Recent COVID-19 Decisions Favor Insurers in Virginia and the 4th Circuit
Recent decisions from the 4th Circuit and Virginia state courts tip the scales in favor of insurers in Virginia, where the status of coverage for business interruption claims had been uncertain following an outlier decision from a Virginia federal court in 2020.
In December 2020, a federal court in Virginia held that a policyholder’s business interruption claim plausibly stated a claim for “direct physical loss.” In Elegant Massage, LLC v. State Farm Mut. Auto Ins. Co., the Eastern District of Virginia found the phrase “direct physical loss” to be ambiguous, noting that this phrase “has been subject 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.” The Elegant Massage court also held that the policy’s virus exclusion did not apply, refusing to apply the anti-concurrent causation language in the exclusion.
Elegant Massage is one of only a handful of cases nationwide ruling in favor of an insured on this issue. It has been frequently cited by policyholders in suits across the country. Numerous other Virginia courts have ruled the other way, rendering Elegant Massage an anomaly even in Virginia. Still, the existence of the Elegant Massage decision has caused reasonable concern among insurers facing COVID-19 business interruption claims from Virginia insureds.
This uncertainty has been mitigated now that the 4th Circuit has joined the growing list of federal appeals courts that have rejected policyholders’ COVID-related business income claims, a Virginia state court rejected a COVID-related business income claim, and the Virginia Supreme Court denied an appeal by opining there was no reversible error in the judgment.
In Uncork & Create v. Cincinnati Insurance Co., the 4th Circuit focused on policy language requiring a “physical loss” or “physical damage.” It found this language “unambiguously covers only losses caused by, or relating to, material destruction or material harm to the covered property.” Subsequent decisions from the 4th Circuit have reached the same conclusion under North Carolina and Maryland law. Although these cases were decided under the substantive law of states other than Virginia (and thus do not expressly overrule Elegant Massage), they call into question the validity of Elegant Massage moving forward.
In April, the Virginia Supreme Court also refused to review a lower court’s dismissal of a policyholder’s COVID-related business interruption claim. It advised in a notice that “[u]pon review of the record in this case and consideration of the argument submitted in support of and in opposition to the granting of an appeal, the court is of the opinion there is no reversible error in the judgment complained of.” Naturally, many have interpreted this as an endorsement of the lower court’s decision and a win for insurers.
These developments, when viewed as a whole, should bolster carriers’ confidence in taking the position that COVID-19 claims from Virginia policyholders do not trigger coverage under standard policy language.
Other state courts within the 4th Circuit have also recently addressed, or are in the process of addressing, the issue of coverage for COVID-19 business interruption claims. The North Carolina Court of Appeals just overturned the controversial North State Deli decision from a trial court in Durham County, which held that a business’s loss of full use of its property constituted “direct physical loss.” The Court of Appeals disagreed, holding that, “[a]ccording to the plain language of the Policies, only direct, accidental, physical loss or damage to the property is covered.” The South Carolina Supreme Court, meanwhile, accepted a number of certified questions from the District of South Carolina in the Sullivan Management, LLC v. Fireman’s Fund Insurance Co. case, including (1) whether the presence of COVID-19 constitutes “direct physical loss or damage,” and (2) whether the phrase “direct physical loss or damage to property” is ambiguous. The questions before the Supreme Court have been fully briefed, and the Justices heard oral arguments in June.
Please contact Anna Cathcart or any member of Phelps’ Insurance team if you have questions or need advice or guidance.
