(Article from Insurance Law Alert, May 2025)
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Holding
An Alaska district court ruled that a communicable disease provision in a property insurance policy did not provide coverage for losses stemming from reduced business income during the COVID-19 pandemic. Baxter Senior Living, LLC v. Zurich American Insurance Co., 2025 U.S. Dist. LEXIS 78777 (D. Ala. Apr. 25, 2025).
Background
Baxter, a senior living facility operator, sought coverage under a property policy for business losses incurred in the wake of the COVID-19 pandemic. Baxter alleged that recommendations by health and government agencies relating to social distancing, safety measures and other procedures resulted in a loss of revenue and increased expenditure of various costs.
In a previous ruling in this case, the Alaska Supreme Court ruled that neither the presence of the COVID-19 virus at the insured’s property nor pandemic-related government orders constituted “direct physical loss of or damage to” property for purposes of insurance coverage. Therefore, the only remaining claims related to a communicable disease provision that provided coverage for lost business income “due to an order of an authorized public health official or governmental authority that prevents access to that ‘premises’…or a portion of that ‘premises’…because of the discovery or suspicion of a communicable disease…”
Zurich moved to dismiss the remaining claims and the court granted the motion.
Decision
The court ruled that coverage was unavailable under the communicable disease provision for several reasons. First, the court held that a March 2020 email from the Alaska Department of Health and Social Services (“DHSS”) that listed the Center for Disease Control’s recommendations for assisted living facilities to reduce the risk of COVID-19 was not an “order” within the meaning of the policy. The court reasoned that the email provided recommended guidance only and “did not impose any binding requirements or repercussions for noncompliance.” To constitute an “order,” the court explained, the “directive must be compulsory[.]” The court rejected Baxter’s assertion that the “urgent” nature of the email during a pandemic, along with DHSS’s power to issue fines and revoke Baxter’s license, rendered the email an official “order.”
Additionally, the court noted that the language of the communicable disease provision itself evidenced an intent to construe the term “order” narrowly; it stated that the coverage period “begins 24 hours after [the facility] receive[s] notice of closing” and lasts “until the public health official or governmental authority authorizes [the facility] to reopen, or 90 days, whichever is earlier.” The court explained that such language indicates that “to trigger coverage, an order must be a government directive of sufficient legal force that it renders the policyholder legally unable to reopen the closed portion of the premises without subsequent government authorization.”
The court reached a different conclusion as to an August 2020 document, issued by the Alaska DHSS, which recommended “aggressive efforts” to limit exposure to the COVID-19 virus. The DHSS document established a detailed three-phase system to be followed by residential care facilities, and expressly stated that a failure to meet the criteria could result in enforcement actions. The court explained that the use of mandatory language, coupled with the threat of an enforcement action for noncompliance, rendered the August 2020 document an “order” under the policy.
However, coverage was nonetheless unavailable because the August 2020 document did not “prevent access” to the insured premises, as required by the communicable disease provision. The court explained that while the order imposed various limitations on activities and operations, it did not completely prohibit access to all or a portion of the facility.
As the court noted, courts in other jurisdictions have interpreted similarly worded communicable disease provisions to require a prohibition on access to the insured property for “any business purpose” rather than a reduction in operations or services.
Comments
The prohibition on access requirement has been the subject of litigation in other COVID-19-related coverage disputes, both in the context of communicable disease provisions and civil authority provisions. The decision highlights an important distinction between the express directives of an order on the one hand, and what actions a policyholder elects to do, on the other. Baxter asserted that the prohibition on access requirement was satisfied because access to the facility’s dining hall was prohibited at certain periods in time. However, the court emphasized that the dining room closure directive came from Baxter, not the August 2020 government order, stating: “what Baxter chose to do is irrelevant under the language of the Communicable Disease Coverage—it is the order that must prevent access.”