The physical damage requirement to property at an insured premise has become the raging debate in many of the Covid-19 business interruption disputes. I noted a Florida case1 in a blog about “physical damage,” which I wrote about in 2009 while working on Hurricane Ike roof damage claims: “Physical Direct Loss” Caselaw and TWIA’s Roofing Memo. Given that the Azalea, Ltd. v. American States Insurance Company decision is now being cited frequently in briefs regarding businesses being shut down, it seems appropriate to have a more in-depth discussion.

The facts are interesting because what actually initiated the physical damage was “an unknown substance.”

[A]n unknown substance was dumped into the on-site sewage treatment facility servicing the mobile home park. The on-site manager found that the fluid in the system had turned bright yellow-green. Appellant immediately took steps necessary to prevent discharge of the unknown pollutant into the river.

The city of Jacksonville prohibited Azalea from utilizing the sewage treatment facility until the unknown substance was determined to be nonhazardous and until the city reapproved the facility for operation. Accordingly, the sewage treatment facility was shut down. Azalea had to provide temporary waste water treatment facilities on site, and hired engineers and testing laboratory companies to determine the chemical composition of the unknown pollutant. Testing took approximately one week during which time Azalea could not operate its sewage treatment facility and had to continue making alternate arrangements. The chemical was finally determined to be of a composition which could pass through the system after treatment. During the period of testing, the chemical residue from the dumped substance adhered to the interior and caused the destruction of a bacteria colony which was part of the sewage treatment process. Azalea was required to completely drain the entire system, steam clean the entire interior of the sewage treatment plant by power steam, and by hand chiseling remove this chemical residue.

This situation is somewhat, if not very, analogous to businesses being forced to shut down by the authorities from Covid-19 and shut down because the presence of it could harm the public. The appellate court expressly overruled the trial court’s finding that there was no “physical damage,” reasoning as follows:

Appellee’s assertion that there was no actual harm to the insured premises is not supported by either the facts or the law. The only evidence presented demonstrates that the bacteria colony is an integral part of the sewage treatment facility. The colony was specifically attached to and became part of the treatment facility structure. The facility could not operate or exist unless this colony was replaced….

In Hughes v. Potomac Ins. Co., 199 Cal.App.2d 239, 18 Cal.Rptr. 650 (Cal.Ct.App.1962), coverage was found to exist under an insurance policy providing coverage for ‘all loss and to damage’ to the insured’s dwelling. In that case, it was argued that there was no damage to the structure where a landslide occurred depriving the subjacent and lateral support essential to the stability of the home. The court found that common sense required that the policy not be interpreted so as to deny coverage for a dwelling rendered completely useless. See also Western Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 437 P.2d 52 (Colo.1968); Gatti v. Hanover Ins. Co., 601 F.Supp. 210 (E.D.Pa.1985), affirmed, 774 F.2d 1151 (3d Cir. Pa.1985).

In the instant case, the facts supporting coverage are even more compelling. The residue from the dumped substance actually covered and adhered to the interior of the structure causing destruction of the bacteria colony which was an integral part of the covered facility. Therefore, there was direct damage to the structure which was caused by the vandalism. Under these circumstances, the trial court erred in denying coverage….

It is significant that the decision approved of the line of cases finding physical damage to structures where the subjacent and lateral support were lost, although no actual cracking or falling apart had occurred to the structure. The court even noted that “common sense” required a finding of physical damage under these circumstances.

Thoughts For The Day

Science is a first-rate piece of furniture for a man’s upper chamber, if he has common sense on the ground-floor. But if a man hasn’t got plenty of good common sense, the more science he has, the worse for his patient.
—Oliver Wendell Holmes, Sr.

The rules of evidence in the main are based on experience, logic, and common sense, less hampered by history than some parts of the substantive law.
—Oliver Wendell Holmes, Jr.
1 Azalea, Ltd. v. American States Ins. Co., 656 So.2d 600 (1995).