Federal Court in Texas Grants Insurer’s Motion to Dismiss COVID-19 Business Income Loss Claim

A federal court in Texas granted an insurer’s motion to dismiss of insured’s suit for business interruption losses from the pandemic for lack of “direct physical loss or damage” to the insured’s property even in the absence of a virus exclusion on the policy. DZ Jewelers, LLC d/b/a Zadok Jewelry v. Certain Underwriters at Lloyd’s, London, Civil Action No. H-20-3606, (S.D. Tex. Mar. 12, 2021).

The insured’s business suffered a downturn when governmental orders were issued for non-essential businesses to close in response to the coronavirus. The policyholder made a claim for business income coverage on its policy. The policyholder did not plead that the virus was found on any surface of its stores, but rather that it was potentially present because there were confirmed cases in the area and customers had been in the stores before they closed and that three employees allegedly tested positive for the virus. The court held that these factual allegations did not “plausibly” allege that the virus had contaminated the store much less caused “property damage.” The court was equally unpersuaded that loss of use of the premises was “direct physical loss” because the Fifth Circuit had defined that term to require allegations of “distinct, demonstrable physical alteration of the property,” and that the language “strongly implies that there was an initial satisfactory state that was changed by some external event into an unsatisfactory state.” (citations omitted.) Further, the policyholder continued to use the property albeit at a reduced capacity. The court also stated that even if the insured had plead that the virus was actually present, that may still not have been enough to survive a motion to dismiss because the virus can be cleaned from surfaces with disinfectant and would not have caused “property damage.”