Policy doesn’t apply to government-ordered COVID closures

Where the district court held that several Virginia executive orders requiring full or partial closure of businesses during the COVID-19 pandemic caused “accidental direct physical loss” to the covered property, it erred. “Direct physical loss” requires “present or impending material destruction or material harm,” which the executive orders did not cause.

Background

State Farm Mutual Automobile Insurance Company appeals the district court’s certification of a class of businesses that was denied insurance coverage when several Virginia executive orders required full or partial closure of those businesses during the COVID-19 pandemic. State Farm also asks, based on this court’s recent decision in Uncork & Create LLC v. Cincinnati Insurance Co., 27 F.4th 926 (4th Cir. 2022), which similarly addressed a question of commercial property insurance coverage during the COVID-19 pandemic, that it exercise pendent appellate jurisdiction to consider alleged legal error in the district court’s denial of State Farm’s motion to dismiss.

Jurisdiction

Because this court granted State Farm’s petition under Rule 23(f), it has appellate jurisdiction to consider State Farm’s arguments challenging the class certification order. But it lacks jurisdiction under Rule 23(f) to consider the district court’s denial of State Farm’s motion to dismiss.

Under the doctrine of pendent appellate jurisdiction, however, the court may review an issue not otherwise subject to immediate appeal when the issue is “so interconnected” with an issue properly before it as to “warrant concurrent review.” Here, the threshold merits question addressed in the district court’s order denying State Farm’s motion to dismiss was integral to the district court’s later conclusion that the class members could prove their claims through evidence common to the class. And, critically, both the district court’s denial of State Farm’s motion to dismiss and the resulting assumptions underlying the class certification order conflict with this court’s later-issued precedent squarely addressing the interpretation of nearly identical language in another commercial property insurance policy.

Because this court’s resolution of the legal question of coverage under the policy is essential to its analysis of the class certification order, and because intervening precedent bears directly on that question, the court exercises pendent appellate jurisdiction to review the district court’s denial of State Farm’s motion to dismiss.

Merits

State Farm argues, relying on Uncork, that the district court committed legal error when it determined that the relevant executive orders caused “accidental direct physical loss” to the covered property. The court agrees; “direct physical loss” under the policy requires “present or impending material destruction or material harm.” Because the executive orders did not cause such harm and did not physically alter the covered property to require repair, rebuilding, replacement or relocation to another property, the policy’s coverage for loss of income and extra expenses does not apply to Elegant Massage’s claim based solely on the closure mandated by those orders.

The district court thus erred when it denied State Farm’s motion to dismiss the complaint. As a result of this conclusion, there is no basis for class certification. Thus, the district court’s denial of State Farm’s motion to dismiss is reversed, the class certification order is reversed and the matter is remanded to the district court with instructions that it dismiss the entire case.

Reversed and remanded with instructions.

Concurring/dissenting opinion

Wynn, J., concurring in the judgment in part and dissenting in part:

In exceedingly rare circumstances, we may exercise pendent appellate jurisdiction to review an issue even though Congress has not otherwise permitted us to do so. However, I do not agree with the majority’s conclusion that we must reach the denial of the motion to dismiss to resolve this appeal. We can — and should — reach the same outcome on the class certification issue with no mention of the motion to dismiss. By addressing the motion to dismiss even though it is not essential to a ruling on class certification, the majority opinion does not properly account for the limitations Congress has set on our review of interlocutory decisions. I therefore concur in the judgment in part and, very respectfully, dissent in part.

Elegant Massage LLC v. State Farm Mutual Automobile Insurance Company, Case No. 22-1853, March 8, 2024. 4th Cir. (Keenan), from EDVA at Norfolk (Jackson). Christina Guerola Sarchio for Appellants. Melissa L. Yeates for Appellee. VLW 024-2-076. 35 pp.