Property Damage Due to Poor Air Quality

Soot From Wildfire Impacting Shakespeare Theatre Constitutes Physical Damage To Property.

An Oregon federal district court, applying Oregon law, addressed the issue of whether “direct physical loss of or damage to covered property” includes poor air quality under claimant’s business income loss coverage. The policyholder, Oregon Shakespeare Association (“OSA”), argued that the term included harm to the interior of a partially-open air theatre when smoke and soot from nearby wildfires caused cancellation of four shows. The district court agreed, discrediting Great American Insurance Company’s (“Great American”) argument that there was no business interruption because the repairs for wildfire smoke in the theatre would not qualify as a “period of restoration” to provide coverage for business income loss.

OSA operates the Oregon Shakespeare Festival in Ashland, Oregon. During the 2013 summer festival, OSA canceled four different shows from July 30, 2013 to August 7, 2013 in its partially-enclosed open air theatre, Allen Elizabethan Theatre, due to debris and smoke emitted from nearby wildfires that caused health concerns. “The fires caused smoke, soot, and ash to accumulate on the surface of the hard plastic seats and concrete ground of OSA’s open-air theatre . . . coating the seating, HVAC, lighting, and electronic system”. OSA formed a committee that met each night prior to the outdoor performances, where air quality and cast members’ physical abilities to perform were evaluated to determine whether to cancel a show. OSA sought lost profits coverage from Great American due to show cancellations as a result of the poor health conditions from the wildfires. OSA later amended its complaint to include breach of contract, breach of good faith, and negligence claims.

The dispute between the parties hinged on the definition of “direct physical loss or damage,” and what constitutes “covered property,” as there was only coverage under the business interruption policy if OSA could first establish the smoke filled air in the theatre was “covered property,” and next that such air was damaged to qualify as a “period of restoration.”  The policy contained no definitions regarding these terms, leaving the district court to interpret the meaning of such provisions in the context of the dispute. Great American argued the claim did not involve “covered property” and “direct physical loss or damage” because the air did not constitute “property” and therefore could not be damaged physically. The court disagreed, finding that Great American failed to address why “air” could not be physically damaged due to its lack of structure: “certainly, air is not mental or emotional, nor is it theoretical.” Great American further argued that smoke in the air did not require “repairs” relying on the meaning that repairs are limited to physical structures. The district court found Great American’s meaning of “direct physical loss or damage” to be implausible under the term’s plain meaning, finding that OSA’s interpretation as, “’any injury or harm to a natural or material thing’” more appropriate and included harm to the theatre’s interior, as well as air.

The district court will determine damages at the conclusion of the jury trial. OR Shakespeare Fest. Ass. v. Great Am. Ins. Co., No. 1:15-cv-01932-CL (D.O.R. June 7, 2016)

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