Wildfire Smoke Constitutes “Direct Physical Loss”

An Oregon federal court decision deemed “air” physical property covered by a property insurance policy, in holding that wildfire smoke infiltration of an outdoor theater caused a physical loss of property.

The policyholder, an outdoor theater, claimed it suffered a property loss because it had to cancel several shows when smoke from nearby wildfires filled its audience seating and stage areas. Although the wildfires caused ash and soot to accumulate on outdoor seating and flooring, and in ventilation, lighting and electronic systems in the interior areas of the theater, the court held that the it was the presence of smoke in the air that caused a “direct physical loss” when it rendered the theater “unusable for its intended purpose.” Each day, theater representatives would decide whether to cancel that night’s show based on their lay assessment of the air quality present in the audience and stage areas at that time.

The insurance company argued that the policy terms required some structural loss necessitating repair and that because theater employees were able to clean up the ash and soot and change ventilation system filters, the property sustained no direct physical damage. The court sided with the policyholder, reasoning that to “exclude the air within the building, is not a plausible plain meaning of the term ‘direct physical loss of or damage to property.’” The court also relied on Oregon and other state cases holding that “odor” is physical damage if it renders property unfit for its intended purpose. Based on those cases, the court highlighted the fact that “physical damage can occur at the molecular level and can be undetectable. . . .” The court also pointed out that in determining whether there was physical loss or damage, courts will consider the nature and intended use of the property and the purpose of the insurance policy obtained.

Here, the court concluded that because the presence of smoke in the theater rendered it unusable for its intended purpose, the theater sustained a “physical loss” covered by the policy. This entitled the policyholder to business income coverage for the cancelled shows. While the court acknowledged the insurance company’s argument that an open-air theater must accept the consequences of the weather conditions, the court pointed out that the insurance policy provided no limitations based on this unique characteristic. The court analyzed several exclusions raised by the insurance company but concluded that none of them applied. This decision tops the list of other Oregon cases that have held that no structural or permanent physical damage to the insured property is necessary to trigger property coverage. The implication is that a loss of use of property can constitute a “direct physical loss” under Coverage A of a property insurance policy.

Or. Shakespeare Festival Ass’n v. Great Am. Ins. Co., 2016 U.S. Dist. LEXIS 74450 (D. Or. June 7, 2016)

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