A federal district court in Virginia has ruled that a spa’s COVID-19-related business income loss lawsuit can move forward despite a virus exclusion in its insurance policy.
The United States District Court for the Eastern District of Virginia, Norfolk Division, denied a motion to dismiss by the spa’s insurer, calling the matter “ripe for judicial determination.”
Since 2016, Elegant Massage LLC has owned and operated Light Stream Spa, which provides therapeutic massages in Virginia Beach, Va. On July 22, 2019, Elegant obtained an all-risk commercial property insurance policy from State Farm, covering loss or damage that results from all risks other than those expressly excluded. The policy was effective through July 22, 2020, and Elegant paid an annual premium of $475.
The policy provided coverage for loss of income and extra expenses as a result of suspended business operations, which included actions of a civil authority prohibiting access to Elegant’s property. However, the policy contained an exclusion for fungi, virus 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 guidance recommending social distancing to stop the spread.
Following this federal guidance, Virginia Governor Ralph Northam and the Virginia State Health Commissioner on March 20 declared a public health emergency and restricted the number of patrons allowed in restaurants, fitness centers and theaters to 10 or fewer.
A few days later, Northam ordered the closure of recreational and entertainment businesses, including spas and massage parlors, and ordered all Virginia residents to stay home unless necessary.
Although some of the Virginia restrictions were eased a couple of months later in May, with spas and massage centers being permitted to re-open, certain guidelines remained in place. These included 50% occupancy, mask requirements for workers and patrons, hourly cleaning and disinfection while in operation and six-foot distancing between work stations.
As a result of the COVID-19-related restrictions, Elegant voluntarily closed Light Stream Spa on March 16. It remained closed through May 15, and in this time, Elegant suffered a complete loss of income.
Although Elegant submitted a claim under its policy on March 16, the claim was denied by State Farm. Among its reasons for denying the claim were that the business was voluntarily closed, there was no civil order to close the business, there was no known damage to the property due to COVID-19 and the policy excluded coverage for loss 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 following the claim denial. State Farm filed a motion to dismiss in August.
Court Finds Virus Exclusion Does Not Apply
In its motion to dismiss, State Farm argued that the policy’s virus exclusion applies in this circumstance because COVID-19 was at the heart of the Virginia executive orders requiring Elegant to close its spa. It 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 had an expansive anti-concurrent causation clause that excluded from coverage any situation where a virus was one of the causes, even if there were also other causes.
On the other hand, Elegant alleged that its loss of business resulted from the Virginia orders mandating specific kinds of businesses like the Light Stream Spa to close operations for two months to prevent the spread of COVID-19. It asserted that the court should find the virus exclusion is not applicable because COVID-19 was not present at its property and was not the basis for its loss of income.
The court found that the policy’s virus exclusion in this case particularly deals with the growth, proliferation, spread or presence of virus, bacteria or other microorganism such as fungi or wet or dry rot capable of inducing physical distress, illness or disease. The policy stated it would not provide coverage for remediation or removal of virus, bacterial or fungi at the property.
“This supports the interpretation that the virus exclusion applies where a virus has spread throughout the property,” United States District Judge Raymond Jackson wrote in the opinion.
Elegant, however, did not claim that there was a presence of the virus at its property or that the virus was the direct cause of the property’s physical loss, the court found. It alleged instead that the executive orders in Virginia were the result of business income loss, and while some businesses could continue operating despite the COVID-19 guidelines, spas were considered a hotspot for COVID-19 under the state’s executive orders and required to be closed as a preventative health measure.
The court held that although Elegant voluntarily closed Light Stream Spa on March 16 after the national and statewide orders and guidelines were announced to stop the spread of COVID-19, seven days later on March 23, Elegant was required by Northam’s executive order to close until mid-May.
The court also found that the anti-concurrent causation clause cited by State Farm was not a recognized or settled doctrine in its jurisdiction and ultimately sided with Elegant in finding that the virus exclusion does not apply in this case.
“To be enforceable, the insurer must draft the language of an exclusion conspicuously, plainly and clearly set forth any limitation on coverage to the insured,” Jackson wrote in the opinion.
Defining ‘Direct Physical Loss’
Beyond the virus exclusion, State Farm also argued that the policy only covered loss of business income resulting from a direct physical loss, which requires structural damage to the covered property. It stated that various district courts in other jurisdictions have interpreted direct physical loss to mean perils that cause tangible structural damage to property, such as hurricane winds, rainwater and fire.
However, Elegant argued that under Virginia law, “direct physical loss” has not consistently been interpreted to require structural or tangible damage to property, adding that federal courts have interpreted this to mean the inability to use the premises because of uncontrollable forces such as the COVID-19-related executive orders in Virginia.
When there are a variety of accepted interpretations as to the policy language, the most favorable to the insured will be adopted, Jackson wrote in the opinion document. Citing the spectrum of accepted interpretations in this case, the court erred on the side of Elegant to grant the most coverage.
With this in mind, the court determined that “direct physical loss” could mean that the property is uninhabitable, inaccessible or dangerous to use because of intangible or non-structural sources and that Elegant submitted a good faith claim to State Farm for a direct physical loss covered by the policy.
“The facts of this case are similar those where courts found that asbestos, ammonia, odor from methamphetamine lab, or toxic gasses from drywall, which caused properties uninhabitable, inaccessible or dangerous to use, constituted a direct physical loss,” Jackson wrote in the opinion.
Motion to Dismiss Denied in Part
Elegant’s policy through State Farm also provided coverage for extra expenses and loss of income caused by a civil authority action that prohibits access to the premises, as long as access is prohibited as a result of a damaged property no more than a mile away.
The policy specified that the civil authority action must be taken in response to dangerous physical conditions at a nearby property or to give a civil authority unimpeded access to the damaged property.
Elegant argued that the civil authority coverage applies in this case because COVID-19 damaged property other than its own, the closure orders were issued by a civil authority and the actions were taken in response to a dangerous physical condition.
State Farm contended, however, that the civil authority coverage only applies when access to an insured’s property is prevented by an order of civil authority issued as a direct result of physical damage to other premises in the proximity of the insured’s property.
In this case, the court found that the civil authority coverage does not apply because Elegant did not show a link between any physically damaged or dangerous surrounding properties.
The executive orders in Virginia were issued instead because COVID-19 presents an ongoing threat to Virginia communities, not because of prior physical damage to Elegant’s property or surrounding properties, the court stated.
As a result, State Farm’s motion to dismiss was granted in part on this basis.
Overall, however, the court concluded that Elegant’s arguments in this case meant that relief could be plausible, and State Farm failed to show that any of the policy’s exclusions clearly apply. With this in mind, the court ruled that Elegant’s claims can proceed, and State Farm’s motion to dismiss was denied 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.
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