ULTIMATE HEARING SOLUTIONS II, LLC v. HARTFORD UNDERWRITERS INSURANCE COMPANY

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

ULTIMATE HEARING :

SOLUTIONS II, LLC, :

et al. :

: CIVIL ACTION

Plaintiffs, :

:

v. : NO. 20-2401

:

TWIN CITY FIRE INSURANCE :

COMPANY, :

:

Defendant. :

MEMORANDUM

Plaintiffs in this case have suffered business losses after being forced to close

or modify their operations due to the COVID-19 pandemic and consequent

government closure orders. Plaintiffs sought indemnity from their insurance

provider, Twin City Fire Insurance Company (“Twin City”) under their all-risk

commercial property policies and Twin City denied their claims. Plaintiffs then filed

suit against Twin City for breach of contract and bad faith. This matter is currently

before the Court on the Parties’ Cross-Motions for Summary Judgment. Having

considered the Parties’ motions, the Court will grant Defendant’s motion and deny

Plaintiffs’ motion.

I. FACTUAL BACKGROUND1

Plaintiffs Ultimate Hearing Solutions II, LLC, Ultimate Hearing Solutions III,

LLC, Ultimate Hearing Solutions IV, LLC, Ultimate Hearing Solutions V, LLC and

Ultimate Hearing Solutions VI, LLC (collectively, “Plaintiffs” or “Ultimate Hearing

Solutions”) are limited liability companies that operate hearing aid stores and

provide hearing tests, hearing aids, and after-care for patients. Plaintiffs are citizens

of Pennsylvania. Plaintiffs’ Amended Complaint (“Compl.”), ECF No. 6. Plaintiffs

operate stores at several locations in Pennsylvania, Delaware, Maryland and

Virginia. Compl. ¶ 8. Twin City Fire Insurance Company is a citizen of Indiana.2

Defendant issued a Business Owner’s Insurance Policy to Plaintiffs for the

period of April 23, 2019 to April 23, 2020, which Plaintiffs renewed for the period

of April 23, 2020 through April 23, 2021. ECF No. 18, Ex. A & B.3 The Policies

provide that Twin City “will pay for direct physical loss of or physical damage to

1 The following facts are taken from the Parties’ Statement of Material Facts as Stipulated by the

Parties (“Stip.”) and its attachments unless otherwise noted. ECF No. 18. The facts are also

undisputed unless otherwise noted.

2 Because the Parties are completely diverse and the amount in controversy exceeds $75,000, this

Court has jurisdiction pursuant to 28 U.S.C. § 1332(a).

3 As the language at issue in the two policies is the same, the Court will refer simply to the “Policy”

or “Policies” for its analysis. The relevant provisions (except for the Virus Exclusion) all come

from the “Special Property Coverage Form,” labeled Form SS 00 07 07 05 (cited as “Coverage

Form”). The Virus Exclusion and Limited Virus Coverage are found in a separate endorsement for

“Limited Fungi, Bacteria or Virus Coverage,” labeled Form SS 40 93 07 05 (cited as “Virus

Coverage”).

Covered Property . . . caused by or resulting from a Covered Cause of Loss.”

Coverage Form at 1. The Policies define “Covered Causes of Loss” as “risks of direct

physical loss unless the loss is: a. Excluded in Section B., EXCLUSIONS; or b.

Limited in Paragraph A.4 Limitations.” Coverage Form at 2. These are all-risk

property damage policies, meaning that all risks are covered unless expressly

excluded.

At issue here, the Policies provide coverage for business income (“Business

Income Coverage”) and business income for civil authority actions (“Civil Authority

Coverage”). The Business Income Coverage clause states that,

[Twin City] will pay for the actual loss of Business Income you sustain due to

the necessary suspension of your “operations” during the “period of

restoration.” The suspension must be caused by direct physical loss of or

physical damage to property at the “scheduled premises” . . . caused by or

resulting from a Covered Cause of Loss.

Id. at 10. The Business Income Coverage includes a provision for “Extra Expense,”

which states that Twin City “will pay reasonable and necessary Extra Expense you

incur during the ‘period of restoration’ that you would not have incurred if there had

been no direct physical loss or physical damage to property at the ‘scheduled

premises.’” Id. The Civil Authority Coverage states:

This insurance is extended to apply to the actual loss of Business Income you

sustain when access to your “scheduled premises” is specifically prohibited

by order of a civil authority as the direct result of a Covered Cause of Loss to

property in the immediate area of your “scheduled premises.”

Id. at 11.

The Policies also contain the following exclusion (“Virus Exclusion”): “[Twin

City] will not pay for loss or damage caused directly or indirectly by …. [the]

Presence, growth, proliferation, spread or any activity of … [a] virus.” Virus

Coverage at 1. The Virus Exclusion has two exceptions: “(1) When ‘fungi’, wet or

dry rot, bacteria or virus results from fire or lightning; or (2) To the extent that

coverage is provided in the Additional Coverage – Limited Coverage for ‘Fungi’,

Wet Rot, Dry Rot, Bacteria and Virus with respect to loss or damage by a cause of

loss other than fire or lightning” (“Limited Virus Coverage”). Id. The Limited Virus

Coverage provides as follows:

We will pay for loss or damage by “fungi”, wet rot, dry rot, bacteria and virus.

As used in this Limited Coverage, the term loss or damage means: (1) Direct

physical loss or direct physical damage to Covered Property caused by

“fungi”, wet rot, dry rot, bacteria or virus, including the cost of removal of the

“fungi”, wet rot, dry rot, bacteria or virus…

Id. at 2. This coverage only applies when the virus is the result of a “specified cause

of loss” other than fire or lightning. Id. “Specified cause of loss” is defined in the

Special Coverage Property Form and means: “Fire; lightning; explosion, windstorm

or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from

fire extinguishing equipment; sinkhole collapse; volcanic action; falling objects;

weight of snow, ice or sleet; water damage.” Coverage Form at 25.

Plaintiffs sought coverage under the Policies for alleged losses they sustained

because of COVID-19. Twin City denied coverage under the Policies. Plaintiffs then

sued Defendant for breach of contract and bad faith. Plaintiffs argue that their losses

are covered under the express coverage language of the Policies and do not fall under

any exclusion. The Parties have stipulated that there was no presence of the COVID-

19 virus at any of the insured properties or at any property in the immediate area of

Plaintiffs’ businesses. Plaintiffs claim that they experienced a “Covered Cause of

Loss” by virtue of the orders by civil authorities which closed or limited the

operations of non-essential businesses to prevent exposure to COVID-19 (the

“Closure Orders”). As “non-essential” businesses, Plaintiffs claim they were forced

to suspend their business operations as a result of the Closure Orders, which

Plaintiffs characterized as a “blockade that prevent[ed] employees and patrons from

entering the businesses for their intended purpose.” Compl. ¶ 14.4

II. PROCEDURAL HISTORY

On May 21, 2020, these Plaintiffs, along with several other LLCs, filed a

Complaint against several insurance-provider Defendants. ECF No. 1. The causes of

action were severed by Order of this Court (ECF No. 3), and Plaintiffs filed an

Amended Complaint (ECF No. 6) against Twin City asserting claims for breach of

contract based on Business Income Coverage (Count I) and Civil Authority

Coverage (Count II), and bad faith under 42 Pa.C.S. § 8371 (Count III). Defendant

4 The parties dispute whether the Plaintiffs were in fact essential businesses and the extent to which they were able to

remain open and operate under the government closure orders. See Defendant’s Brief in Support of Twin City Fire

Insurance Company’s Motion for Summary Judgment (ECF No. 20).

filed its Answer on August 21, 2020. ECF No. 17. The parties then filed Cross-

Motions for Summary Judgment. ECF Nos. 19 & 20. Oral argument was held on

November 19, 2020.

III. LEGAL STANDARD

Summary judgment is proper when there is no genuine dispute of material fact

and the movant is entitled to judgment as a matter of law. See Fed R. Civ. P. 56(a).

The moving party bears an initial burden of proving a lack of any genuine issues of

material fact. See Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp., 475 U.S.

574, 585-86 & n.10 (1986). After that burden is met, the nonmoving party must

“come forward with specific facts showing there is a genuine issue for trial.” Id.

(internal citations and quotation marks omitted). A factual dispute is “material” if it

“might affect the outcome of the suit under the governing law.” Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 248 (1986). And a dispute is “genuine” if “the evidence

is such that a reasonable jury could return a verdict for the nonmoving party.” Id.

All facts “should be viewed in the light most favorable to the non-moving party, with

all reasonable inferences [drawn] in that party’s favor.” Jutrowski v. Township of

Riverdale, 904 F.3d 280, 288 (3d Cir. 2018) (quoting Scheidemantle v. Slippery Rock

Univ. State Sys. of Higher Educ., 470 F.3d 535, 538 (3d Cir. 2006) (internal

quotation marks omitted)). Summary judgment is warranted where the nonmoving

party “fails to make a showing sufficient to establish the existence of an element

essential to that party’s case, and on which that party will bear the burden of proof

at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). “In such a situation,

there can be no genuine issue as to any material fact, since a complete failure of

proof concerning an essential element of the nonmoving party’s case necessarily

renders all other facts immaterial.” Id. (internal citations and quotation marks

omitted).

IV. DISCUSSION

Plaintiffs claim that Defendant breached their insurance contract by failing to

provide Business Income Coverage, Extended Business Income coverage, and Extra

Expense coverage (Count I) and Civil Authority Coverage (Count II) to Plaintiffs

for their pandemic-related losses. Compl. at ¶ 19-30; Id. at ¶ 31-37. Plaintiffs also

bring a bad faith claim (Count III). Id. at ¶ 38-41.

A. Breach of Contract (Counts I and II)

Under Pennsylvania law, “[c]ontract interpretation is a question of law that

requires the court to ascertain and give effect to the intent of the contracting parties

as embodied in the written agreement.” In re Old Summit Mfg., LLC, 523 F.3d 134,

137 (3d Cir. 2008) (internal citation omitted). The language of an insurance policy

“must be construed in its plain and ordinary sense, and the policy must be read in its

entirety.” Pennsylvania Nat. Mut. Cas. Ins. Co. v. St. John, 106 A.3d 1, 14 (Pa.

2014) (internal citation omitted).

The Court’s analysis begins with whether a provision in the insurance policy is

ambiguous. When insurance policy language is “clear and unambiguous,” a court

applying Pennsylvania law must “give effect to that language.” 401 Fourth St. v.

Inv’rs Ins. Co., 879 A.2d 166, 170 (Pa. 2005). “Alternatively, when a provision in

the policy is ambiguous, the policy is to be construed in favor of the insured to further

the contract’s prime purpose of indemnification and against the insurer, as the

insurer drafts the policy, and controls coverage.” Kvaerner Metals Div. of Kvaerner

U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888, 897 (Pa. 2006) (quoting 401

Fourth St., 879 A.2d at 170) (internal quotation marks omitted).5

A policy is ambiguous “if it is reasonably susceptible of different constructions

and capable of being understood in more than one sense.” Madison Const. Co. v.

Harleysville Mut. Ins. Co., 735 A.2d 100, 106 (Pa. 1999) (quoting Hutchison v.

Sunbeam Coal Co., 519 A.2d 385, 390 (1986)). Under Pennsylvania law, “ambiguity

(or the lack thereof) is to be determined by reference to a particular set of facts.” Id.

at 607. The “proper focus regarding issues of coverage under insurance contracts is

the reasonable expectation of the insured.” Bubis v. Prudential Prop. & Cas. Ins.

5 Because the policy at issue was drafted by one party and only signed by the other, it is also a

contract of adhesion. Under the doctrine of contra proferentem, “any ambiguous language in a

contract is construed against the drafter and in favor of the other party if the latter’s interpretation

is reasonable.” Colorcon, Inc. v. Lewis, 792 F. Supp. 2d 786, 797 (E.D. Pa. 2011) (citing Sun Co.

v. Pa. Tpk. Comm’n, 708 A.2d 875, 878-79 (Pa. Commw. Ct. 1998) (citing Restatement (Second)

of Contracts § 206)).

Co., 718 A.2d 1270, 1272 (Pa. Super. Ct. 1998). Under Pennsylvania law, even if

the terms of the insurance contract arohe clear and unambiguous, the insured’s

reasonable expectations may prevail over the express terms of the contract. See

Bensalem Twp. v. Int’l Surplus Lines Ins. Co., 38 F.3d 1303, 1309 (3d Cir. 1994).

Nonetheless, the language of the insurance contract itself serves as the best evidence

of the parties’ reasonable expectations. See Safe Auto Ins. Co. v. Berlin, 991 A.2d

327, 332 (Pa. Super. Ct. 2010).

The insured party bears the burden to “make a prima facie showing that a claim

falls within the policy’s grant of coverage.” State Farm Cas. Co. v. Estates of

Mehlman, 598 F.3d 105, 111 (3d Cir. 2009) (applying Pennsylvania law). Once that

burden is met, the insurance company must “prov[e] the applicability of any

exclusions or limitations on coverage.” Koppers Co. v. Aetna Cas. & Sur. Co., 98

F.3d 1440, 1446 (3d Cir. 1996) (applying Pennsylvania law).

Plaintiffs assert that their losses are covered under the Policy. Its all-risk

policy insures against “direct physical loss of or direct physical damage to Covered

Property . . . caused by or resulting from a Covered Cause of Loss.” Coverage Form

at 1. “Covered Cause of Loss” is defined as “risks of direct physical loss unless the

loss is Excluded . . . or Limited . . . .” Id. at 2. Plaintiffs claim that their losses are

covered under the Business Income Coverage, Extra Business Income, Extra

Expense, Civil Authority Coverage, and Limited Virus Coverage endorsements of

the Policy.

The Business Income Coverage provision covers certain losses of business

income caused by direct physical loss of or damage to the covered property. It

provides that Defendant:

will pay for the actual loss of Business Income you sustain due to the

necessary suspension of your “operations” during the “period of restoration.”

The suspension must be caused by direct physical loss of or damage to

property at the described premises. The loss or damage must be caused by or

result from a Covered Cause of Loss.

Id. at 10. “[O]perations” means the insured’s “business activities occurring at the

‘scheduled premises’ and tenantability of the ‘scheduled premises’.” Id. at 24. The

“period of restoration” is defined as the time that “begins with the date of direct

physical loss or damage caused by or resulting from any Covered Cause of Loss at

the described premises” and “[e]nds on the earlier of” (1) the “date when the property

at the described premises should be repaired, rebuilt or replaced with reasonable

speed and similar quality,” or (2) the “date when business is resumed at a new

permanent location.” Id. at 24-25. Extended Business Income coverage extends the

eligible Business Income Coverage beyond the end of the period of restoration.

However, the Loss of Business Income “must be caused by direct physical loss or

physical damage at the ‘scheduled premises’ caused by or resulting from a Covered

Cause of Loss.” Id. at 11. Under the Policy’s separate Extra Expense coverage

provision, Defendant agreed to pay Extra Expense (other than the expense to repair

or replace property) to:

(a) Avoid or minimize the suspension of business and to continue “operations”

at the described premises or at replacement premises or temporary locations,

including relocation expenses and costs to equip and operate the replacement

premises or temporary locations; or (b) To minimize the suspension of

business if you cannot continue “operations.”

Id. at 10. “Extra Expense” under this provision “means reasonable and necessary

Extra Expense [the insured] incur[s] during the ‘period of restoration’ that [it] would

not have incurred if there had been no direct physical loss of or damage to property

caused by or resulting from a Covered Cause of Loss.” Id. The Policy also includes

an endorsement for Civil Authority Coverage providing that:

This insurance is extended to apply to the actual loss of Business Income you

sustain when access to your “scheduled premises” is specifically prohibited

by order of a civil authority as the direct result of a Covered Cause of Loss to

property in the immediate area of your “scheduled premises.”

Id. at 11.

Under Pennsylvania law, the Court first determines whether Plaintiffs have

met their burden of establishing coverage under the Policy. See State Farm, 598

F.3d at 111. The policy provisions that Plaintiffs invoke share certain essential

elements. Business Income Coverage and Extra Expense are tied to “direct physical

loss of or damage to property at the described premises.” Coverage Form at 10.

Business Income Coverage requires the suspension of operations to be caused by

“direct physical loss of or damage to property” of the insured, while the Extra

Expense endorsement covers costs that Plaintiffs “would not have incurred if there

had been no direct physical loss of or physical damage to property.” Id. Each

coverage also depends on the existence of a “Covered Cause of Loss.” Id. The

Business Income and Extra Expense coverages only apply where the “direct physical

loss of or damage to” property is caused by or resulting from a “Covered Cause of

Loss.”6 Id.

i. Direct Physical Loss of or Damage to Property

For Ultimate Hearing Solutions to state a prima facie claim of coverage under

the Business Income Coverage or the Extra Expense endorsement, it must show it

has suffered “direct physical loss of or damage to” its property. The parties sharply

dispute the meaning of that phrase. Ultimate Hearing Solutions contends that “direct

physical loss of . . . property” is not limited to physical alteration of the property but

includes loss of use of its property. Plaintiffs analogize the virus to odors, carbon

monoxide or noxious gasses, which are not tangible or visible yet have been held to

render property unusable and constitute a “physical loss.”

Third Circuit precedent is on point and instructive here. In Port Authority of

New York and New Jersey, the Circuit addressed whether the presence of asbestos

6 Because eligibility for Extended Business Income coverage is predicated on eligibility for

Business Income Coverage, coverage under the extended provision is also tied to “direct physical

loss of or damage to” property caused by or resulting from a covered cause of loss. Coverage

Form at 11.

in a building constituted “direct physical loss or damage” under New Jersey law.

Port Auth. of N.Y. & N.J. v. Affiliated MF Ins. Co., 311 F.3d 226, 235 (3d Cir. 2002).

The Court explained that “[i]n ordinary parlance and widely accepted definition,

physical damage to property means distinct, demonstrable, and physical alteration

of its structure.” Id. (quoting 10 Couch on Ins. § 148:46 (3d ed. 1998)). Damage by

sources unnoticeable to the naked eye must “meet a higher threshold” than “typical

examples of physical damage from an outside source that may demonstrably alter

the components of a building.” Id. at 235. Recognizing that the policy at hand also

covered “physical loss,” the Court concluded that the proper standard for ‘physical

loss or damage’ is one that triggers coverage:

only if an actual release of asbestos fibers from asbestos containing materials

has resulted in contamination of the property such that its function is nearly

eliminated or destroyed, or the structure is made useless or uninhabitable, or

if there exists an imminent threat of the release of a quantity of asbestos fibers

that would cause such loss of utility.

Id. at 236 (emphasis added). The criteria for ‘physical loss’ caused by a source

“unnoticeable to the naked eye” is thus “whether the functionality of the . . . property

was nearly eliminated or destroyed, or whether the[] property was made useless or

uninhabitable” by that source. The “mere presence of asbestos, or the general threat

of future damage from that presence, lacks the distinct and demonstrable character

necessary for first-party insurance coverage.” Id. This test is consistent with

Pennsylvania law. See Motorists Mut. Ins. Co. v. Hardinger, 131 F. App’x 823, 826

(3d Cir. 2005) (finding an issue of material fact existed under Pennsylvania law as

to whether a house’s functionality was nearly eliminated or destroyed, or made

useless or uninhabitable, by the presence of e coli in a well).

The Court agrees with and adopts the conclusion reached by another Court in

this district. In 4431, Inc. et al v. Cincinnati Ins. Cos., the Court concluded that,

“under Pennsylvania law, for Plaintiffs to assert an economic loss resulting from

their inability to operate their premises as intended within the coverage of the

Policy’s ‘physical loss’ provision, the loss and the bar to operation from which it

results must bear a causal relationship to some physical condition of the premises.”

No. 5:20-cv-04396, 2020 WL 7075318, at *11 (E.D. Pa. Dec. 3, 2020) (emphasis in

original). There must also be an “element correlating to [the] extent of operational

utility – i.e., a premises must be uninhabitable and unusable, or nearly as such.” Id;

see also Brian Handel D.M.D. v. Allstate Ins. Co., No. 20-3198, 2020 WL 6545893

(E.D. Pa. Nov. 6, 2020) (finding Port Authority and Hardinger preclude a finding of

“direct physical loss of or damage to” property where it remained inhabitable and

usable, albeit in limited ways). In sum, while structural damage is not required to

show “direct physical loss of” property, the source that destroys the property’s utility

must have something to do with the physical condition of the premises.

And so, the Court must determine whether there is a genuine dispute of

material fact as to whether Ultimate Hearing Solutions’ losses “bear some causal

connection to the physical condition of the premises” and whether those conditions

“operate[d] to completely or near completely preclude operation of the premises as

intended.” 4431, Inc., 2020 WL 7075318, at *10. Ultimate Hearing Solutions

expressly disclaims that the virus was on its property. Stip. ¶ 22. Instead, it claims

that the Closure Orders operated as a blockade preventing its employees and patrons

from using the property for its intended purpose. Compl. ¶ 14.

This loss, even assuming arguendo that the Closure Orders prohibited

Ultimate Hearing Solutions and its customers from entering the property, does not

bear a causal connection to the physical condition of its premises. Because Ultimate

Hearing Solutions expressly denies the existence of anything affecting the physical

condition of its premises, its losses are a mere loss of use untethered to the physical

condition of the property itself. Reading “direct physical loss of or damage to

property” to contemplate mere loss of use is not a reasonable interpretation of the

Policy because it does not make sense when reading the contract as a whole.

Colorcon, Inc. v. Lewis, 792 F. Supp. 2d 786, 797 (E.D. Pa. 2011)(a court must read

the contract “as a whole ... it being necessary to consider every part thereof in order

to resolve the meaning of a particular part as well as that of the whole”)(internal

citation and quotation omitted).

If mere loss of use counted as “direct physical loss of” property, the “period

of restoration” language would be rendered a nullity. Business Income Coverage

and Extra Expense coverage are only provided during the “period of restoration,”

defined in part as the time that begins “with the date of direct physical loss or

damage” and ends on the earlier of the date when the property is either “repaired,

rebuilt or replaced” or when “business is resumed at a new permanent location.”

Coverage Form at 10.7 Built into the Business Income Coverage and related

provisions, then, is the idea that there must be something to repair, rebuild, or replace

– none of which exists for mere loss of use untethered to a physical condition of the

property. See Newman Myers Kreines Gross Harris, P.C. v. Great N. Ins. Co., 17

F. Supp. 3d 323, 332 (S.D.N.Y. 2014) (“The words ‘repair’ and ‘replace’

contemplate physical damage to the insured premises as opposed to loss of use of

it.”). The Court cannot ignore this period of restoration language; it must construe

the Policy as a whole.

Ultimate Hearing Solutions cites Friends of Danny Devito v. Wolf to support

its claims. See 227 A.3d 872 (Pa. 2020). In that case, the Pennsylvania Supreme

Court found that the COVID-19 pandemic qualifies as a natural disaster under a

statute that defines natural disasters as events that result in “substantial damage to

property, hardship, suffering or possible loss of life.” Id. According to Ultimate

7 Extended Business Income is similarly available during the period immediately after the period

of restoration, beginning “on the date the property is actually repaired, rebuilt or replaced and

‘operations[]’ are resumed.” Id. at 11.

Hearing Solutions, this case shows that the coronavirus causes “damage to

property,” not just economic losses; that, because it was compared to a natural

disaster, it must be sufficiently similar to fires and earthquakes such that it is also

covered under property insurance policies; and that the actual presence of the virus

at its property is not dispositive.

However, Danny Devito does not support Ultimate Hearing Solutions’ claims.

First, the Pennsylvania Supreme Court did not hold that COVID-19 causes property

damage. It held that COVID-19 is a natural disaster that triggers the Governor’s

executive authority because the pandemic “is unquestionably a catastrophe that

‘results in . . . hardship, suffering or possible loss of life.’” Devito, 227 A.3d at 888

(ellipses in original) (quoting 35 Pa. Cons. Stat. § 7102). Second, Danny Devito has

nothing to do with property insurance. Its discussion of a statute triggering executive

authority for various natural disasters has no bearing on how the Court must construe

the plain language of an insurance contract, and its discussion of the existence of the

virus throughout the Commonwealth of Pennsylvania has no bearing on the

application of property insurance coverage to properties in Pennsylvania, Delaware,

Maryland, and Virginia, where the Plaintiffs expressly disclaim the presence of the

virus.8 The devastating impact of the COVID-19 pandemic is not in dispute in this

8 For similar reasons, Ultimate Hearing Solutions’ argument that its situation is similar to cases in

which courts found physical loss or damage when asbestos, ammonia, or other substances or odors

case, the question is whether the businesses losses suffered by Ultimate Hearing

Solutions are covered under the Policy and whether Defendant breached its

obligations to Ultimate Hearing Solutions in denying their claims. Ultimate Hearing

Solutions has failed to show it suffered covered “direct physical loss or damage” to

its property.

ii. Covered Cause of Loss

The Policy defines a Covered Cause of Loss as “risks of direct physical loss

unless the loss is Excluded . . . or Limited . . . .” Coverage Form at 2. A Covered

Cause of Loss must cause the “direct physical loss of or damage to” Ultimate

Hearing Solutions’ property for purposes of the Business Income Coverage,

Extended Business Income, and Extra Expense endorsements. For purposes of Civil

Authority Coverage, a Covered Cause of Loss must impact property other than

Ultimate Hearing Solutions’ in the immediate area of the insured property, and the

government must take an action prohibiting access to Ultimate Hearing Solutions’

property due to that Covered Cause of Loss at the other property. Coverage Form

at 11.

Plaintiffs claim that the Closure Orders constitute a Covered Cause of Loss,

but that argument does not fit with the plain language of the Policy. The government

were on properties and affected the properties’ functionality misses the mark. Ultimate Hearing

Solutions expressly claims the virus is not on its properties.

orders themselves cannot constitute a Covered Cause of Loss under either the

Business Income and Extra Expense coverages or the Civil Authority Coverage

provisions because they do not entail any risk of direct physical loss to the insured

property. The Closure Orders were issued to prevent the spread of the coronavirus,

not in response to any physical condition of the insured properties. See, e.g., Stip.

Ex. D at 1 (explaining that the March 19 Pennsylvania order was issued in response

to a “public health emergency of international concern”); see also Stip. Ex. E at 1

(explaining that the March 23 Maryland order was issued to “reduce the threat to

human health caused by transmission of the novel coronavirus in Maryland, []to

protect and save lives, . . . [and to] control the spread of COVID-19”).

Ultimate Hearing Solutions’ complaint also alleges that the government

orders caused direct physical loss and damage to nearby property for purposes of the

Civil Authority Coverage. But as a matter of logic, the civil authority orders that

purportedly affected access to Ultimate Hearing Solutions’ property cannot have

been issued due to loss or damage caused to other property by the same orders.

Further, the effect of the Civil Authority Coverage is to extend additional coverage

to a specific situation that would not otherwise be covered under the Policy—when

there is a “Covered Cause of Loss to property in the immediate area” of the insured

property, but the actual insured property has not suffered a “Covered Cause of Loss.”

Implicit in the Civil Authority Coverage is the assumption that the insured property

has not suffered a Covered Cause of Loss. Since the relevant conditions and Closure

Orders impacted both the insured property and the properties in the immediate area,

the losses suffered by the Plaintiffs cannot fall under the Civil Authority Coverage.

Relatedly, Ultimate Hearing Solutions has not demonstrated any facts to show

the existence of any direct physical loss of or damage to nearby property caused by

a Covered Cause of Loss. In support of its argument that the existence of the

coronavirus pandemic satisfies this requirement, Plaintiffs cite Danny Devito and an

unpublished, out-of-circuit case, which do not save their claim. As explained, supra,

Danny Devito does not hold that COVID-19 causes property damage, and the Middle

District of Florida case Ultimate Hearing Solutions cites merely denied the insurance

company’s motion to dismiss that was exclusively premised on the policy’s virus

exclusion. See Urogynecology Specialist of Florida LLC v. Sentinel Ins. Co. Ltd.,

No. 6:20-cv-1174, 2020 WL 5939172 (M.D. Fla. Sept. 24, 2020).9 Ultimate Hearing

Solutions has not shown a genuine dispute of material fact as to whether the

government orders were issued due to physical loss of or damage to nearby property,

and without such direct physical loss or damage, there can be no coverage.

9 And even if the coronavirus were present on other properties, that presence would not mean that

other properties suffered “direct physical loss” or “damage” as those terms apply in the Policy.

Actual or imminent presence of the coronavirus on property does not meet the requirements for

direct physical loss of or damage to property under Port Authority because surfaces could be

disinfected and contamination would not render properties useless or uninhabitable. Port Auth.,

311 F.3d at 235.

Separately, Ultimate Hearing Solutions has not shown a genuine dispute of

material fact with respect to whether the Closure Orders prohibited access to its

premises. Ultimate Hearing Solutions claims that the Closure Orders barred the

public from its premises. See, e.g., Compl. at ¶ 14. They argue that the Closure

Orders required all non-life-sustaining businesses to cease operations and close

physical locations. Id. ¶ 13. However, Ultimate Hearing Solutions fails to

adequately respond to Twin City’s argument that its businesses were actually

essential diagnostic facilities or businesses supplying medical devices and

equipment under the respective state orders. See ECF No. 20-1 at 5-8. Additionally,

Ultimate Hearing Solutions’ argument—even setting aside whether or not its

businesses were actually essential—fails to distinguish “between [their] place of

business (i.e., the physical premises where they operate their business), and the

business itself.” Pappy’s Barber Shops, Inc. v. Farmers Grp. No. 20-cv-907, 2020

WL 5500221, at *6 (S.D. Ca. Sept. 11, 2020). Because access to their place of

business was not categorically “prohibited” by government order, Ultimate Hearing

Solutions has also not satisfied this prerequisite for coverage. 10

10 Plaintiffs cite Narricot Industries for the proposition that prohibition on operating a facility

constitutes a “prohibition of access” under Pennsylvania law. See Narricot Indus., Inc. v.

Fireman’s Fund Ins. Co., No. 01-4679, 2002 WL 31247972 (E.D. Pa. 2002). But that case is

distinguishable. While two industrial plants were ordered not to operate, the city also prohibited

access to the road that led to one plant, and prohibited road travel to all but emergency personnel

around the other. Id. at 1-2. Because individuals could not travel on roads that led to the facilities,

there was a prohibition on access not present here.

Upon review of Ultimate Hearing Solutions’ Policy and relevant case law

from the Third Circuit, the Court finds that Ultimate Hearing Solutions has not met

its burden to show prima facie coverage under its Policy under either the Business

Income, Extended Business Income, or Extra Expense coverages (Count I), or the

Civil Authority Coverage (Count II). Because Plaintiffs have not met this burden,

they have not shown that they are entitled to summary judgment on their breach of

contract claims or that a genuine dispute of material fact exists that would warrant a

denial of summary judgment to Twin City.

iii. Virus Coverage

Plaintiffs argue that their losses are covered under the Limited Virus Coverage

of its Policies or, failing that, that the virus coverage is illusory. Pursuant to the

“Limited Fungi, Bacteria or Virus Coverage,” Defendant “will pay for loss or

damage by … virus. As used in this Limited Coverage, the term loss or damage

means: (1) Direct physical loss or direct physical damage to Covered Property

caused by … virus, including the cost of removal of the … virus.” Virus Coverage

at 2. The aforementioned coverage “only applies when the …virus is the result of

one or more of the following causes … (1) A ‘specified cause of loss’ other than fire

or lightning; (2) Equipment Breakdown Accident occurs to Equipment Breakdown

Property, if Equipment Breakdown applies to the affected premises.” Id. “Specified

cause of loss” is defined in the Special Coverage Property Form and means: “Fire;

lightning; explosion, windstorm or hail; smoke; aircraft or vehicles; riot or civil

commotion; vandalism; leakage from fire extinguishing equipment; sinkhole

collapse; volcanic action; falling objects; weight of snow, ice or sleet; water

damage.” Coverage Form at 25.

Plaintiffs’ claims here fail for the same reasons they are not covered under the

Business Income Coverage or the Civil Authority Coverage. The Limited Virus

Coverage clearly states that the Policy only covers “Direct physical loss or direct

physical damage to Covered Property caused by … virus.” Plaintiffs did not allege

that the coronavirus was present at any of their insured properties. They also have

not shown, as discussed above, physical loss or damage to their properties.

Plaintiffs argue that the Court should find coverage under the Limited Virus

Coverage because if the Court accepts the Defendant’s argument that the provision

requires physical damage to the property, that would mean that coverage under this

provision is impossible and therefore illusory. Under Pennsylvania law, the

“illusory coverage” doctrine provides that insurance coverage is considered

“illusory” where the insured purchases no effective protection. ACE Capital Ltd. v.

Morgan Waldon Ins. Mgmt., LLC, 832 F. Supp. 2d 554, 572 (W.D. Pa. 2011)

(citation omitted); see also 401 Fourth Street, Inc. v. Investors Insurance Group,

879 A.2d 166, 174 n. 3 (Pa. 2005). If an exclusion provision would effectively

preclude coverage for all risks reasonably anticipated by the parties under a

particular coverage provision (i.e., an illusory coverage provision), the coverage

provision should be enforced in a way that would protect the reasonable expectations

of the insured. Great N. Ins. Co. v. Greenwich Ins. Co., No. CIV.A. 05-635, 2008

WL 2048354, at *4 (W.D. Pa. May 12, 2008). Plaintiffs claim it is impossible to

conceive of even a single hypothetical situation where a virus would be caused by

one of the “specified causes of loss” listed in the Policies and therefore be entitled

to coverage under the Policy.

However, Plaintiffs fail to acknowledge that this Limited Virus Coverage

provision also applies to fungi, wet rot, dry rot, and bacteria, not just viruses. While

it may be difficult to think of a hypothetical situation where a virus causes physical

damage to a property, it is not difficult to imagine that wet rot, dry rot or fungi can

cause damage that would satisfy the “direct physical loss or direct physical damage”

requirement. Further, while it may be difficult to imagine, Defendants did in fact

identify a case where insured property was damaged due to a virus caused by a

Covered Cause of Loss. See Curtis O. Griees & Sons, Inc. v. Farm Bureau Ins. Co.

of Nebraska, 528 N.W.2d 329 (Neb. 1995) (finding coverage where a windstorm

caused insured livestock to become infected with the pseudorabies virus).

iv. Virus Exclusion

Even if Plaintiffs had plausibly alleged their losses qualified for Business

Income Coverage or Civil Authority Coverage, the Virus Exclusion precludes

coverage. The Virus Exclusion provides that Twin City “will not pay for loss or

damage caused directly or indirectly by . . . [p]resence, growth, proliferation, spread

or any activity of . . . virus.” Virus Coverage at 1. The exclusion applies “regardless

of any other cause or event that contributes concurrently or in any sequence to the

loss” and “whether or not the loss event results in widespread damage or affects a

substantial area.” Id.

A Third Circuit panel upheld a similar exclusion barring coverage for losses

caused by hazardous substances or microorganisms. See, e.g., Certain Underwriters

at Lloyds of London Subscribing to Policy No. SMP3791 v. Creagh, 563 F. App'x

209, 211 (3d Cir. 2014) (applying microorganism exclusion to bacteria). A sister

court also recently upheld a virus exclusion identical to this Policy’s as

unambiguous. See Wilson v. Hartford Cas. Co., No. 20-cv-3384, 2020 WL 5820800,

at *7 (E.D. Pa. Sept. 30, 2020) (“[Insurer] will not pay for loss or damage caused

directly or indirectly by ... [p]resence, growth, proliferation, spread or any activity

of ‘fungi’, wet rot, dry rot, bacteria or virus.”). In his opinion, Judge Robreno noted

that several Pennsylvania courts have also “enforced similar exclusions as

unambiguous.” Id. (collecting cases). Exclusions are “effective against an insured

if they are clearly worded and conspicuously displayed, irrespective of whether the

insured read the limitations or understood their import.” Frederick Mut. Ins. Co. v.

Ahatov, 274 F. Supp. 3d 273, 283 (E.D. Pa. 2017). Just as in Wilson, “the Policy

language here…is conspicuously displayed, clear, and unambiguous.” 2020 WL

5820800, at *7. The coronavirus is a virus, and the Policy explicitly and

unambiguously excludes losses caused directly or indirectly by viruses unless they

are caused by a specified cause of loss.

By the terms of the Policy, the virus only needs to be one cause of loss, not

the sole cause of loss, for the exclusion to bar coverage. That the virus may or may

not be present at the insured properties is immaterial—the Plaintiffs alleged that their

losses stem from the Closure Orders designed to prevent the exposure to COVID-19

and the spread of the virus. Even if the virus was not the direct cause of the Plaintiffs’

losses, it was at least an indirect cause, which is sufficient to bar coverage under the

Virus Exclusion clause.

B. Bad Faith Claim (Count III)

Finally, Ultimate Hearing Solutions claims that Twin City is liable for acting

in bad faith. For an action arising under an insurance policy, an insurer/defendant

may be liable for interest, punitive damages, court costs, and attorney fees if the

insurer acted in bad faith toward the insured/plaintiff. See 42 Pa. C.S.A. § 8371. To

succeed on a bad faith claim, the plaintiff must satisfy two elements by clear and

convincing evidence. Klinger v. State Farm Mut. Auto. Ins. Co., 115 F.3d 230, 233

(1997). The plaintiff must demonstrate that (1) “the insurer did not have a reasonable

basis for denying benefits under the policy;” and (2) “the insurer knew or recklessly

disregarded its lack of reasonable basis in denying the claim.” Wolfe v. Allstate

Property & Cas. Ins. Co., 790 F.3d 487, 498 (3d Cir. 2015) (citing Terletsky v.

Prudential Property & Cas. Ins. Co., 649 A.2d 680, 688 (Pa Super. Ct. 1994)). Bad

faith can include “[a]ny frivolous or unfounded refusal to pay proceeds of a policy,”

though “mere negligence or bad judgment is not bad faith.” Id. (quoting Terletsky,

649 A.2d at 688). In § 8371 claims, the underlying issue is “the manner in which

insurers discharge their duties of good faith and fair dealing during the pendency of

an insurance claim.” Wolfe, 790 F.3d at 499 (emphasis in original) (citation

omitted). Bad faith can also include a bad-faith delay, see, e.g., Kosierowski v.

Allstate Ins. Co., 51 F. Supp. 2d 583, 588 (E.D. Pa. 1999), aff’d 234 F.3d 1265 (3d

Cir. 2000), or a “lack of investigation into the facts[] or a failure to communicate

with the insured.” Frog, Switch & Mfg. Co., Inc. v. Travelers Ins. Co., 193 F.3d 742,

751 n.9 (3d Cir. 1999).

A bad faith claim is an “independent cause of action to an insured that is not

dependent upon success on the merits, or trial at all, of the contract claim.” Nealy v.

State Farm Mut. Auto. Ins. Co., 695 A.2d 790, 792-93 (Pa. Super. Ct. 1997). But, if

a bad-faith claim is premised solely on the denial of coverage, the claim must

necessarily fail if a court finds that no coverage exists. See Gallatin Fuels, Inc. v.

Westchester Fire Ins. Co., 244 F. App’x 424, 435 (3d Cir. 2007) (“[I]f the insurer

[is] correct as a matter of law in denying coverage, there is no basis for the [bad

faith] claim” premised solely on a refusal to provide coverage) (citing Frog, Switch,

193 F.3d at 751 n.9). On the other hand, “if bad faith is asserted as to conduct beyond

a denial of coverage, the bad faith claim is actionable as to that conduct regardless

of whether the contract claim survives.” Gold v. State Farm Fire & Cas. Co., 889

F. Supp. 2d 587, 598 (E.D. Pa. 2012) (citing Gallatin Fuels, 244 F. App’x at 435)

(analyzing plaintiff’s bad faith claim because it was “based largely on behavior

beyond [Defendant’s] denial of the claim”). That distinction has been accepted

when, for example, an insured claims the insurer investigated his claim in bad faith

in addition to a bad-faith denial of coverage. See id. (collecting cases).

Ultimate Hearing Solutions’ bad faith claim consists of three paragraphs in

the complaint: (1) that “Defendant Twin City has no actual basis for declining

complete coverage of the plaintiffs’ claims for damages” (Compl. ¶ 39); (2) that

“[t]he refusal of defendant to compensate plaintiffs for losses sustained and its

practices in the handling of the claim constitute bad faith towards the insured” (id. ¶

40); and (3) that “Defendant has declined coverage in an intentional, willful and

wanton disregard of the terms of the Policy.” Id. ¶ 41. The first and third paragraph,

and the extent to which the second paragraph alleges that the refusal to compensate

Plaintiffs was in bad faith, relate solely to the denial of coverage. Accordingly,

Ultimate Hearing Solutions’ bad faith claim with respect to that conduct must fail

because the Court has found the Policy does not cover Ultimate Hearing Solutions’

losses. See Gallatin Fuels, 244 F. App’x at 435.

The Court then turns to Ultimate Hearing Solutions’ allegation that Twin City

exhibited bad faith “in its practices in the handling of the claim.” Compl. ¶ 40. In

its motion, Ultimate Hearing Solutions argues that Twin City’s bad faith is evinced

by Twin City’s immediate denial of Ultimate Hearing Solutions’ claim “without

conducting any investigation,” and without addressing or acknowledging Ultimate

Hearing Solutions’ reasonable interpretation of “direct physical loss.” To the extent

that these allegations may be construed to extend beyond bad faith in the denial itself

to bad faith in the investigatory process or process of denial, Ultimate Hearing

Solutions has not met its burden.

In the context of a claim for coverage based solely on the Closure Orders

where there are no claims that the insured property or nearby property has been

physically damaged and access to Plaintiffs’ property has not been entirely

prohibited, there is nothing to investigate: coverage does not exist on the face of that

claim. Therefore, Ultimate Hearing Solutions has not shown bad faith in Twin

City’s lack of investigation or by denying Ultimate Hearing Solutions’ claim “in

light of the current context of mass denials of COVID-19 related business

interruption claims.” Discovery on this issue would not change that conclusion.

Accordingly, Ultimate Hearing Solutions has not shown its entitlement to damages

on its bad faith claim or an existence of a dispute of material fact as to Twin City’s

bad faith.11

V. CONCLUSION

Because the Policies do not cover Plaintiffs’ losses, the Court will deny

summary judgment to Plaintiffs and will grant summary judgment to Defendant on

Counts I and II of the Amended Complaint. And because Plaintiffs have not shown

bad faith or the existence of a dispute of material fact as to that bad faith, the Court

will grant summary judgment to Defendant on Count III of the Amended Complaint.

11 Plaintiffs cite this Court’s previous opinion in 1009 Clinton Properties, LLC v. State Farm Fire

& Cas. Co., in which the Court held that, without discovery, a plaintiff could never know whether

a claim was denied in bad faith. See No. 18-5286, 2019 WL 1023889 (E.D. Pa. Mar. 4, 2019).

But that case focused on whether the plaintiff had sufficiently pleaded whether “the insurer knew

or recklessly disregarded its lack of reasonable basis in denying the claim.” Id. at *3 (quoting

Wolfe, 790 F.3d at 498); see also id. at *5 (“Other than the length of time, a plaintiff will never

know whether a denial was done in bad faith, i.e., whether the insurance company denied the

plaintiff’s claim knowing it did not have a reasonable basis to do so.”). It also took place at the

motion to dismiss stage, when the Court had not yet decided whether the insurance contract was

breached. Id. Here, the Court has concluded that the contract was not breached and that the Policy

does not cover Ultimate Hearing Solutions’ losses, so as a matter of law Twin City did not

“knowingly or recklessly disregard its lack of reasonable basis in denying the claim.” Id.; see also

Gallatin Fuels, 244 F. App’x at 435.