“PHYSICAL LOSS” MEANS “TANGIBLE LOSS” ACCORDING TO THE FIFTH CIRCUIT

Last week, the United States Court of Appels for the Fifth Circuit clarified that pandemic closures are not “physical losses” to businesses.  In Coleman E. Adler & Sons, L.L.C. v. Axis Surplus Insurance Company, 2022 WL 4354638 (5th Cir. September 20, 2022), the owner of a New Orleans jewelry store had to shut down his store due to being a non-essential business during the height of COVID-19.  Adler sought business interruption reimbursement from his insurance policy as a “direct physical loss of or damage to” his property.  His property insurer, Axis, denied his claim, and Adler filed suit against Axis and his insurance agents alleging the insurance agents were liable for not recommending pandemic coverage.  The insurance defendants removed the case to federal court and obtained dismissals for a failure to state a claim, which Adler appealed.

The Fifth Circuit first addressed the issue of whether a direct physical loss of or damage to property meant only tangible deprivations of property.  The Fifth Circuit held that even though one Louisiana state appellate court did hold that similar policy language covered a restaurant’s losses from the pandemic (Cajun Conti, LLC et. al. v. Certain Underwriters at Lloyd’s, London et. al., 022 WL 2144863 *5 (La. App. 4 Cir. June 15, 2022)), the Rule of Orderliness required the Fifth Circuit to be consistent with its previous holding, Q Clothier New Orleans, L.L.C. v. Twin City Fire Ins. Co., 29 F.4th 252, 257 (5th Cir. 2022).

The Court additionally addressed Adler’s claims that the insurance agents were liable for not recommending pandemic coverage.  The Court reaffirmed that insurance agents have a duty of reasonable diligence to provide coverage to their clients, but that duty does not include the obligation to investigate or advise whether the client has obtained the correct amount or type of insurance coverage—even if the insurance agent has a “close relationship” with the client. 

Editor’s Note: Although it of course remains a good business practice for an insurance agent to recommend the full range of insurance options to their clients, this case serves as a good reminder of those limitations on an insurance agent’s duties.