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For now, “no”, but that could soon change.
From the heart of the COVID-19 pandemic, many businesses that have taken an economic hit due to shelter-in-place orders have sued their insurers for denying coverage for their claims. While most lawsuits were initially filed in state court due to the nature of the dispute (breach of contract, violation of Texas insurance code, etc.), more often than not cases were moved to a federal court. Thus, federal courts have increasingly been asked to decide whether economic losses resulting from government shutdown orders issued due to COVID-19 should be covered by commercial insurance policies. With little or no guidance from Texas law on this issue, federal courts have relied on their own precedent (in particular, the requirement that there be tangible destruction of covered property for there to be is “physical loss or damage to property”), and have dismissed almost all of these lawsuits.
Several plaintiffs have appealed their cases to the Fifth Circuit Court of Appeals, arguing that, under a proper application of Texas rules of contract interpretation, the term “physical loss and damage” includes situations in which policyholders are limited in the use of much or all of their physical resources. space, even without physical damage or structural modifications. The Fifth Circuit is currently evaluating whether to reinstate several COIVD-19 insurance coverage lawsuits, two of which are restaurant insurance coverage cases in Texas — Terry Black’s Barbecue, LLC v. State Auto. Mut. Ins. Co., 514 F. Supp. 3d 896 (WD Tex. 2021) and Aggie Investments, LLC v. Cont’l Case. Co., 4:21-CV-0013, 2021 WL 1550479 (ED Tex. 2021). The Fifth Circuit has also been asked to certify questions to the Texas Supreme Court, primarily over whether “direct physical loss or property damage” includes only material deprivation of property or structural alterations. 1
The Terry case is the first COVID-19 coverage case to reach the Fifth Circuit; thus, the question is a matter of first impression. If the Fifth Circuit revives coverage claims, policyholders may be able to file a claim against insurance companies that refuse to cover their business interruption losses resulting from government COVID-19 shutdown orders. If denied, COVID-19 and related civil authority orders will not be considered physical loss or property damage under property insurance policies.
For context, plaintiffs Terry, the owners and operators of two restaurants sued their insurance provider and broker for breach of contract, breach of duty of good faith and fair dealing, and insurance code violations. of Texas, as well as for negligence resulting from their losses due to COVID-19 government shutdown orders and the provider’s denial of their insurance coverage claims. The policy at issue contained several provisions under which the plaintiffs sought coverage – (1) Loss of Business Income, which provided coverage for loss of business income during necessary suspensions of their operations caused by “loss or direct physical damage to business or property”; and (2) the Restaurant Extension Rider, which provided coverage for business interruption losses resulting from suspension of operations “due to the order of a civil authority” resulting from exposure actual or suspected premises described to a contagious or infectious disease.
The plaintiffs argued that the coverage was triggered under these two provisions because state and local governments had issued orders limiting gatherings and restricting the activities of non-essential businesses, which, in turn, had reduced and suspended their usual and customary business activities, resulting in disruption and loss of business income. The district court disagreed and, relying on Fifth Circuit precedent (and other circuit court opinions), held that the phrase “physical loss or damage to property” required proof of demonstrable physical damage to the property, and that pure economic damage is not enough. The district court further held that the extension endorsement did not apply because (1) the plaintiffs’ operations had never been suspended; they continued to offer take-out services and, later, limited-capacity restaurant services; and (2) the plaintiffs did not allege that the virus that causes COVID-19 was still present in any of their restaurants.
Similarly, in Aggie, a tearoom operator sued its insurance provider for breach of contract and declaratory judgment after the provider denied its claim for cover due to economic losses suffered by the operator after the show shelter-in-place orders. It also had policy provisions that covered loss of business income due to necessary suspensions of their operations caused by “direct physical loss or damage to business or property” and necessary suspensions due to orders of the civil authorities. But, unlike Terry’s plaintiffs, the Aggie operator was unable to use its facilities at all for some time and was forced to suspend business operations. However, that was not enough. Like the court in Terry, the court in Aggie dismissed the suit, finding that none of the clauses were triggered because the phrase “direct physical loss or damage to property” requires physical damage to the property.
Historically, the Fifth Circuit has required structural damage for a claim to be covered by the “physical loss and damage clause”; hence why federal judges dismissed the original lawsuits. But, the owners and their supporters argue that the interpretation is incorrect when, as in both cases, the term “loss” is undefined and its ordinary meaning is different from “damage”. In other words, “loss” and “damage” have distinct meanings, and “loss” includes recognizable physical loss even if the property is not physically damaged. Plaintiffs urge the Fifth Circuit to expand the meaning of “physical loss and damage” to include property rendered inoperable for its intended purpose due to government-imposed shutdowns and/or restrictions. It is unclear whether the Court will uphold the lower court rejections. Oral arguments took place on November 1, 2021, and a decision should follow shortly. Whatever the rulings (whether affirming or overturning the denial) will likely affect not only the restaurant industry, but also other industries with similar pending claims. There are currently several other COVID-19 insurance lawsuits on appeal. See, for example, Berkseth-Rojas v. Aspen Am. Ins. Co., 513 F. Supp. 3d 724 (ND Tex. 2021) (dental practice); Coleman E. Adler & Sons, LLC v. Axis Surplus Ins. Co., CV 21-648, 2021 WL 2710469, at *1 (ED La. July 1, 2021) (jewelry chain); Q Clothier New Orleans LLC v. Twin City Fire Ins. Co., CV 20-1470, 2021 WL 1600247 (ED La. April 23, 2021) (men’s clothing store); Lafayette Bone & Joint Clinic, Inc. c. Transp. Ins. Co., 6:21-CV-00317, 2021 WL 1740466, at *1 (WD La. May 3, 2021) (Medical and Surgical Clinic).
1 Other certified questions requested include:
- Business income coverage. Does “direct physical loss or damage to property” require permanent or tangible alteration of the insured’s property?
- Virus exclusion. If the virus exclusion prohibits coverage where the insured’s losses were caused by or resulting from government orders, not any virus.
- Restaurant extension approval. Does the “actual or alleged exposure” of the insured’s property to a contagious or infectious disease necessitate the “presence” of COVID-19 on the property?
- Appellant’s brief. Barbecue by Terry Black, LLC vs. State Auto. Mut. Ins. Co, Court of Appeal file: 21-50078, at 54-55.
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