COVID-19 Case Note: Government mandated shutdown did not cause direct physical loss required to trigger business interruption coverage.

September 13th, 2020 By Sheila Tan

For many businesses in Texas that have been shut-down or restricted by state and local government orders due to the ongoing Covid-19 pandemic, one of the most pressing questions raised is: is there business interruption coverage? And for at least some barber shops in Bexar County, the Western District has answered with a definitive no.

In Diesel Barbershop et al. v. State Farm Lloyds, No. 5-20-CV-461-DAE, Plaintiffs run barbershop businesses that were classified as “non-essential businesses” and forced to cease operations to prevent the spread of Covid-19 in the community.

Plaintiffs’ properties were insured under State Farm policies. The policies provided coverage for “accidental direct physical loss to Covered Property,” unless the loss was excluded or there was some property limitation. The policies specifically included a “Fungi, Virus, or Bacteria,” exclusion, preceded by anti-concurrent causation language.

Plaintiffs argued that “direct physical loss” did not require that the property be destroyed or that there be tangible and complete physical loss, but it could be a partial loss. However, the Court agreed with State Farm that Texas law requires there be some “distinct, demonstrable alteration to the property,” distinguishing Plaintiffs’ claim from other cases involving asbestos or odor that can reasonably be interpreted to have caused a “physical injury” to a property. In this case, the Court found that Plaintiffs failed to tie their economic injury to any physical loss to the property.

Moreover, even assuming there was physical loss, the Court held that the Virus Exclusion precluded coverage in this case, which State Farm also pointed out was introduced after the SARS outbreak. While Plaintiffs contended that the Virus exclusion did not apply because it was the executive orders that had forced the businesses to shut down, the Court held such a distinction to be a technicality, and pointed out that the orders only came about because of the rapid spread of Covid-19. In short, the Court agreed that there was no ambiguity regarding the plain meaning of the language of the policies and the Virus exclusion applies. Because Plaintiffs failed to allege a legally cognizable, covered cause of loss, the Court granted State Farm’s motion to dismiss.