(LexisNexis) In Elegant Massage, LLC v. State Farm Mut. Auto. Ins. Co., No. 2:20-cv-265, 2020 WL 7249624 (E.D. Va. December 9, 2020), a Federal District Court denied State Farm's motion to dismiss a Business Interruption claim based on COVID-19 despite a Virus Exclusion.
The plaintiff-policyholder is a spa. It bought an all-risk commercial property insurance policy from State Farm. It made claims under that policy for Business Interruption losses both for the time when it voluntarily closed its doors for business, and through the time that followed Executive Orders which required it to close. State Farm denied the claims based in part on the policy's Virus Exclusion.
The spa sued for coverage and alleged bad-faith damages. State Farm filed its motion to dismiss. The District Court's analysis was simple and basic analysis of coverage under an all-risk insurance policy.
The policyholder making a claim under an all-risk policy first has to establish coverage. Here, that meant establishing that the claimed losses were caused by "accidental direct physical loss" to the property.
The Federal Court found that Virginia Courts have applied a "spectrum of accepted interpretations" of "direct physical loss" in the case law, and the Federal Court applied the interpretation most favorable to coverage in this case since the carrier had the opportunity to limit and define the phrase in the policy, but did not.
"Based on the case law, the Court finds that it is plausible that a fortuitous 'direct physical loss' could mean that the property is uninhabitable, inaccessible, or dangerous to use because of intangible, or non-structural, sources." Elegant, 2020 WL 7249624, at *10.
Coverage having been established -- or more accurately in the context of this case, a plausible claim to coverage having been established -- the next step of the analysis is whether coverage under the all-risks policy is excluded. That brings us, as it brought the Court, to the Virus Exclusion at issue here.
The burden is on the all-risks carrier to show the applicability of an Exclusion. In this case, the all-risks carrier did not meet its burden. This was so even in the face of a more or less standard Virus Exclusion which a vast majority of Courts across the country have interpreted to exclude Business Interruption claims arising from COVID-19.
But not in this case. The Court in this case was not intimidated by reports of a majority view of Virus Exclusions.
The Court's approach is a lesson in coverage interpretation and not just for interpretation of all-risks policies. Here, the Court thought "outside the box," and counsel for policyholders and counsel for insurance companies alike would do well to take notice.
The facts alleged in the policyholder's complaint did not depend on a virus. The policyholder did not allege either that COVID-19 was present at the spa or that COVID-19 was the direct cause of physical loss to Covered Property. See Elegant, 2020 WL 7249624, at *13. In basic and simple terms, the plaintiff's claim to coverage was based on alleged losses due to a threat risk, and not a virus.
Next, the Court turned its attention to the language in the all-risks policy at issue. Interpretation of an insurance policy is a legal issue. The Court held that, as a matter of law, the Virus Exclusion at bar "applies where a virus has spread throughout the property." Elegant, 2020 WL 7249624, at *12. Therefore the Virus Exclusion at bar does not apply to the facts alleged in this particular case. To put it another way, the all-risks carrier failed to meet its burden to show that the Virus Exclusion applies to the spa's Business Interruption claims. Elegant, 2020 WL 7249624, at *13.
Coverage was plausibly alleged, sufficiently enough to withstand the carrier's motion to dismiss based on its Virus Exclusion. In accordance with the majority of jurisdictions in the United States, the Court also denied the carrier's motion to dismiss the policyholder's bad-faith claim, which the carrier had urged should be dismissed because there was no coverage. However, as noted, the Court held to the contrary at this stage of the case. Therefore, coverage having been plausibly alleged, the carrier's argument for dismissal of the bad-faith claim was politely but firmly rejected. Elegant, 2020 WL 7249624, at *14.
To say again what was said here as recently as December 17, 2020, "The pandemic has revealed many things. Who knew that interpreting insurance policies would be among the things revealed?"
More of these revelations will be explored in a forthcoming ABA Tort Trial & Insurance Practice Law Journal (Spring 2021) article by Dennis J. Wall, Remedies in Business Litigation: Update on Business Income Losses in the Coronavirus Pandemic.
Please read the disclaimer. ©2020 Dennis J. Wall. All rights reserved.
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