The federal district court in Virginia denied the insurer's motion to dismiss the insured's claim for losses due to COVID-19. Elegant Massage, LLC v. State Farm Mut. Auto. Ins. Co., 2020 U.S. Dist. LEXIS 231935 (E.D. Va. Dec. 9, 2020).
Elegant Massage owned and operated its business providing therapeutic massages. Due to local and state orders that limited occupancy to 50% and required six feet between workstations for spas, Elegant voluntarily closed its operations on March 16, 2020, and remained closed through May 15, 2020. Elegant suffered a complete loss of income after closing on March 16, 2020.
Elegant had an all risk commercial property policy with State Farm. Elegant's claim for business losses was denied by State Farm because Elegant had voluntarily closed its business when there was no civil order to do so and there was no known damage to the business space resulting from COVID-19.
Elegant sued. On State Farm's motion to dismiss, the issue was whether the closure was a fortuitous loss which caused a "direct physical loss" to Elegant's commercial property. The court found that the phrase "direct physical loss" had 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 made he property uninhabitable or dangerous to use. After surveying various cases, the court found that while the spa was not structurally damaged, it was plausible that Elegant experienced a direct physical loss when the property was deemed uninhabitable, inaccessible and dangerous to use by the orders because of the high risk for spread of COVID-19. Therefore, Elegant submitted a good faith plausible claim to State Farm for a "direct physical loss'"covered by the policy.
The Civil Authority Coverage did not apply, however, because Elegant had not shown a causal link between any physically damaged or dangerous surrounding properties proximate to the insured property and a civil authority prohibiting Elegant from accessing or using their property.
The policy included a Virus Exclusion, to which the court next turned. Loss caused by fungi, virus or bacteria was excluded whether other causes acted concurrently or in any sequence with the excluded event to produce the loss.The court found that the Virus Exclusion did not apply here and that the anti-concurrent theory had not been established as law in Virginia.
To be enforceable, the insurer had to draft the language of an exclusion that plainly and clearly set forth any limitation or coverage to the insured. The exclusion here particularly dealt with the "growth, proliferation, spread or presence" of "virus, bacteria or other microorganism" just as it applied to "fungi or wet or dry rot." The language supported the interpretation that the Virus Exclusion applied where a virus had spread throughout the property. There had to be a direct connection between the exclusion and the claimed loss endnote and not a tenuous connection anywhere in the chain of causation. In other words, although the Virus Exclusion did require that the virus was the cause of the loss, the connection had to be the immediate cause in the chain. Here, Elegant alleged that the local and state orders were the sole cause of the loss. Therefore, State Farm filed to meet its burden to show that the Virus Exclusion applied to Elegant's claim.