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

> District Court, E.D. Pennsylvania · January 14, 2021

URL: https://www.frixlaw.com/law-library/cases/10400311

## Case

- **Court:** District Court, E.D. Pennsylvania
- **Decided:** January 14, 2021
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10400311

## How later opinions describe it (automated extraction)

- finding coverage where a windstorm caused insured livestock to become infected with the pseudorabies virus
- applying microorganism exclusion to bacteria
- 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

## Opinion text

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.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10400311. Public record. Not legal advice.