Policy’s virus exclusion bars COVID coverage

An insurer’s virus exclusion barred a beauty salon’s claims for business losses related to the COVID-19 pandemic.

The salon sought coverage under its business loss policy for losses suffered when it closed because of COVID-19 orders.

But Judge Robert E. Payne pointed out that the Eastern District of Virginia addressed a similar matter earlier this year involving a virus exclusion provision in L&L Logistics & Warehousing Inc. v. Evanston Ins. Co.

The plain language in that policy was unambiguous, and because virtually the same exclusionary language is at play in the instant case the salon’s claim for coverage of its business income and expense losses is prohibited, the judge concluded.

The latest decision is Adorn Barber & Beauty LLC v. Twin City Fire Insurance Company (VLW 021-3-492).

State of emergency

Gov. Ralph Northam declared a state of emergency due to COVID-19 on March 12, 2020, and issued an order requiring closure of all nonessential businesses.

Adorn Barber & Beauty closed on March 24, 2020. In addition to racking up $150,000 in losses, the salon had to dismiss part-time employees and it expected to reduce salaries of its full-time employees.

Adorn claims its damages were caused by the contamination of its facilities by the virus as well as the commonwealth’s orders related to COVID-19. The salon argued its insurance policy through Twin City Fire Insurance Company included coverage for business income losses and extra expenses attributable to COVID and the government’s COVID-related orders and sought a declaratory judgment. 

But Twin City said its policy language was unambiguous and there was no coverage for virus-related losses. It filed a 12(b)(6) motion to dismiss in the Eastern District of Virginia Richmond Division.

Exclusionary language

Courts must adhere to the terms of a contract of insurance as written if they are plain and clear and not in violation of law or inconsistent with public policy.

Insurers must make their contracts clear since the policies are written without the insured’s input. Any ambiguities must be construed against the insurer.

When there is exclusionary language in the policy, the insurer must show that the exclusion applies to the facts of the case when it decides to bar coverage.

Payne said federal district courts have ruled that insurance policies with a virus exclusion like Twin City’s bar claims for business losses related to the pandemic.

Federal courts around the country have upheld virus exclusion provisions found in insurance policies.

Closer to home, courts within the 4th Circuit Court of Appeals have “largely agreed” that this exclusionary language applies in the case of COVID-19 business closures.

“On the basis of the foregoing extensive and well-reasoned authority, the court finds that Adorn’s claims for coverage for its business income and expense losses is excluded by the plain language of the virus exclusion provision of the policy,” Payne said.

‘Reasonable expectations’

Adorn put forth several arguments to the contrary, but the court rejected them all.

For example, the salon claimed that denial of coverage would be contrary to the parties’ reasonable expectations. Payne, however, said that argument only addressed Adorn’s expectations and didn’t demonstrate the parties’ mutually held expectations.

He added that “the argument attempts to reconfigure Virginia contract law because Virginia hews to the rule that, if a policy is ambiguous, then the policy should be interpreted against the insurer, Virginia law just as clearly holds that ‘contractual provisions are not ambiguous merely because the parties disagree about their meaning.’”

Also, like the plaintiff’s in L&L Logistics, Adorn said it would be unreasonable to think its policy would exclude coverage for damage or loss caused by COVID because the term “virus” rather than “pandemic” was used.

Again, Payne disagreed.

“Nothing in the Virus Exclusion suggests that it becomes inoperative when a virus turns into a pandemic,” he explained. “Thus, the policy language, given its plain meaning, controls here.”

Civil authority

Adorn then turned to its policy’s civil authority coverage, which kicks in when access to an insured property is “specifically prohibited by order of a Civil Authority as the direct result of a Covered Cause of Loss to Property in the immediate area of [the insured property].”

Payne agreed that, in certain cases, this provision does offer coverage for actual loss of business income and expenses. But Adorn’s amended complaint failed because it did not allege that its claimed losses were incurred when access to the salon was “specifically prohibited by order of a Civil Authority as a direct result of a Covered Loss to property in the immediate area.”

A practical interpretation of Adorn’s complaint is that “the virus was an indirect cause of the business and expense losses.”

The policy’s virus exclusion, however, “operates to exclude coverage ‘regardless of any other cause or event that contributes concurrently or in any sequence to the loss.’”

Payne again said the policy’s plain language “necessitates the conclusion that, because COVID-19 precipitated the Civil Authority Orders, it was an indirect cause of Adorn’s losses.” As such, coverage for those losses was precluded by the virus exclusion.

Adorn’s final argument — that Twin City didn’t cite any case law outside of the developing area of COVID business interruption insurance — did nothing to sway the court.

That argument, Payne said, was “not persuasive precisely because the burgeoning body of COVID-19 cases assessing policy coverage decisions in like situations is more persuasive on that issue that non-COVID-19 insurance cases.”

In fact, those rulings “provide a base of authority that is a sound ground upon which to base coverage decisions where, as here, the virus and Civil Authority Orders are the key issues.”