On Dec. 9, 2020, the U.S. District Court for the Eastern District of Virginia issued a favorable ruling for policyholders related to COVID-19 business interruption claims. The case is Elegant Massage, LLC v. State Farm Mutual Auto. Ins. Co., __ F. Supp. 3d __, 2020 WL 7249624 (E.D. Va. Dec. 9, 2020).

In Elegant Massage, the court denied State Farm’s motion to dismiss and allowed the insured’s claim to proceed to discovery. In making its ruling, the court issued two notable holdings that provide a basis for COVID-19 insurance recovery claims to proceed to discovery under Virginia law.

First, the court held that Virginia law required the finding that “direct physical loss” is ambiguous and can be interpreted to cover a variety of losses, including no requirement for tangible structural damage.

Second, the court held that the virus exclusion contained in the policy at issue was inapplicable because an executive order required the shutdown resulting in the plaintiff’s recoverable losses.

Virginia Law: Physical Loss or Damage

As the court articulated, the “first key issue [was] what constitutes a ‘direct physical loss’ in context of the Policy and Plaintiff’s circumstances.” With no definition in the policy, the court turned to whether it was ambiguous.

In Virginia, as the plaintiff argued, “direct physical loss ha[d] not been consistently interpreted to require structural or tangible damage to the property.” In reviewing the case law, the court agreed, finding that it had “been subject to a spectrum of interpretations in Virginia on a case-by-case basis.”

At one end of the spectrum, Virginia courts had held that “direct physical loss” covered “incidents that result in structural damage to the property caused by ... fires, floods, hurricanes, and rainwater.”

At the other end of the spectrum, however, Virginia courts had “also found physical loss when a plaintiff cannot physically use his or her covered property, even without tangible structural destructions, if a plaintiff cannot show a distinct and demonstrable physical alteration to the property.” For example, in TRAVCO Ins. Co. v. Ward, 715 F. Supp. 2d 699, 708 (E.D. Va. 2010), aff’d, 504 F. App’x 251 (4th Cir. 2013), the court held that “physical damage to the property is not necessary, at least where the building in question has been rendered unusable by physical force.”

As for a third variation on the spectrum, Virginia courts (and other courts) had held that direct physical loss included “incidents that make the covered property uninhabitable, inaccessible, and dangerous to use ... because of ... intangible and invisible noxious gasses or toxic air particles.”

Thus, with this spectrum of interpretations, the court held that “direct physical loss” was ambiguous and should be construed in favor of coverage and against the insurer. Further, the court noted that “if Defendants wanted to limit liability of ‘direct physical loss’ to strictly require structural damage to property, then Defendants, as the drafters of the policy, were required to do so explicitly.”

Virus Exclusion

The second notable issue that the court reviewed was whether the policy’s virus exclusion applied.

The policy explicitly excluded losses from “(1) Growth, proliferation, spread or presence of ‘fungi’ or wet or dry rot; or (2) Virus, bacteria or other microorganism that induces or is capable of inducing physical distress, illness or disease; and (3) We will also not pay for ... (a) Any remediation of “fungi”, wet or dry rot, virus, bacteria or other microorganism ....”

With no definition of “virus,” the court turned to the plain reading of the virus exclusion taken together with the exclusion language as a whole. Finding that the exclusion applies only to the “growth, proliferation, spread or presence,” the court held the exclusion inapplicable. In this case, “the Executive Orders specifically classified Plaintiff’s type of property, a spa, as a hotspot for COVID-19 and, thus, selectively ordered that it be closed as a preventative health measure.” The court found the plaintiff’s losses are entirely distinguishable from any growth, proliferation, spread or presence of COVID-19.

Conclusion

Elegant Massage is an important decision for policyholders seeking coverage for COVID-19 losses under Virginia law. The decision is a potentially important precedent that will support claims by Virginia policyholders to collect business interruption insurance claims arising from COVID-19.