One of the hottest insurance issues stemming from the COVID pandemic is whether business interruption losses resulting from governmental shut-down orders are covered under standard commercial property insurance policies. Under most policies, the issue boils down to whether the shutdown of the business constitutes “direct physical loss of or damage to the property” so as to be covered. Courts across the country continue to grapple with this issue, primarily because the typical policy does not include definitions for the words “direct,” “physical,” and “loss,” leaving the meaning of those words (and thus the scope of coverage) unclear.
One of my clients, Aggie Investments, LLC, operates a small spice and tea shop located in downtown McKinney. The shop, Spice and Tea Merchants of McKinney, was forced to close its doors for a brief period last year in response to the Mayor of McKinney’s “shelter in place” order. The tea shop submitted a claim for its losses to its property insurer, and the insurance company promptly denied the claim, contending there was no “physical loss of or damage to” the property.
As a result of the denial of coverage, my client was forced to file a lawsuit against the insurer in Aggie Investments, LLC v. Continental Casualty Company, Case No. 4:21-cv-0013, in the United States District Court for the Eastern District of Texas, Sherman Division. The insurer then filed a motion to dismiss the case on the basis that no coverage was afforded by the tea shop’s policy. In ruling on the motion, U.S. District Judge Amos Mazzant followed what he believed to be mandatory authority from the Fifth Circuit. In this connection, he stated that “the Policy’s provisions require demonstrable harm to property to trigger coverage.” Applying this standard, he concluded that the tea shop did not sustain “direct physical loss” of the property, and dismissed the tea shop’s case.
We believe that Justice Mazzant’s decision is in error, and is contrary to well-recognized Texas principles of contract interpretation. We also believe that the Fifth Circuit “authority” he and other Texas federal judges have relied upon in dismissing similar COVID coverage cases is flawed and does not accurately reflect Texas law. Therefore, earlier this week my client filed its notice of appeal to the U.S. Fifth Circuit Court of Appeals.
This will likely be the first case in which the Fifth Circuit squarely addresses this issue, so stay tuned for updates.
Alex Beard has 30 years of experience representing individuals and businesses, with a practice focusing on liability insurance coverage, property damage insurance, and civil appeals. He has extensive experience with liability insurance claims, and enjoys analyzing coverage issues under numerous types of insurance, including commercial general liability, commercial auto and life. Read more about Alex and his insurance-related practice here: https://saunderswalsh.com/insurance-related-disputes/.
