Dallas partners Rick Harmon and Jennifer Kearns obtained a judgment on the pleadings in the United States District Court for the Western District of Texas on a Covid-19 business interruption case, which resulted in a dismissal of the case with prejudice.
Harmon and Kearns filed a motion for judgement on the pleadings arguing that Plaintiff's (Lonesome Dove Austin) claimed losses due to the COVID-19 pandemic are not covered under the Policy because they do not constitute a “direct physical loss of or damage to” Plaintiff’s Property.
Lonesome Dove Austin restaurant claims their “bustling” restaurant was rendered “nonfunctional for its intended purposes” and that it suffered serious financial losses as a result of the civil authority orders restricting restaurants from March 2020 until December 2020 as a result of COVID-19. They submitted a claim, which was denied based on the terms of their policy.
The claim related to the “Building and Personal Property” policy, which provides coverage for “direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.” The parties dispute whether business interruption losses due to the COVID-19 pandemic and related civil authority orders constitutes a direct physical loss of or damage to property. The Court determined that the Plaintiff’s interpretation of the Policy was unreasonable because it focused on the word “loss” while ignoring the Policy’s unambiguous requirement that there must be a “direct physical loss of or damage to property” in order to trigger coverage. Thus, “it makes logical sense that the property that is insured, i.e., the building and/or personal property in or on the building, must first be lost or damaged before Business Income coverage kicks in.”
In addition, while the Policy does not define direct physical loss, the Policy contains a “loss of use” exclusion providing, in relevant part: “We will not pay for loss or damage caused by or resulting from any of the following: … b. Delay, loss of use or loss of market.” This separate provision for loss of use suggested that the “direct physical loss of or damage to property” clause “was not intended to encompass a loss where the property was rendered unusable without an intervening physical force.” Fifth Circuit case law also supports Defendant’s argument that the Policy does not cover financial losses for mere loss of use or partial loss of use of property.
The court determined that the civil authority orders did not physically alter Plaintiff’s Property; rather, they merely ordered Plaintiff to temporarily suspend dine-in services. Courts have found that closing dining rooms, moving furniture, installing partitions and similar safety installations do not constitute physical loss of or damage to property. Plaintiff’s restaurant continued to offer take-out services and, later, dine-in services in a limited capacity. They remained in possession of its restaurant, property and was never denied access to or use of its property.
The Plaintiff was also not able to prove that COVID-19 was present on the premises of the insured property. The Court found that the allegation that the virus was present fails to raise a “right of relief above the speculative level.” To accept this assertion would be to accept the proposition that any business located in a community with COVID-19 infections was likely contaminated with the virus. Regardless, the Court said even assuming COVID-19 was present, it would not constitute the direct physical loss or damage to trigger coverage because the virus can be eliminated. Plaintiff also failed to demonstrate that it is entitled to business interruption losses under the Civil Authority provision. Even had all the above provisions been applied in this case, the Policy contains a virus exclusion clause that denies coverage if the alleged damage is caused by a virus. Courts have rejected the argument that the virus exclusion doesn’t apply because it uses the word “virus” and not “pandemic.”
The unambiguous terms of the Policy do not provide coverage for solely economic losses unaccompanied by physical property loss or damage to their property. Although the Fifth Circuit has yet to address whether the COVID-19 pandemic and related civil authority orders can qualify as a physical loss of or damage to property under property insurance policies, district courts in this Circuit have determined that they do not.