of a question as the underlying coverage issues. Major commercial properties across the country have been all but abandoned in the wake of a pandemic whose end is finally in sight. This has led directly to millions of dollars in failed plumbing water losses, fire losses, and damage to equipment and other property. Disruption of supply lines and transportation networks has also caused damage and loss of profits. The repair of property damage resulting from the pandemic has also been delayed and become much more expensive; adding to the many questions surrounding a myriad of possible connections between COVID and subrogation which will begin to play themselves out as the above litigation is resolved, one case at a time.
Almost all property insurance policies require “physical loss or damage” to physical property owned by the insured as a requirement for coverage. When an insured’s fence, building, vehicle, or equipment is damaged by fire or water, there is always resulting physical change or structural damage involved. However, if the insured property’s structure is unaltered in its appearance, and the insured claims the property’s value, usefulness, or functionality has still been lost or diminished, questions arise whether coverage is triggered. For instance, cleanup costs have been held to be “damages” sufficient to trigger coverage. While the term ’trigger of coverage’ is not a term used in an insurance policy, it is a phrase used to describe that which, under the specific terms of an insurance policy, must happen in the policy period in order for the potential of coverage to arise.
In MTDB Corp. v. Am. Auto Ins. Co., 2022 WL 18012348 (Ill. App. 1st Dist. 2022), plaintiff sued seeking declaratory judgment action against defendant, American Auto Insurance Company (AAIC), seeking a declaration that AAIC owed it coverage for alleged business losses and property damage due to the COVID-19 pandemic. The decision by the Illinois Court of Appeals provides a snapshot into the issues being address by the thousands of cases being litigated across the country. The Court of Appeals followed the Illinois Supreme Court requiring actual physical damage to property and refused coverage to the plaintiff. It defined “physical” in connection with interpreting direct physical loss or damage for insurance coverage and said there must be an actual change or alternation in the appearance, shape, color, or other physical aspect of the “property” in order for there to be coverage under the policy. Under its plain and ordinary meaning, “physical” meant just that—pertaining to natural or material things. The Court of Appeals held that the COVID-19 virus does not alter the appearance, shape, color, or other physical aspect of the “property” in such a way as to trigger coverage under the policies in that case. The court noted that, unlike ordinary “property damage” as that phrase is commonly understood, contamination by the COVID-19 virus can be remedied by routine cleaning or disinfecting of surfaces and the air, all without altering the appearance, shape, color, or other material aspect of the “property.”
For questions regarding insurance subrogation on all lines of insurance, contact Stephen Smith at [email protected].
Stephen A. Smith is an insurance litigation attorney. His practice focuses on insurance litigation and subrogation, including automobile, property, and workers’ compensation, and product liability. Steve attended Oklahoma City University School of Law, where he received his J.D., and the University of Oklahoma, where he received his B.A. in political science and minor in German. Steve also studied at International House LGS Sprachschule in Freiberg, Germany, where he received his Zertifikat Deutsch (ZD) for German proficiency.