Portion of COVID-19 Claim Resurrected on Appeal

    The Colorado Court of Appeal reversed, in part, the trial court's dismissal of the insured's COVID-19 claim. Spectrum Retirement Communities, LLC, et al v. Continental Casualty Company, 2025 Colo. App. LEXIS 876 (Colo. Ct. App. June 18, 2025). 

    Spectrum owned and operated forty-three senior living and memory care communities in ten different states. Spectrum was insured by Continental under an all-risk commercial property policy that included a health care endorsement (HCE). 

    During the COVID-19 pandemic, Spectrum kept its facilities open in a limited fashion based upon orders from state and federal authorities. Spectrum contended it suffered property and economic losses due to the governmental orders. It filed claims with Continental, which were denied.

    Spectrum sued Continental for breach of contract and common law bad faith. Spectrum filed a motion to dismiss which was granted in part, denied in part. The trail court found that Spectrum had asserted recognized legal claims and alleged sufficient facts to plausibly support a conclusion that COVID-19 caused it to suffer a "direct physical loss" under the policy. The court also found that Spectrum had plausibly pleaded a direct connection between the local government COVID-19 shutdown orders and the resulting limited use of the covered properties.

    After discovery, Spectrum filed an amended complaint. Continental moved for judgment on the pleadings. The motion was granted because based on the facts alleged in the amended complaint, Spectrum could not establish a direct physical loss or damage to covered property resulting from COVID-19 or the associated governmental orders. Judgment was entered in favor of Continental and against Spectrum.

    Prior case law from the Colorado Supreme Court held that a claim for a direct physical loss did not necessarily have to be based on visible, physical damage to a building. Rather, a direct physical loss could result from the existence of airborne materials that accumulated to such a degree that they rendered a property completely uninhabitable, even though they did not cause physical damage or destruction of the subject property. The Supreme Court further held that any intangible damage had to render the insured property uninhabitable, making further use of the property highly dangerous.

    Here, Spectrum did not allege that there was a buildup of COVID-19 to such a degree that it rendered the properties "uninhabitable." In fact, it was undisputed that Spectrum's facilities remained open throughout the COVID-19 pandemic. Therefore, the Court of Appeals agreed that Spectrum failed to allege a direct physical loss of property. 

    The court then turned to the HCE, which provided, in part, that the evacuation of a building due to an order from governmental authority after the discovery or suspicion of a communicable disease would require the insurer to pay for:

(1) direct physical loss of or damage to covered property; and

(2) the necessary and reasonable costs incurred by the Insured to:

    (a) evacuate the contaminated location, if required by the governmental authority;

    (b) decontaminate or dispose of contaminated covered property . . . 

Spectrum argued that the trail court erred by concluding, as a matter of law, that it failed ot allege coverage under the HCE.

    The trial court rejected Spectrum's claims based solely on its conclusion that Spectrum had suffered no direct physical loss to its property. However, the language of the HCE provided coverage for losses in addition to those caused by a direct physical loss of property. Section (2) provided coverage for "necessary and reasonable costs" incurred for, among other things, the decontamination of property and providing care for patients affected by a communicable disease. The trial court erred by failing to consider Spectrum's claim for coverage under section (2). Spectrum alleged sufficient facts to state a claim for coverage under section 2. Therefore, the judgment entered by the trail court was reversed on this portion of Spectrum's claim.