Interpretation Tips for Insurers and Policyholders in Litigating Utah COVID-19-Related Business Losses

Contact: Richard A. Vazquez


COVID-19 has spawned nationwide litigation between businesses and their first-party property insurers for denied business interruption claims arising from virus-related closures.  This short article addresses possible insurer and policyholder arguments regarding a key element in many of these cases: whether COVID-19 premises contamination constitutes a covered “direct physical loss” under standard commercial property policies.

Standard language found in many commercial property policies reads:


A. Coverage

We will pay for direct physical loss of or
damage to Covered Property at the premises
described in the Declarations caused by or
resulting from any Covered Cause of Loss….

B. Covered Causes of Loss

Risks of direct physical loss unless the loss
Excluded…or Limited….

Under Utah law, the burden is on the policyholder to show that a particular loss is covered by the policy’s insuring clause.  Once the policyholder has made that initial showing, the burden shifts to the insurer to show that any exclusion nonetheless applies to bar coverage.  “The burden of establishing coverage under an insurance policy is on the party who asserts that a loss comes within the coverage of the policy, even when the insurer commences a declaratory action to resolve the question.”  Cincinnati Ins. Co. v. AMSCO Windows, 921 F. Supp. 2d 1226, 1233 (D. Utah 2013), aff’d, 593 F. App’x 802 (10th Cir. 2014) (citation omitted). “When an insured….brings himself within the insuring clause he has made his case … and any exceptions or conditions which would then deny him relief, take him out of the indemnity provisions, render them inoperative as to him, are matters of defense, and the burden thereof rests upon the insurer……..” LDS Hosp., Div. of Intermountain Health Care, 765 P.2d 857, 858-59 (Utah 1988) (quoting Browning v. Equitable Life Assur. Society, 94 Utah 570, 80 P.2d 348, 350-51(Utah 1938)

Because the phrase “direct physical loss” first appears in a standard commercial property policy’s insuring clause, the policyholder will typically bear the burden of establishing a COVID-19-related loss as such.  For the purposes of this article, we assume no applicable exclusions in the policy exist, such as the commonly-found “virus and bacteria” exclusion, which would likely present a significant obstacle to coverage.

Utah courts “construe insurance contracts by considering their meaning to a person of ordinary intelligence and understanding, viewing the matter fairly and reasonably, in accordance with the usual and natural meaning of the words, and in the light of existing circumstances, including the purpose of the policy. Furthermore, any ambiguity or uncertainty in the language of an insurance policy must be resolved in favor of coverage.” Doctor’s Co. v. Drezga, 218 P.3d 598, 603 (Utah 2009) “[I]f the language within the four corners of the contract is unambiguous, the parties’ intentions are determined from the plain meaning of the contractual language.” Id.

Whether an ambiguity exists in a contract is a question of law.” Saleh v. Farmers Ins. Exchange, 133 P.3d 428, 432 (Utah 2006).  “If a policy is ambiguous, doubt is resolved against the insurer.  However, if a policy is not ambiguous, no presumption in favor of the insured arises and the policy language is construed according to its usual and ordinary meaning.” Alf v. Zurich Fire & Cas. Co., 850 P.2d 1272, 1274 (Utah 1993). “Although [Utah courts have] left some discretion to courts in determining whether ambiguity exists, at minimum one universal standard applies to this determination: words and phrases do not qualify as ambiguous simply because one party seeks to endow them with a different interpretation according to his or her own interests. In other words, for a proffered alternative interpretation to merit a court’s applause, it must be more than a conjecture but may be less than a certainty.” Saleh, 133 P.3d at 433.

Utah appellate courts, at times, have trended toward a policyholder-friendly view with regard to policy interpretation.  However, the cases of American Nat. Prop. & Cas. Co. v. Sorensen, 362 P.3d 909, 2013 UT App 295 (Utah Ct. App. 2013) (reh’g denied Feb. 6, 2014) and Fire Ins. Exch. v. Oltmanns, 285 P.3d 802 (Utah Ct. App. 2012) provide examples of the lengths Utah Courts have gone to in the past decade to find insurance policy ambiguity.

In Oltmanns, the Utah Court of Appeals found that a policy exclusion barring coverage for personal injuries arising out of the use of “jet skis or jet sleds” was inapplicable to an injury which took place on a “Honda F–12 AquaTrax personal watercraft on a lake in southern Utah…. [a type of] personal watercraft…designed for use by a seated driver and up to two additional seated passengers.”  Id. at 804.  The Court cited, among other things, an online Wikipedia entry for the term “jet ski” in its reasoning that “jet ski” could theoretically refer either only to stand-up watercraft, or just the trademarked “Jet Ski” manufactured by Kawasaki.

In Sorensen, the Utah Court of Appeals found that for purposes of application of an exception to an exclusion, a planned unit subdivision’s park located in a “common area” to the east of the insured’s home was an “insured location” under the subject homeowners’ policy. The Court also found that an ATV was not necessarily a “motorized land conveyance” because that term was undefined in the policy, even while acknowledging that “intuitively” that could very well be the case.  The Court ignored majority rule in reaching its 2-1 decision.

More recent cases by the Utah Supreme Court, however, show a softening of the extreme policyholder-friendly trend.  This is probably likely because of fairly recent turnover in justices at the Utah Supreme Court.  In Compton v. Houston Cas. Co., 2017 UT 17 (Utah Mar. 23, 2017), the Utah Supreme Court held that the insured real estate agent was not engaged “in the performance of services as a Real Estate Agent/Broker of non-owned properties, for others for a fee” as required by his Errors & Omissions policy’s insuring agreement, when the claimed “fee” was a payment that was in violation of both Utah law and the commission structure in the agent’s employment agreement with his brokerage. In the underlying real estate purchase dispute the insured agent, who was employed by a large brokerage, approached the investor plaintiffs with information about a potential commercial real estate deal with a developer. However, the agent did not disclose to the investor plaintiffs that he would receive a payment from the developer from the investor plaintiff’s escrow deposit as compensation for bringing in a buyer. Since this payment arrangement violated both Utah real estate agent/broker law, as well as the brokerage’s compensation policy with its agents, the Utah Supreme Court held that it would not be reasonable to interpret the phrase “for a fee” as covering any payment other than a lawful real estate agent commission that was consistent with both Utah law and the agent’s brokerage’s compensation policy.

Additionally, the Utah Supreme Court called the Utah Court of Appeals’ policyholder-friendly reading in Oltmanns into serious question, and hinted that it may even overturn the reasoning used in that case if presented with the opportunity to do so.  The Supreme Court in the identically-named Fire Ins. Exch. v. Oltmanns, 2017 WL 5623415, 2017 UT 81 (Utah Nov. 21, 2017), found that 1) for purposes of bad faith liability, the insurer’s interpretation of “jet ski” in the underlying case was “fairly debatable; and 2) the applicability of the “fairly debatable” defense in the third-party liability context remained an open question in Utah, but allowed it to be applied in the case because the parties acquiesced in its applicability.

Perhaps the most important line in the opinion, however, was when the Supreme Court stated that the Court of Appeals’ finding of ambiguity in the term “jet ski” may have been erroneous, and that the Supreme Court may have ruled differently on the issue had it been given the opportunity: “But, candidly, the correctness of the court of appeals’ decision is as open to debate as the issue it resolved.” See 2017 UT 81 ¶ 12.

Businessowner policyholders seeking to establish COVID-19 contamination as a “direct physical loss” would be wise to focus on the decontamination and cleaning measures required for their business to reopen following a COVID-19-related closure.  The necessity of such remediation procedures arguably shows contamination and loss of use of tangible physical property within the business premises.  This would arguably constitute a “direct physical loss” under the policyholder-friendly ambiguity standards set forth in cases such as Oltmanns and Sorensen.  Reports or testimony from a restoration / remediation contractor may be helpful in explaining the necessity of the cleaning measures to kill the virus on surfaces within the business.

Conversely, insurers would instead focus on the lack of visible physical injury to property within COVID-19-infected premises.  They would emphasize that the policyholder bears the insuring-clause burden in establishing the “direct physical” nature of the loss.  In many COVID-19 contamination cases, there is little or no actual evidence that the virus actually existed on any physical structure within the business property, and that cleaning measures are employed to address the possibility of contamination rather than actual contamination.  Insurers could also point to the Utah Supreme Court’s more recent pronouncements in Compton and Oltmanns to argue that the unambiguous “usual and natural” meaning of the phrase “direct physical loss” necessarily implies visible physical damage to property.

Our insurance coverage and bad faith lawyers are ready to help.  For more information about the services SCM provides in this area, contact Richard A. Vazquez.


Richard A. Vazquez