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By George E. Reede, Jr.
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In response to the wave of litigation over COVID-19-related business income claims, an overwhelming majority of courts considering the relevant policy language — approximately 80% — have found no coverage as a matter of law under the applicable insurance policy.[1]

But in Elegant Massage LLC v. State Farm Mutual Automobile Insurance Co.,[2] the U.S. District Court for the Eastern District of Virginia went its own way; ignoring well-established principles of contract interpretation, the court found the term "direct physical loss" ambiguous and the virus exclusion inapplicable.

In the coming months, we expect other courts applying Virginia law will treat this decision as an outlier and reject its misguided analysis.

The Facts

On March 23, to prevent the spread of COVID-19, Virginia's governor ordered closure of spas and massage parlors, among other businesses deemed nonessential. On May 15, he eased restrictions subject to certain limitations, e.g., 50% occupancy.

Light Stream Spa, a provider of therapeutic massages located in Virginia Beach, Virginia, closed voluntarily on March 16, in advance of the governor's mandate. The spa submitted a claim to State Farm for lost income and extra expenses the same day.

On March 26, State Farm denied the claim:

[B]ecause [the Spa] voluntarily closed their business on March 16, 2020, there was no civil order to close the business, there was no known damage to the business space or property resulting from COVID-19, and the Loss of Income Coverage excludes coverage for loss caused by virus.[3]

In response, the spa filed a class action complaint asserting claims for breach of contract and declaratory relief. Notably, the spa did not allege presence of the virus at its property and it characterized the governor's order as the sole cause of its income losses.[4] In other words, the spa alleged only a loss of use of its property entirely unrelated to whether the virus was actually ever present on the property.

State Farm moved to dismiss.

The court granted the motion in part,[5] and denied it in part. In the court's view, the spa's alleged "inability to use the premises because of uncontrollable forces" was sufficient to constitute an "accidental direct physical loss to Covered Property," and State Farm "failed to show that any of the Policy's Exclusions clearly apply" — including the virus exclusion.[6]

Direct Physical Loss

The first key issue for the court was "what constitutes a 'direct physical loss' in the context of the Policy and Plaintiff's circumstances." Specifically, the court focused on the meaning of the phrase as used in three policy provisions:

Covered Cause of Loss

"Covered Cause of Loss" was defined as an "accidental direct physical loss to covered property unless the loss is (1) Excluded in SECTION 1-EXCLUSIONS; or (2) Limited in the Property Subject to Limitations Provisions."

Business Income

According to the court:

The policy provides for the loss of business income sustained as a result of the "suspension" of "operations." The suspension "must be caused by accidental direct physical loss to property at the described premises." The Policy states that it will only pay for "Loss of Income" that [the policyholder] sustains during the "period of restoration"[7] that occurs after the date of accidental direct physical loss.

Extra Expense

The policy covered:

Extra expenses incurred during the "period of restoration" that [the policyholder] would not have incurred if there had been no accidental direct physical loss to property at the described premises. The loss must be caused by a Covered Cause of Loss.

Finding no policy definition, the court immediately began an analysis of whether the phrase "direct physical loss" was ambiguous — and never looked beyond those three words again. This was a critical error. Virginia's Supreme Court has emphasized that:

A judicial interpretation should conform to the plain meaning that reasonable insurers and insureds likely would have attributed to the words. … The search for this plain meaning does not myopically focus on a word here or a phrase there. Instead, it looks at a word in the context of a sentence, a sentence in the context of a paragraph, and a paragraph in the context of the entire agreement. The plain meaning of a word depends not merely on semantics and syntax but also on the holistic context of the word within the instrument.[8]

The court found three potential meanings for "direct physical loss" in Virginia case law: structural damage; distinct and demonstrable physical alteration; and "incidents that make the covered property uninhabitable, inaccessible, and dangerous to use … because of, for example, intangible and invisible noxious gases or toxic air particles."[9]

The court looked to Travco Insurance Co. v. Ward as the source for the court's second and third definitions.[10] In Travco, the toxic gases released by the drywall were actually present at the property.

However, the spa took pains to allege the virus was not present at its property, obviously in large part to avoid application of the virus exclusion — an incongruent position the court accepted.[11] Thus, the spa alleged nothing more than a loss of use at its own property, which did not fit within any of the court's three definitions of "direct physical loss."[12]

By focusing on only three words of the policy, the court lost sight of the larger context, leaving critical questions unanswered.

Looking at the complete sentence, what does the context of four additional words — "accidental direct physical loss to covered property" — do to the meaning of the phrase? In Turek Enterprises Inc. v. State Farm Mutual Automobile Insurance Co., the U.S. District Court for the Eastern District of Michigan found it essential to understand the plain meaning of the policy:

Plaintiff suggests that "physical loss to Covered Property" includes the inability to use Covered Property. … This interpretation seems consistent with one definition of "loss" but ultimately renders the word "to" meaningless. "To" is used here as a preposition indicating contact between two nouns, "direct physical loss" and "Covered Property." Accordingly, the plain meaning of "direct physical loss to Covered Property" requires that there be a loss to Covered Property; and not just any loss, a direct physical loss.[13]

Moving to the paragraph describing the loss of income coverage, a suspension of operations must be "caused by accidental direct physical loss to property at the described premises."

"Suspension" is defined in the alternative as "untenable," i.e., not able to be occupied.[14] How can the inability to use the property serve as both cause and effect — as both the direct physical loss that causes the suspension, and the suspension itself?

Both the loss of income and extra expense coverage are dependent upon the period of restoration as the measure of loss, i.e., the period of time when the property is "repaired, rebuilt or replaced with reasonable speed and similar quality' or until 'business is resumed at a new permanent location."

How can one measure the period of restoration in the absence of any loss or damage to "repair, rebuild or replace"? As the U.S. District Court for the Southern District of Mississippi has pointedly noted in Real Hospitality LLC v. Travelers Casualty Insurance Co.:

If there is no requirement that physical loss of or physical damage to the property be involved, the definition of the time period for paying the claim makes no sense … the Court rejects Plaintiff's interpretation of the "Period of Restoration," which is that when the Executive Orders are lifted, this would constitute a "repair" because Plaintiff's property would be restored to a "sound state." This contorted interpretation is inconsistent with the plain and common sense meaning of the word "repair."[15]

Having failed to consider the policy as a whole, the court left many questions unanswered, ultimately creating ambiguities where none existed. Viewed in its larger context, "direct physical loss" cannot be fairly interpreted to mean loss of use alone.[16]

Virus Exclusion

In addition to its failure to apply Virginia's rules of policy construction in its analysis of "direct physical loss," the court also misapplied the policy's virus exclusion. The State Farm fungi, virus or bacteria exclusion specifically 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.

The court acknowledged the exclusion was subject to an expansive anti-concurrent causation clause, which preceded the exclusion and stated:

1. We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss; or (d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these.[17]

However, the court found that the clause "is not recognized or settled doctrine in the court's jurisdiction" and that "the anti-concurrent theory has not been established as law in this jurisdiction."[18] As a result, rather than make any attempt to interpret and apply the language itself, the court opted to ignore it entirely — and found the virus exclusion inapplicable as a matter of law:

Therefore, in applying the Virus Exclusion there must be a direct connection between the exclusion and the claimed loss and not, as the Defendants argue, a tenuous connection anywhere in the chain of causation. That is, although the Virus Exclusion does require that the virus be the cause of the policyholder's loss, the connection must be the immediate cause in the chain.[19]

Under Virginia law, policy language cannot simply be ignored; "every word, clause, and provision of the policy 'should be considered and construed together and seemingly conflicting provisions harmonized when that can be reasonably done, so as to effectuate the intention of the parties as expressed therein.'"[20]

Even if the court was not enamored with the anti-concurrent causation language, by requiring a direct connection between the exclusion and the loss, and that the virus be the immediate cause in the chain, the court's interpretation was directly at odds with the exclusion's plain language.

Only a clear statement of public policy explicitly rejecting anti-concurrent causation clauses would warrant such an approach — not mere silence.[21] But no court or statute in Virginia has rejected these clauses.

To the contrary, in Lower Chesapeake Associates v. Valley Forge Insurance Co., the Virginia Supreme Court accepted and applied anti-concurrent causation language, concluding that:

Coverage is excluded under the policy if a loss is caused "directly or indirectly" by one of the enumerated causes or events, "regardless of any other cause or event that contributes concurrently or in any sequence" to the loss. The evidence amply supports the trial court's finding that the damage to Docks A, B, and D resulted, at least in part, from the excluded causes of "[f]lood, ... waves, tides, tidal waves, ... all whether driven by wind or not," or from the excluded cause of "gradual deterioration," or from any combination of these excluded causes.[22]

Thus, under Virginia law, the court should have applied the anti-concurrent language in its analysis of the virus exclusion. Taking that language into account, the inescapable causal connection between the virus and the governor's orders required application of the virus exclusion — and dismissal of the spa's complaint.[23]

Conclusion

Virginia's Supreme Court has provided clear guidance on how to interpret policy language. The Elegant Massage court ignored that guidance when it denied State Farm's motion to dismiss.

While other creative arguments may be propounded by plaintiffs, following the well-established principles of contract interpretation will avoid anomalous decisions and lead to the common-sense results courts strive for — particularly when the stakes are high.

George Reede serves as senior counsel at Zelle LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Tom Baker, COVID Coverage Litigation Tracker, https://cclt.law.upenn.edu/.

[2] No. 2:20-CV-265, 2020 WL 7249624 (E.D. Va. Dec. 9, 2020).

[3] Id., at *2.

[4] Id., at *10.

[5] The court found no Civil Authority coverage because Light Stream Spa did not show "… a causal link between any physically damaged or dangerous surrounding properties proximate to the insured property and a civil authority prohibiting Plaintiff's from accessing or using their property." Id., at *11. Also, to the extent the Spa voluntarily closed prior to the Governor's Order, the court granted the motion based upon the consequential loss exclusion for that limited period of time. Id., at *14.

[6] Id., at *8, 15.

[7] Although the court alluded to the period of restoration, it made no mention of the definition: "the period when the property is 'repaired, rebuilt or replaced with reasonable speed and similar quality' or until 'business is resumed at a new permanent location.'" ELEGANT MASSAGE, LLC d/b/a Light Stream Spa, on behalf of itself and all others similarly situated, Plaintiff, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY and State Farm Fire and Casualty Company, Defendants., 2020 WL 4882688 (E.D. Va.), Def. Mem. In Support, at p. 21 [Ecf. 18].

[8] EPC MD 15, LLC v. Erie Ins. Exchange, 297 Va. 21, 28-29 (2019).

[9] 2020 WL 7249624, at *8-10.

[10] 715 F. Supp. 2d 699, 707-10 (E.D. Va. 2010), aff'd, 504 F. App'x 251 (4th Cir. 2013).

[11] "Here, Plaintiff is neither alleging that there is a presence of a virus at the covered property nor that a virus is the direct cause of the property's physical loss. Also, Plaintiff does not allege that the Executive Orders the Commonwealth of Virginia issued were as a result of 'growth, proliferation, spread or presence' of virus contamination at the Plaintiff's property. Rather, Plaintiff alleges that the Orders were the 'sole cause of the Plaintiff's [...] loss of business income and extra expense.'" Id., at *13.

[12] Other courts willing to consider loss of use as a form of "direct physical loss" have generally relied upon allegations that the virus was at least present on the property. See, e.g., Studio 417, Inc. v. Cincinnati Insurance Co., No. 20-cv-03127-SRB, 2020 WL 4692385, *6 (W.D. Mo. Aug. 12, 2020) (insured "plausibly alleged that COVID-19 particles attached to and damaged their property").

[13] Turek Enterprises, Inc. v. State Farm Mut. Auto. Ins. Co., No. 20-11655, 2020 WL 5258484, at *6 (E.D. Mich. Sept. 3, 2020).

[14] "Suspension." Merriam-Webster Online Dictionary. 2020. http://www.merriam-webster.com (29 Dec. 2020).

[15] Real Hospitality, LLC v. Travelers Cas. Ins. Co. of America, No. 2:20-cv-00087, 2020 WL 6530405, at *5 (S.D. Miss. Nov. 4, 2020).

[16] See, e.g., Turek Enterprises, Inc., 2020 WL 5258484, at *5-8; Pappy's Barber Shops, 2020 WL 5500221 (S.D. Cal. Sep. 11, 2020) (alleged losses from an inability to use property do not amount to "direct physical loss of or damage to property," and physical loss or damage occurs only when property undergoes a distinct and demonstrable physical alteration.)

[17] 2020 WL 7249624, at *5-6.

[18] Id., at *11-12.

[19] Id., at *12.

[20] EPC MD 15, LLC, 297 Va. at 28, quoting Floyd v. Northern Neck Ins., 245 Va. 153, 158 (1993).

[21] See, e.g., Cal. Ins. Code § 530 (West) ("An insurer is liable for a loss of which a peril insured against was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of the loss"); Safeco Ins. Co. v. Hirschmann, 773 P.2d 413 (Wash. 1989) (en banc) ("If the initial event, the 'efficient proximate cause,' is a covered peril, then there is coverage under the policy regardless whether subsequent events within the chain, which may be causes-in-fact of the loss, are excluded by the policy").

[22] 260 Va. 77, 85-87 (2000).

[23] N&S Rest. LLC v. Cumberland Mut. Fire Ins. Co., No. CV2005289RBKKMW, 2020 WL 6501722, at *3, 5 (D.N.J. Nov. 5, 2020) ("There is no doubt that COVID-19, a virus, caused [the governor] to issue the Executive Order mandating closure of Plaintiff's restaurant. Therefore, COVID-19 is still a cause of the closure because the Virus Exclusion specifically provides for such indirect causation"); Raymond H Nahmad DDS PA v. Hartford Cas. Ins. Co., No. 1:20-CV-22833, 2020 WL 6392841, at *9 (S.D. Fla. Nov. 2, 2020) ("Even ifCOVID-19 is not a direct cause of their losses, the Complaint's allegations demonstrate that the government's civil orders were specifically enacted to addressCOVID-19 activity in Florida … Thus, coronavirus still remains part of the causal chain leading to Plaintiffs' losses, and the exclusion applies 'regardless of any other cause or event that contributes concurrently or in any sequence to the loss'"); Seifert v. IMT Ins. Co., No. CV 20-1102 (JRT/DTS), 2020 WL 6120002, at *4 (D. Minn. Oct. 16, 2020) (granting motion to dismiss pursuant to virus exclusion because plaintiff "alleges that his business losses are the direct and proximate result of 'Governmental Pandemic Closure Orders; orders that have been put in place in an effort to control the spread of the COVID-19 Pandemic.' Pursuant to the anti-concurrent loss provision, if a virus is any part of the causal chain causing a loss, then the loss is not covered").