In a recent COVID-19 Washington State insurance bad faith case, Tulalip Tribes of Washington v. Lexington Ins. Co., Division I of the Washington Court of Appeals affirmed Washington’s stance holding lost physical use of property due to government COVID-19 orders is not sufficient to establish direct physical loss coverage, rejecting the laws of other states that hold otherwise.
Background
In Tulalip Tribes of Washington v. Lexington Ins. Co., the Tulalip Tribes of Washington (Tribes) sought coverage under multiple primary and excess all-risk policies for business losses due to COVID-19 closures. Tulalip Tribes of Washington v. Lexington Ins. Co., 86115-8-I, 2025 WL 955713, at *1 (Wash. Ct. App. March 31, 2025). Like most all-risk policies, the Tribes' policies covered the risk of “direct physical loss or damage occurring during the period of this Policy.” Id.
The applicable policies did not contain a virus exclusion. Id. Nevertheless, the Snohomish County trial court granted the Insurer’s Motion to Dismiss under Washington Civil Rule (CR) 12 (b)(6), ruling that the policies did not cover the Tribes’ claim because COVID-19 orders did not cause “direct physical loss or damage.” While the trial court recognized the impact of the COVID-19 virus, it observed that nothing in the Tribes’ complaint indicated that the virus caused “direct physical damage, that doesn’t dissipate, that is permanent in nature.” The Tribes appealed the dismissal, and a nonprofit policyholder group filed an amicus brief in support.
Government Orders Continue to Not Constitute Direct Physical Damage in Washington
In affirming the dismissal, the Court of Appeals relied heavily on the oft-cited Washington Supreme Court case, Hill & Stout, PLLC v. Mut. of Enumclaw Ins. Co., 200 Wn.2d 208, 230, 515 P.3d 525, 537 (2022), which holds loss of business income due to a government order does not equate to a physical loss of the property. Rather the loss must directly physically alter property to establish coverage. Id. (noting that although the insured “was not able to use the property in the way that it wanted,” the loss was not “physical,” but “more akin to an abstract or intangible loss”).
However, the Hill & Stout case left one potential exception when it declined to address “whether the presence of COVID-19 itself can cause physical alteration to a property such that the virus causes physical loss of or damage to the property.” (Emphasis in original.) The Tribes attempted to fit their claim within this potential exception by arguing that COVID-19’s contagious effects physically altered surfaces within insured buildings or rendered air in the buildings “unsafe.” Id. at 6. In particular, the Tribes creatively argued that physical materials were altered by being transformed into “fomites,” i.e., materials that can carry and spread disease. The Court of Appeals rejected the Tribes’ “fomite” arguments, primarily on the basis that COVID-19 “can be cleaned and removed, and that while COVID-19 is persistent, the virus will dissipate on its own.”
The appellate court also rejected the Tribes’ “loss of use” argument, noting that the Tribes still accessed and used the property during the policy period despite being aware of the potential COVID-19 contamination. Id. The Tribes’ remaining argument that remediation efforts physically altered the insured property also was rejected since those efforts were conducted for the purpose of addressing safety and not to repair, rebuild, or replace property.
Finally, and significantly, the Washington Court of Appeals rejected the Tribes' argument to follow the reasoning of North State Deli, LLC v. Cincinnati Ins. Co., 386 N.C. 733, 908 S.E.2d 802, 813 (2024), in which the North Carolina Supreme Court held that when restaurants “lost physical use of their properties as restaurants due to the pandemic orders, they experienced a direct physical loss.” Id. Based on Hill & Stout, the Washington Court of Appeals concluded that an average purchaser of insurance in the State of Washington would expect that property “must be directly physically lost to trigger coverage.” Tulalip Tribes of Washington v. Lexington Ins. Co., 86115-8-I, 2025 WL 955713, at *6, n. 9 (Wash. Ct. App. March 31, 2025).
The Bottom Line
Tulalip Tribes of Washington provides an excellent summary of the current status of Washington’s law evaluating COVID-19 coverage disputes, and closes an exception potentially left open by prior Washington Supreme Court precedent. The case also confirms that North Carolina’s national outlier opinion in North State Deli, LLC, is not applicable in Washington.
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