A Virginia federal district court has ruled that a spa’s COVID-19 loss of business income lawsuit can go ahead despite a virus exclusion from its insurance policy.
The United States District Court for the Eastern District of Virginia, Division of Norfolk, dismissed a motion to dismiss filed by the spa’s insurer, calling the case “ripe for a court decision.”
Since 2016, Elegant Massage LLC has owned and operated Light Stream Spa, which provides therapeutic massage treatments in Virginia Beach, Virginia. On July 22, 2019, Elegant obtained an all-risk commercial property insurance policy from State Farm, covering any resulting loss or damage. all risks other than those expressly excluded. The policy went into effect until July 22, 2020 and Elegant paid an annual premium of $ 475.
The policy provided coverage for lost income and additional expenses resulting from the suspension of business operations, which included actions by a civil authority barring access to Elegant property. However, the policy contained an exclusion for fungi, viruses or bacteria.
In March, President Donald Trump issued a national emergency regarding the COVID-19 outbreak, and the Centers for Disease Control (CDC) subsequently issued guidelines recommending social distancing to stop the spread.
Following these federal guidelines, Virginia Governor Ralph Northam and Virginia State Health Commissioner on March 20 declared a public health emergency and limited the number of patrons allowed in restaurants, fitness centers. and theaters at 10 or less.
Days later, Northam ordered the closure of leisure and entertainment businesses, including spas and massage parlors, and ordered all Virginia residents to stay in their homes unless necessary.
Although some of Virginia’s restrictions were relaxed a few months later in May, as spas and massage centers were allowed to reopen, some guidelines have remained in place. These included 50% occupancy, mask requirements for workers and customers, hourly cleaning and disinfection during operation, and a six-foot distance between workstations.
Due to COVID-19 restrictions, Elegant voluntarily closed Light Stream Spa on March 16. It remained closed until May 15, and during that time Elegant suffered a total loss of income.
Although Elegant submitted a claim under its policy on March 16, the claim was dismissed by State Farm. Among the reasons he dismissed the claim was the fact that the business had been closed voluntarily, that there had been no civil order to close the business, that there was no had no known damage to property due to COVID-19 and that the policy excluded coverage for losses caused by a virus.
In May, Elegant filed a class action lawsuit for declaratory judgment and breach of contract against State Farm Mutual Automobile Insurance Company and State Farm Fire and Casualty Company over the denial of the claim. State Farm filed a motion to dismiss in August.
The court finds that the virus exclusion does not apply
In its motion to dismiss, State Farm argued that the virus exclusion from the policy applies in this circumstance because COVID-19 was at the heart of Virginia’s executive orders requiring Elegant to shut down its spa. He alleged that this virus exclusion “applies to any loss where a virus is anywhere in the chain of causation.”
This means, according to State Farm, that the virus exclusion included an extensive anti-competitive causation clause that excluded from coverage any situation in which a virus was one of the causes, even though there were others as well. causes.
On the other hand, Elegant alleged that its loss of business was the result of Virginia orders forcing specific types of businesses like the Light Stream Spa to shut down for two months to prevent the spread of COVID-19. He claimed the court should find that the virus exclusion is not applicable because COVID-19 was not present in his property and was not the basis for his loss of earnings.
The court concluded that the exclusion of viruses from the police in this case deals in particular with the growth, proliferation, spread or presence of viruses, bacteria or other microorganisms such as fungi. or wet or dry rot capable of inducing physical distress, disease. Police said they would not provide coverage for remediation or removal of viruses, bacteria or fungi on the property.
“This supports the interpretation that the virus exclusion applies when a virus has spread throughout the property,” U.S. District Judge Raymond Jackson wrote in the notice.
Elegant, however, did not claim that there was a presence of the virus on her property or that the virus was the direct cause of the physical loss of the property, the court found. Rather, he alleged that the executive orders in Virginia were the result of lost business income, and although some businesses may continue to operate despite COVID-19 guidelines, spas were considered a hotspot for COVID-19 in under state decrees and were to be closed as a preventive health measure.
The court ruled that although Elegant voluntarily closed Light Stream Spa on March 16 after announcing national and state orders and guidelines to stop the spread of COVID-19, seven days later, on March 23, Elegant was required by Northam Order in Council to close until mid-May.
The court also concluded that the anti-competitive causation clause cited by State Farm was not a recognized or established doctrine in its jurisdiction and ultimately sided with Elegant in concluding that the exclusion of the virus does not apply. did not apply in this case.
“To be enforceable, the insurer must draft the wording of an exclusion in a conspicuous, simple and clear manner stating any limitation of coverage to the insured,” Jackson wrote in the notice.
Definition of “direct physical loss”
Beyond excluding the virus, State Farm also argued that the policy only covers loss of business income resulting from direct physical loss, which requires structural damage to the covered property. He said various district courts in other jurisdictions have interpreted direct physical loss to mean hazards that cause tangible structural damage to property, such as hurricane winds, rainwater and fire.
However, Elegant argued that under Virginia law “direct physical loss” was not always interpreted as requiring structural or tangible damage to property, adding that federal courts have interpreted this to mean the inability to use the premises due to uncontrollable forces such as Executive Orders related to COVID-19 in Virginia.
Where there are a variety of accepted interpretations of the policy language, the most favorable to the insured will be adopted, Jackson wrote in the opinion piece. Citing the range of interpretations accepted in this case, the court erred on Elegant’s side to give the most coverage.
With this in mind, the court determined that “direct physical loss” could mean that the property is uninhabitable, inaccessible or unsafe to use due to intangible or non-structural sources and that Elegant submitted a good faith claim to State Farm for direct physical loss. loss covered by the policy.
“The facts of this case are similar to those where the courts found that asbestos, ammonia, lab odor of methamphetamine or toxic gases from drywall, which caused uninhabitable, inaccessible or dangerous properties to use, was a direct physical loss, ”Jackson wrote in the review.
Motion to dismiss partially dismissed
Elegant’s policy via State Farm also provided coverage for additional expenses and loss of income caused by an action by the civil authority that prohibits access to the premises, as long as access is prohibited due to a damaged property within a mile and a half.
The policy specified that the action of the civil authority was to be taken in response to dangerous physical conditions in a neighboring property or to give a civil authority unhindered access to the damaged property.
Elegant argued that civil authority coverage applies in this case because COVID-19 damaged property other than his own, the closure orders were issued by a civil authority and action was taken in response to an unsafe physical condition.
State Farm argued, however, that civil authority coverage only applies where access to an insured’s property is prevented by a civil authority order issued as a result of physical damage to d ‘other premises near the property of the insured.
In that case, the court concluded that civil authority coverage did not apply because Elegant had failed to demonstrate a connection between physically damaged or dangerous surrounding properties.
The orders in Virginia were issued instead because COVID-19 poses an ongoing threat to communities in Virginia, and not due to previous physical damage to Elegant property or surrounding properties, the court said.
Accordingly, State Farm’s motion to dismiss was allowed in part on this basis.
Overall, however, the court concluded that Elegant’s arguments in this case meant that a remedy might be plausible, and State Farm did not demonstrate that any of the policy exclusions clearly applied. . With that in mind, the court ruled that Elegant’s claims could be pursued, and State Farm’s motion to dismiss was dismissed in part.
The case is Elegant Massage LLC d / b / a Light Stream Spa v State Farm Mutual Automobile Insurance Company and State Farm Fire and Casualty Company.
COVID-19 lawsuits Loss of profit