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Interruption coverage for COVID-19 OK’d, nixed

A Norfolk federal judge has allowed litigation of some claims that a Virginia Beach spa qualifies for business interruption coverage under its State Farm policy since it was closed due to the COVID-19 pandemic.

The decision this month by U.S. District Judge Raymond A. Jackson could give hope to businesses hobbled or closed for good because of government infection-control measures. But another Virginia federal judge, Judge Leonie M. Brinkema, last month turned thumbs down on coverage for an Arlington restaurant crippled by virus restrictions.

Jackson’s decision turned on the absence of policy language expressly defining “direct physical loss” as a requirement to trigger coverage. The ambiguity should be construed against the insurer on its motion to dismiss, the judge ruled.

Jackson’s published Dec. 9 opinion is Elegant Massage LLC v. State Farm Mutual Automobile Insurance Co. (VLW 020-3-610).

Carrier denied claim

Plaintiff Elegant Massage has owned and operated “Light Stream Spa” in Virginia Beach since 2016, according to Jackson’s opinion. The business took out “all risk” commercial property insurance with State Farm in 2019.

A national emergency declaration for COVID-19 came on March 13, the opinion said. Even before state restrictions were imposed, the spa voluntarily closed on March 16 and remained closed through May 15.

On March 16, the spa owner submitted a claim for loss of business income and extra expenses. State Farm denied the claim on March 26. The spa owner filed a declaratory judgment action seeking coverage on May 27.

The spa’s putative class action sought coverage for similarly situated businesses, but the plaintiff had not yet sought class certification when Jackson ruled on the motion to dismiss.

Ambiguity found

Jackson summarized key policy terms. The policy provides for the loss of business income sustained as a result of the “suspension of operations.” The suspension must be by “accidental direct physical loss to property at the described premises.” The policy pays only for income loss during the “period of restoration” following the “accidental direct physical loss.”

State Farm argued that “direct physical loss” unambiguously requires “structural damage.” The spa owner countered with federal decisions interpreting “direct physical loss” as the inability to use the premises because of uncontrollable forces.

Jackson found the term has been subject to a “spectrum of interpretations” in Virginia cases.

“In the instant matter, there is no distinct, demonstrable, or physical alteration to the structure of the property. However, this second plausible interpretation of ‘direct physical loss’ does show that if Defendants wanted to limit liability of ‘direct physical loss’ to strictly require structural damage to property, then Defendants, as the drafters of the policy, were required to do so explicitly,” Jackson wrote.

“Defendants were fully aware of cases that interpreted intangible damage as a ‘direct physical loss’ promulgated before the issuance of Plaintiff’s policy. Since Defendants did not explicitly include ‘structural damage’ in the language, the Policy may be construed in favor of more coverage based on plausible interpretations,” Jackson continued.

Given the spectrum of accepted interpretations, Jackson interpreted the “direct physical loss” phrase most favorably to the insured to grant more coverage:

“Here, while the Light Stream Spa was not structurally damaged, it is plausible that Plaintiff experienced 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.”

But Jackson said civil authority coverage would not apply for lack of a causal link between nearby damage and a government ban on access.

A virus exclusion in the policy did not apply, Jackson ruled, because there was no direct connection between the exclusion and the claimed loss amounting to an “immediate cause.”

The spa owner is represented by William H. Monroe Jr. of Norfolk. State Farm is represented by Theodore I. Brenner of Richmond. Neither was available for comment, but a State Farm spokesperson said the company “will be considering all of our options as we continue with this litigation.”

“State Farm is confident we have honored the terms of our customer’s contract. We do not collect premiums to protect against losses resulting from viruses. Still, we know this is a difficult time and empathize with all those who have suffered amidst COVID-19,” the spokesperson said.

Restaurant denied coverage

A dec action in the case of Guajillo Mexican Cuisine in the Rosslyn area of Arlington County foundered on a summary judgment motion. The owner claimed pandemic orders forced the restaurant to limit its sales to take-out orders only. The owner’s state court complaint was removed to federal court, where U.S. District Judge Leonie M. Brinkema granted summary judgment in a Nov. 10 order.

“I must tell you, I think you’ve got an uphill battle here,” she told the owner’s counsel in a telephone hearing, according to a transcript. “The vast majority of the case law, in my view, is definitely and unfortunately tipped against you.”

Brinkema focused on policy language excluding coverage for loss caused by a virus.

“[I]t’s the governor’s orders that are the immediate cause of your injury, but those orders only issued because of the virus, and so when you have the word ‘indirectly,’ how do you get around the fact that the virus is not the indirect cause of your loss or damage?” Brinkema asked Christopher LaFon of Washington, who represented restaurant owner Barroso Inc.

Brinkema said it was clear that the virus exception prevailed to exclude coverage.

LaFon said he and co-counsel respected the judge and her decision.

“We, however, argued and believe that the limited coverage endorsement that she chiefly relies upon, which contains exclusionary language regarding wet rot as well as viruses, does not act to exclude our client’s claim, as the closure of its seated service operations were the result of the Governor’s orders and not the presence of a virus at its business premises,” LaFon said in an email.

“Our client, like many others, paid thousands in premiums for coverage for the loss of business income without a pandemic exclusion and now is left without any coverage to assist in trying to stay alive during these extremely difficult times,” LaFon added.

The Guajillo case is Barroso Inc. v. Twin City Fire Insurance Co., No. 1:20-cv-632 in the Eastern District of Virginia.

The insurance company was represented by lawyers from Steptoe & Johnson in Washington who were not available for comment.