For six years, business interruption claims tied to COVID-19 have largely followed a predictable script. Insurers cite “no direct physical loss or damage.” Courts agree. Case dismissed. But every so often, a decision reminds us that insurance coverage disputes are unique and decided by policy language. The Ninth Circuit’s recent decision involving Treasure Island and Affiliated FM Insurance Company (AFM) is one of those rare reminders. 1
Let’s be clear that this opinion was not a wholesale rejection of the prevailing rule that COVID-19 does not constitute “direct physical loss or damage” under standard business interruption provisions. The Ninth Circuit affirmed that Nevada law requires actual physical alteration of property for traditional business interruption coverage. The presence of virus particles in the air or on surfaces is not enough. On that point, the trial court’s ruling for the insurer was affirmed.
But that is not the whole story. Treasure Island did something many fail to do. It read the entire policy. The AFM policy contained specific communicable disease provisions. Those provisions expressly provided coverage for losses resulting from diseases transmissible from human to human. That language mattered. It changed the analysis. It created a pathway independent of the traditional “direct physical loss or damage” argument, which has been rejected in countless other COVID cases.
Treasure Island argued that if the policy provides coverage for communicable disease losses, the phrase “physical loss or damage” cannot be interpreted in a way that renders that coverage meaningless. Even more interesting, AFM conceded on appeal that some communicable diseases can cause “physical loss or damage” under its policy. That concession alone distinguished the case from many of the earlier COVID rulings.
The insurer attempted to rely on its contamination exclusion, which barred coverage for conditions due to the presence of a virus. But the Ninth Circuit recognized the obvious problem. You cannot sell communicable disease coverage on one page and then use a virus exclusion on another page to eliminate it entirely. Insurance policies must be read as a whole. Exclusions are construed narrowly. If there is a conflict between a specific grant of coverage and a general exclusion, courts will not allow the exclusion to swallow the coverage.
That is precisely what the Ninth Circuit held. The communicable disease provisions were not barred by the contamination exclusion because the insurer could not show that its interpretation was the only reasonable one. Under Nevada law, that is the insurer’s burden. It failed to meet it.
The court also found that Treasure Island presented sufficient evidence that COVID-19 was actually present on the property during the policy period and that its closure decision was driven by that presence, not solely by government orders. That was enough to create a triable issue of fact. Summary judgment for the insurer on those communicable disease provisions was improper.
The larger lesson is not to let the insurer frame the loss as a one-sentence issue. Insurance contracts are sophisticated risk-transfer instruments. They contain multiple grants of coverage, conditions, sublimits, and carve-backs. The path to recovery is not always through the most obvious doorway. Sometimes it is through a separate provision that the insurer assumed would never be tested.
Treasure Island’s win is the product of disciplined policy analysis and a court willing to enforce the contract as written. In an era where pandemic claims ended with the predictable losing outcome, this case proves that careful reading of the full policy still matters.
Thought For The Day
“The life of the law has not been logic; it has been experience.”
— Oliver Wendell Holmes Jr.
1 Treasure Island, LLC v. Affiliated FM Ins. Co., No. 24-7428, 2026 WL 594860 (9th Cir. Mar.3, 2026). See also, Reply Brief of Appellant Treasure Island, LLC.
