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By Scott D. Greenspan, Richard P. Lewis, Lorelie S. Masters,Chris Kozak

Look at virtually any COVID-19 case favoring an insurer, and you will find a citation to Section 148:46 of Couch on Insurance. It is virtually ubiquitous: courts siding with insurers cite Couch as restating a “widely held rule” on the meaning of “physical loss or damage”—words typically in the trigger for property-insurance coverage, including business-income coverage. It has been cited, ad nauseam, as evidence of a general consensus that all property-insurance claims require some “distinct, demonstrable, physical alteration of the property.” Indeed, some pro-insurer decisions substitute a citation to this section for an actual analysis of the specific language before the court.

Couch is generally recognized as a significant insurance treatise, and courts have cited it for almost a century. That respect began with the first edition written by George Couch and subsequent editions written by his successors.

This particular section, however, as formulated in the third edition of Couch, contains an unfortunate, and serious, error. Couch’s apparent conclusion—that “direct physical loss” requires a “distinct, demonstrable, physical alteration”—is wrong. It was wrong when Couch first made it in the 1990s, and it is wrong today. As another well-respected treatise puts it, “when an insurance policy refers to physical loss of or damage to property, the ‘loss of property’ requirement can be satisfied by any ‘detriment,’ and a ‘detriment’ can be present without there having been a physical alteration of the object.”

A review of the three editions of Couch shows that this statement first appeared in the third edition. As originally published, it supported its assertion by citing to five cases for support and two cases holding to the contrary, presenting the former as “widely held” majority rule.

But none of these cases used the “distinct, demonstrable, physical alteration” test that Couch presents, and it was far from the majority rule. As of March 2020, there were at least thirty-five cases adopting a broader rule (including many binding appellate decisions and several rulings by state high courts), and significantly fewer following the Couch test. The “physical alteration” test gained traction only because courts relied on Couch’s initial mischaracterization—inferred from a single district court opinion that was disapproved three years later by the governing Court of Appeals, rather than from the thirteen extant cases then holding to the contrary.

We may never know why Couch got the law so profoundly backwards on this key issue. But one thing is clear: courts need to stop citing it as the sine qua non of what “physical loss or damage” means. It is not. If the courts, and particularly the federal courts, continue down this path without addressing Couch’s fallacy, there will be serious practical consequences. They risk overruling decades of insurance law and drastically narrowing the scope of property insurance that forms the backbone of risk protection for homeowners, businesses, and the banks that lend to them. All of those policies rest on the same terms Couch misconstrued. More immediately, courts will deprive American businesses of billions of dollars in coverage they paid for and need to survive the worst public health crisis in a century. Until Couch reckons with this error, busy trial and appellate judges cannot, and should not, trust it to give them the straight answer on this foundational question.

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