Colorado’s second-highest court ruled on Wednesday that the COVID-19 pandemic and related public health orders did not cause a “direct physical loss” to the property of various assisted living facilities to the point of triggering insurance coverage.

By 2-1, a three-judge Court of Appeals panel relied on the reasoning of recent federal court opinions and a related Colorado Supreme Court decision that all concluded the novel coronavirus itself did not cause physical damage to property or render it uninhabitable. 

“Having reached this conclusion, however, we caution that our analysis does not mean that COVID-19 can never be found to cause a direct physical loss,” wrote Judge Timothy J. Schutz in the June 18 majority opinion. But in the case before the court, the plaintiffs’ properties “remained habitable, even though the day-to-day facility operations were significantly impacted.”

Judge Craig R. Welling disagreed, believing Spectrum Retirement Communities, LLC had alleged the danger posed by COVID-19 reached the point of affecting the use of its assisted living facilities’ physical areas.

“I acknowledge that this is a close case that poses serious difficulties in drawing clear lines. This is because the insured property is only partially uninhabitable, not completely so,” he wrote. Still, “Spectrum adequately alleged that sufficient portions of its facilities were rendered ‘uninhabitable and highly dangerous’ by COVID-19.”

The lawsuit over Spectrum’s insurance claim implicated four other Colorado cases providing a roadmap for when an airborne hazard affects physical property.

In 1968, more than 50 years before the COVID-19 pandemic, the state Supreme Court decided Western Fire Insurance Company v. First Presbyterian Church. The Littleton Fire Department closed a church building because gasoline infiltrated the soil around it. The leak contaminated the interior of the church, “making the use of the building dangerous.”

At the time, the Supreme Court acknowledged that the inability to use the church might not qualify as a “direct physical loss” on its own. However, the saturation of gasoline into the church had rendered the entire building uninhabitable, meaning the property insurance company could be held liable for a claim.

Then in early 2023, the U.S. Court of Appeals for the 10th Circuit addressed whether an insurer was liable for a restaurant’s “accidental physical loss or accidental physical damage” due to the novel coronavirus. The court concluded Western Fire did not apply to such a scenario, as the loss “must be physical, not simply stem from something physical.” 

Later that year, the 10th Circuit reached a similar conclusion in the lawsuit of a casino seeking insurance coverage. It relied upon a recent Colorado Supreme Court decision addressing whether COVID-19 affected property use.

“COVID-19 may have infected people who were on the property. But COVID-19 did not infect the property itself,” wrote Chief Justice Monica M. Márquez.

Spectrum, which is based in Denver and operates 43 assisted living facilities across the country, filed suit against Continental Casualty Company for denying its insurance claim. Spectrum had paid over $3 million for a policy covering “direct physical loss or damage” to its property, and it detailed how public health orders forced it to close, limit access to or alter certain physical spaces within its facilities at a financial loss to the company.

In July 2022, Denver District Court Judge Marie Avery Moses permitted Spectrum’s claims to proceed. At that time, she only had the Western Fire decision as guidance, and similarly found the contamination by airborne particles could trigger a property loss.

“Dining rooms and other common areas had to be shut down, residents were required to stay in their rooms, and guests and new potential residents were not allowed inside,” Moses wrote. “Accordingly, under the physical contamination theory, COVID-19 plausibly amounted to physical loss or damage to Spectrum’s covered properties.”

However, after the 10th Circuit and Supreme Court issued their own decisions bearing on the effect of the novel coronavirus on property, District Court Judge Martin F. Egelhoff, who took over the case from Moses, conceded the claims were not viable after all.

“Indeed, the recent cases demonstrate that the rule announced in Western Fire is inapplicable,” he wrote, “because the plaintiffs did not — and cannot — plead that COVID-19 built up to the point of making its property uninhabitable and unsafe and unusable for any and all purposes whatsoever.”

Spectrum turned to the Court of Appeals and insisted Western Fire remained the appropriate case to follow. But the appellate panel appeared hesitant to liken the presence of the novel coronavirus to an overwhelming gas leak.

“The complaint doesn’t allege uninhabitability. The word, I think, doesn’t appear,” observed Welling during oral arguments. “And clearly these facilities continue to be inhabited.”

“If there was one COVID order and it said you can’t use the dining room for some period of time,” wondered Schutz, “that would be rendering the property uninhabitable? Even though those who are the intended residents — the elderly, the disabled — continued to occupy the property and pay for the service.”

Ultimately, the panel’s majority agreed with the more recently decided cases that found COVID-19 could not be categorically said to affect property and render it unusable.

“Spectrum acknowledges that every sneeze or cough that requires some cleaning of property does not equate to a direct physical loss,” wrote Schutz for himself and Judge W. Eric Kuhn. “But Spectrum identifies no objective line that a court can draw to say what degree of limitation on the day-to-day operations should be deemed such an impairment that it results in direct physical loss. Should it be 5% of the facility, 25%, 50%?”

Welling, in dissent, acknowledged the difficulty of drawing a line, but he believed Spectrum had sufficiently alleged it deserved coverage for its COVID-19 losses.

However, the panel revived Spectrum’s claim that another provision of its insurance policy about communicable diseases supplied an alternative basis for coverage. The appeals court returned the lawsuit to Egelhoff for further proceedings.

The case is Spectrum Retirement Communities, LLC v. Continental Casualty Company.