DALLAS FEDERAL COURT JOINS CHORUS OF COURTS NATIONWIDE IN DISMISSING COVID-19-RELATED BUSINESS LOSS CLAIMS DUE TO LACK OF “DIRECT PHYSICAL LOSS”

The Federal District Court for the Northern District of Texas in Dallas recently granted an insurer’s motion to dismiss an insured’s COVID-19-realted business loss claim, adding its voice to a growing list of courts dismissing such claims based on policy language requiring a “risk of direct physical loss.”  In Graileys, Inc. d/b/a Graileys Fine Wines v. Sentinel Ins. Co., Ltd., No. 3:20-cv-01181, 2021 WL 3524032 (N.D. Tex. Aug. 9, 2021), the insured, a wine club, made a claim under its policy with the insurer for business losses resulting from coronavirus after Dallas County issued an Order closing all private clubs in the face of the coronavirus pandemic.

After the insurer denied the claim, the insured filed suit and asserted claims for breach of contract, violations of the Texas Insurance Code, and breach of the duty of good faith and fair dealing, amongst others. The insurer responded to the lawsuit by filing a motion to dismiss, claiming the claim was not covered under the Policy and was subject to an endorsement that also precluded coverage.

Striking down the insured’s assertion that the policy term “physical loss” was ambiguous, the Court clarified that the term excluded alleged losses that were intangible or incorporeal and did not involve a physical alteration of the property. As such, and because the insured could not show any nexus between any property damage and the presence of coronavirus or the Dallas County Order, the policy did not cover the alleged loss.

Interestingly, the insurer in this case did not rely on the absence of physical loss in its motion to dismiss; instead, the insurer argued that the Virus Coverage Provision specifically excluded “loss or damage caused directly or indirectly by the presence, growth, proliferation, or any activity of virus.” The insured responded by arguing that such exclusion did not apply because its losses were due to a civil order responding to a “civil commotion,” a Specified Cause of Loss. The Court quickly disposed to insured’s argument, interpreting a “civil commotion” to mean something like a riot and not the spread of a virus. In turn, the civil order causing an insured to close its business must have been in response to a riot or “analogous civil commotion.” Similarly, the Court disagreed with the insured’s contention that the Virus Coverage Provision covered business interruption in the presence of a virus—concluding that the opposite was true, that the provision covered business loss that resulted in the presence of a virus. The Court based its ruling on the lack of coverage and granted the insurer’s motion to dismiss.