Sullivan Mgmt., LLC v. Fireman's Fund Ins. Co.

• Decision Date: 10 August 2022
• Docket Number: Appellate Case No. 2021-001209,Opinion No. 28105
• Citation: 437 S.C. 587,879 S.E.2d 742
• Parties: SULLIVAN MANAGEMENT, LLC, Plaintiff, v. FIREMAN'S FUND INSURANCE COMPANY, and Allianz Global Risks, US Insurance Company, Defendants.
• Court: South Carolina Supreme Court

437 S.C. 587

879 S.E.2d 742

SULLIVAN MANAGEMENT, LLC, Plaintiff,

v.FIREMAN'S FUND INSURANCE COMPANY, and Allianz Global Risks, US Insurance Company, Defendants.

Appellate Case No. 2021-001209

Opinion No. 28105

Supreme Court of South Carolina.

Heard June 8, 2022

Filed August 10, 2022

Rehearing Denied November 17, 2022

Justin O'Toole Lucey, Anna McCann, Sohayla R. Townes and Amanda Nicole Funai, all of Justin O'Toole Lucey, P.A., of Mt. Pleasant, for Plaintiff.

D. Larry Kristinik, A. Mattison Bogan, and Blake Terence Williams, all of Nelson Mullins Riley & Scarborough, of Columbia; Brett Ingerman, of Baltimore, MD, and Brett Solberg, of Houston, TX, both of DLA Piper LLP (US), all for Defendants.

Harmon L. Cooper, of Crowell & Moring LLP, of Washington, D.C., for Amicus Curiae American Property Casualty Insurance Association, National Association of Mutual Insurance Companies, and South Carolina Insurance Association.

G. Murrell Smith, Jr., Jonathan M. Robinson, and Shanon N. Peake, of Smith Robinson Holler Dubose & Morgan, LLC, of Columbia; Amy Mason Saharia and Kaitlin J. Beach, of Williams & Connolly, LLP, of Washington, D.C., all for Amicus Curiae Selective Insurance Company of America.

Mark Billion, of Billion Law, of Bluffton; Rhonda D. Orin, Marshall Gilinsky, and Jason E. Kosek, of Anderson Kill P.C., of New York, NY, all for Amicus Curiae United Policyholders.

JUSTICE HEARN :

Sullivan Management, LLC operates restaurants in South Carolina and filed suit to recover for business interruption losses during COVID-19 under a commercial property insurance policy issued by Fireman's Fund and Allianz Global Risks US Insurance Company (Fireman's). This Court accepted five questions from the federal district court stemming from the litigation but we elect to answer only the following question:

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

The answer to this question is no because the presence of COVID-19 and corresponding government orders prohibiting indoor dining do not fall within the policy's trigger language of "direct physical loss or damage."

FACTS/PROCEDURAL BACKGROUND

On March 17, 2020, Governor Henry McMaster issued an executive order prohibiting on-site consumption of food and beverages at restaurants. This order followed the governor's declaration of a public health emergency and coincided with the issuance of "stay-at-home" orders by many localities across the state. Sullivan, which operates several Carolina Ale House establishments in South Carolina, sought coverage from its property insurance carrier for the loss of income as a result of both the presence of the coronavirus in its restaurants and the government-ordered prohibition of indoor dining. Fireman's denied the claim for failure to trigger coverage, and Sullivan filed suit in state court. Fireman's subsequently removed the case to federal court and then filed a motion to dismiss. After the parties submitted briefs on the motion to dismiss, the court certified five questions, which this Court accepted.

STANDARD OF REVIEW

Our standard of review when answering a certified question depends on the context of the case. Typically, when a novel issue of law is raised, we are "free to decide the question based on [our] assessment of which answer and reasoning would best comport with the law and public policies of the state as well as the Court's sense of law, justice, and right." Thomerson v. DeVito , 430 S.C. 246, 249, 844 S.E.2d 378, 380 (2020). However, this question derives from contract interpretation, limiting our review to ascertaining the intent of the parties based on the language used in the policy.

DISCUSSION

Sullivan contends the presence of COVID-19 and associated government orders prohibiting indoor dining constitute "direct physical loss or damage." It asserts the definitions of "physical", "loss", and "damage" warrant coverage here, either by the plain language of those terms or alternatively, because the terms are ambiguous and the Court must construe them in favor of the insured. Additionally, Sullivan argues other provisions in the policy, including the communicable disease coverage extension, demonstrate the phrase has a broad interpretation and is not limited to situations involving permanent dispossession of property. Further, Sullivan contends pre-COVID-19 jurisprudence supports its interpretation of the phrase as well as several decisions from other jurisdictions.

Conversely, Fireman's asserts neither the presence of the coronavirus nor the government shut-down orders constitute "direct physical loss or damage" because that phrase requires "actual" or "discernable" physical damage. In other words, in order to trigger coverage, the loss or damage must be more than mere loss of use or economic loss; instead there must be a "physical alteration, destruction, or permanent dispossession of property." Fireman's supports its interpretation by highlighting the policy provision affording coverage during the "period of restoration", which is the time it takes to repair, replace, or rebuild the property. Fireman's, noting the significant majority of decisions from state and federal courts in its favor, contends the restoration provision would be mere surplusage if the phrase in question were construed as broadly as Sullivan requests. We agree with Fireman's.

The policy does not expressly define "direct physical loss or damage"; therefore, those terms must be interpreted under their common meaning. See Fritz-Pontiac-Cadillac-Buick v. Goforth , 312 S.C. 315, 318, 440 S.E.2d 367, 369 (1994) ("We must enforce, not write, contracts of insurance and we must give policy language its plain, ordinary, and popular meaning. We should not torture the meaning of policy language to extend or defeat coverage that was never intended by the parties."). Physical is defined as "(a) having material existence: perceptible especially through the senses and subject to the laws of nature; (b) of or relating to material things." See Physical , Merriam-Webster, https://www.merriam-webster.com/dictionary/physical (last visited Jul. 13, 2022). Loss means "destruction; ruin" and can also be "the disappearance or diminution of value, usually in an unexpected or relatively unpredictable way." Loss , Black's Law Dictionary (8th ed. 2004). Another definition for loss is "deprivation, the failure to keep possession, and a "decrease in amount, magnitude, value, or degree." Loss , Merriam-Webster, https://www.merriam-webster.com/dictionary/loss (last visited Jul. 13, 2022). Finally, damage means "loss or harm resulting from injury to person, property, or reputation." Damage , Merriam-Webster, https://www.merriam-webster.com/dictionary/damage (last visited Aug. 9, 2022).

Unsurprisingly, many courts across the country have been asked to answer similar questions concerning whether losses due to the presence of the coronavirus and/or resulting government closure orders are covered under commercial property insurance policies. While it is helpful for the Court to be aware of the tidal wave of litigation, we rely on South Carolina law to answer this question. In other words, the vast amount of persuasive authority is just that, merely persuasive. Nevertheless, we agree that the alleged losses here do not constitute "direct physical loss or damage."

The triggering language for coverage under an all-risks policy—direct physical loss or damage—is the "North Star" of a property insurance policy. Santo's Italian Cafe LLC v. Acuity Ins. Co. , 15 F.4th 398, 402 (6th Cir. 2021) (noting the triggering language is the "North Star" of the policy in ascertaining what is covered and concluding "[i]t pays little heed to these omnipresent words in the policy, if not erases them, to construe them to cover business losses generated by a statewide shutdown order. All in all, the cause of the suspension of operations—the prohibition on in-person dining—did not arise from a physical loss of property or physical damage to it.").¹ The contention that a government shut-down order caused direct physical loss or damage is meritless.

While the order prohibiting indoor dining certainly affected Sullivan's financial well-being, the order itself was not directly physical. See, e.g. , Estes v. Cincinnati Ins. Co. , 23 F.4th 695, 700 (6th Cir. 2022) (concluding that "COVID-19 and the government shutdown orders caused only ... intangible or economic harms"); Colectivo Coffee Roasters, Inc. v. Soc'y Ins. , 401 Wis.2d 660, 974 N.W.2d 442, 448 (2022) (noting that although the governor's order closing indoor dining restricted the use of the property, "loss of use is distinct from physical loss of or damage to property"); Visconti Bus Serv., LLC v. Utica Nat'l Ins. Grp. , 71 Misc.3d 516, 142 N.Y.S.3d 903, 915 (N.Y. Sup. Ct. 2021) ("The words ‘direct’ and ‘physical,’ which modify the phrase ‘loss or damage,’ require a showing of actual, demonstrable physical harm of some form to the insured premises — the forced closure of the premises for...