January 12, 2021
A recent decision out of the Eastern District of Virginia allowed a policyholder to continue pursuing its claims against its insurer for losses related to the COVID-19 pandemic and ensuing government shutdown orders.
Elegant Massage, LLC, the plaintiff and policyholder, owned a massage parlor in Virginia Beach. Elegant Massage, LLC v. State Farm Mutual Automobile Insurance Co., No. 2:20-CV-265, 2020 WL 7249624, at *1 (E.D. Va. Dec. 9, 2020). Because of the state and federal orders requiring social distancing and imposing restrictions on non-essential businesses, Elegant Massage voluntarily closed its Virginia Beach location on March 16, 2020, and the spa remained closed through May 15, 2020. Id. at 2. When it finally reopened, the spa could operate at only 50% and had to undertake additional sterilization and social distancing measures. Id.
Elegant Massage submitted a claim for loss of business income under the all-risks property insurance policy that it had purchased from State Farm, its insurer and the defendant in this case. Id. State Farm rejected that claim. Id.
Elegant Massage sued, and State Farm moved to dismiss the complaint. Id. State Farm contended, among other things, that Elegant Massage had not suffered “direct physical loss” as required under the policy; it argued that “direct physical loss” unambiguously requires that there be “structural damage” to the covered property; and it asserted that there was no structural damage. Id. at 7. It also contended (among other things) that an exclusion that barred coverage for loss of income caused by viruses prohibited Elegant Massage from recovering under the policy. Id. at 11.
The court rejected State Farm’s motion to dismiss. As an initial matter, it found that the term “direct physical loss” is ambiguous because it is susceptible to a “spectrum of interpretations in Virginia on a case-by-case basis, ranging from direct tangible destruction of the covered property to impacts from intangible noxious gasses or toxic air particles that make the property uninhabitable or dangerous to use.” Id. at 10. As a result, it adopted the interpretation most favorable to the policyholder: “that ‘direct physical loss’ could mean that the property is uninhabitable, inaccessible, or dangerous to use because of intangible, or non-structural, sources.” Id. Under that broad definition, even though the spa was not structurally damaged, Elegant Massage could still have suffered a “direct physical loss when the property was deemed uninhabitable, inaccessible, and dangerous to use by the Executive Orders because of its high risk for spreading COVID-19, an invisible but highly lethal virus.” Id.
The court also rejected State Farm’s contention that exclusions in the policy barred coverage. Id. at 11. Specifically, State Farm argued that the policy’s fungi, virus or bacteria exclusion has an expansive scope that excludes from coverage any loss “if [a] virus is ‘in any sequence’ in the chain of causation, even if there are also other causes.” Id. at 11. The court rejected such a broad reading, stating that “the anti-concurrent theory has not been established as law in this jurisdiction” and ruling that the insurer had a duty to plainly and conspicuously draft exclusions. Id. at 12. It held that the virus had to be an “immediate cause” of the loss. Id. Because Elegant Massage alleged that the government orders, and not a virus, caused the loss, the exclusion did not apply. Id.1 For a further look at the court’s analysis, see our post on the Hunton Insurance Recovery Blog.
The takeaway for policyholders is this: Virginia policyholders should not be deterred by the chorus of voices asserting that COVID-19 related claims for business interruption losses are not covered by insurance. The decision in Elegant Massage—like others across the country—indicates that courts have recognized that the broad all-risk policies issued by many property insurers plausibly cover business interruption losses resulting from COVID-19 and the related government orders. These policies can include various procedural hurdles, like deadlines for filing suit, so policyholders may need to act quickly to preserve their claims.
1 State Farm has moved for reconsideration. That motion is pending.