Are lost profits associated with local shelter-at-home orders recoverable under a property insurance policy? At least one court, the US District Court for the Western District of Texas, has ruled they are not.

1.    Non-Essential Businesses

In Diesel Barbershop, LLC v. State Farm Lloyds, 2020 WL 4724305 (W.D. Tex., San Antonio Div.), several hair salons were forced to close due to their being categorized as non-exempt businesses under Bexar County’s Shelter-at-Home Order and as non-essential businesses under one of Governor Abbott’s Executive Orders.  Diesel and the other companies filed business interruption claims with State Farm, their property insurer. State Farm denied the claims on the basis that there was no “accidental direct physical loss” and the claim was excluded by the “virus exclusion”. Diesel filed suit, yielding the coverage dispute in US District Court.

The virus exclusions contained in the State Farm policies read as follows.

We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss; or (d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these:
…
j.  Fungi, Virus or Bacteria
…
(2) Virus, bacteria or other microorganism that induces or is capable of inducing physical distress, illness or disease.

In its motion to dismiss, State Farm made two arguments.  First, Diesel failed to plead any “accidental direct physical loss to covered property”.  Second, by virtue of the virus exclusion, damage resulting from COVID-19 orders are not a covered loss.

2.    No Physical Loss

With regard to physical loss, the Court examined what type of “physical” damage is required.  Must there be a “physical alteration” of the covered property or is something less required?  While acknowledging that courts in other States have held that physical loss even without tangible destruction suffices, the Western District, citing precedent, refused to do so.  Instead, the Court held that the loss needs to have been a “distinct, demonstrable physical alteration of the property.”

3.    Virus Exclusion Applies

The Court next examined the virus exclusion.  Diesel alleged that the loss of business occurred as a result of the Orders that mandated non-essential businesses to close to help staunch community spread of COVID-19. It also argued that the Court should find that the virus exclusion did not apply because COVID-19 was not present at its place of business. The Court disagreed, finding that COVID 19’s presence in Bexar County was the primary root cause for Diesel and the other businesses temporarily closing. As a result, the virus exclusion applied and there was no coverage for the businesses’ alleged losses.

There are many factors that go into determining whether losses are covered under specific policies.  The nature of the alleged loss, the language of the policies, even the State in which the policy was issued may be determinative factors.  In interpreting coverage questions, it is always prudent to contact coverage counsel.  The attorneys in our Austin and Dallas offices, while not coverage attorneys, can assist refer you to counsel to assist with insurance-coverage questions.

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