Another federal court has dismissed a COVID-19 business interruption lawsuit, finding that a closure order does not constitute a covered “direct physical loss” and that the policy excluded damages caused by viruses anyway.
The ruling by the U.S. District Court for the Eastern District of Michigan continues a losing streak for attorneys who argued that government agency closure orders to prevent the spread of COVID-19 should trigger coverage for lost business income. Federal courts in Florida, California, Texas, the District of Columbia and a state court in Michigan have dismissed similar lawsuits.
On the other hand, the U.S. District Court for Western Missouri allowed a COVID-19 business-interruption lawsuit by a group of hair salons that were shuttered because of coronavirus to proceed, without ruling on the merits. The insurance policies for the Missouri plaintiffs did not contain a virus exclusion.
Turek Enterprises, which does business as Alcona Chiropractic, filed suit against State Farm after the carrier denied a claim for business income lost because of a COVID-19 closure order that lasted from March 24 to May 28. Although the policy excluded coverage for damages caused by “fungi, virus or bacteria,” Turek argued that the exclusion did not apply because the loss of income was not caused by the virus. The loss was caused by a government closure order which was covered under the civil authority section in the policy, lawyers for the chiropractic clinic argued.
The lawsuit asked the court to certify a class that would include all Michigan businesses that had purchased similar State Farm policies.
State Farm filed a motion to dismiss the suit, arguing that there was no direct physical loss to the property and even if there were, any loss caused by a virus was excluded.
Judge Thomas L. Ludington concluded the insurer was correct on both points.
While Turek argued that the closure order was the sole cause of its income loss, Ludington said there would not have been an order but for COVID-19. “Furthermore, plaintiff’s position essentially disregards the Anti-Concurrent Causation Clause, which extends the Virus Exclusion to all losses where a virus is part of the causal chain,” the judge wrote in his order.
Ludington said Turek’s lawsuit was distinguishable from the Missouri case that was allowed to proceed, titled Studio 417 v. Cincinnati Insurance Co. In that case, the policy covered “accidental physical loss or accidental physical damage.” Turek’s policy, in contrast, covered “accidental direct physical loss” to property.
The judge also rejected an argument that the virus exclusion does not apply because the coronavirus was never on the insured premises. The judge said the policy requires a “direct physical loss” to trigger coverage. While that term is not defined in the policy, Ludington said the 6th Circuit Court of Appeals gave guidance in a 2012 ruling, Universal Image Prods. Inc. v Fed. Ins. Co.
In that case, the appellate court affirmed a ruling that a business that had to close down for mold remediation did not suffer a direct physical loss and therefore its lost income was not covered. Ludington noted that a Texas federal court had rejected similar arguments, finding that direct physical loss to a property is not the same thing as loss of use of a property.
“Based on the foregoing, ‘accidental direct physical loss to Covered Property’ is an unambiguous term that plainly requires plaintiff to demonstrate some tangible damage to covered property,” the order states.
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