Across the country claims for business income loss presented by policyholders to their insurers and the suits that follow for business interruption caused by COVID-19 and government regulatory closures have not fared well. Most policyholders who have suffered a suspension of business operations have been denied their policy claims when relying on policy clauses covering “direct physical loss of or physical damage” to the policyholders’ place of business. Likewise, when these denied claims become lawsuits, some courts have dismissed cases based on an interpretation that the coronavirus cannot cause property damage at the policyholder’s place of business.

Such turned out ultimately not to be the case in a recent order by U.S. District Judge James R. Nowlin, in Independence Barbershop LLC v. Twin City and Fire Insurance Company.1 The Independence Barbershop in Austin, Texas was forced to temporarily close at the end of March due to Governor Abbott’s statewide order closing, public establishments, such as bars, restaurants, gyms, schools, and yes, barbershops, among others. The Independence Barbershop immediately filed a business loss claim with its insurer, Twin City Fire Insurance Company (“Twin City”) under a clause in the policy covering “direct physical loss of or physical damage” to its place of business. Like many of such recent suits, Twin City denied coverage claiming that COVID-19 did not cause property damage to the barbershop’s place of business and even if it did cause damage, that the policy’s Virus Endorsement bared coverage.

Independence Barbershop filed suit on May 22, 2020, seeking (1) a class certification and designation as Class Representative; (2) damages for breach of contract; (3) a declaratory judgment; (4) pre- and post-judgment interest; and (5) attorney’s fees and costs. Twin City answered and immediately filed a Rule 12(b)(6) Motion to Dismiss contending that the policy’s Virus Endorsement constituted an exclusion of the claimed damages and disposed of all of Plaintiff Independence Barbershop’s claims.

Independence Barbershop responded to the Motion to Dismiss and provided three reasons for its denial. First, that the Virus Endorsement was designed to cover something other than the COVID-19 Pandemic. Second, that regulatory estoppel precluded the application of the Virus Endorsement to exclude Plaintiff’s claims. Third, under Section B.1.f. in the Virus Endorsement provision, coverage for viruses was specifically included and stated that it allowed for up to 30 days of coverage for business interruption if “‘loss or damage to property caused by…virus’” causes a suspension of operations and if “‘Time Element Coverage applies.”’2

The court addressed all three arguments and agreed with Twin City on the first two but sided with Plaintiff on its third argument. In Plaintiff’s second argument that regulatory estoppel should apply, the court held that only one state in the Union had recognized the doctrine of regulatory estoppel and Texas was in the overwhelming majority of states that had not recognized it.

Independence Barbershop’s third argument fared better. In its third argument, Plaintiff relied on a provision, Section B.1.f. in the Virus Endorsement, which, as noted above, specifically included up to 30 days of coverage for viruses.3 In addressing this third argument, the Court first explained that “Time Element Coverage” is a term of art in the insurance industry that refers to coverages measured in time, including business interruption. The court then disagreed with Twin City’s two arguments that: (1) the Time Element Coverage provision only applied within the context of the Virus Endorsement which listed specified causes from which a covered virus must result; and (2) allowing independent recovery under Section B.1.f. would render the Virus Endorsement (which was continually referred to as the Virus Exclusion) moot.

In carefully analyzing the parties’ arguments, the court found that Independence Barbershop had pled a plausible claim for relief pertaining to coverage under B.1.f. of the policy and ruled that the text of the policy did not limit Section B.1.f. to certain contributing causes as found in Section B.1.a.4 The court denied Twin City’s Motion to Dismiss Independence Barbershop’s business interruption claim relating specifically to Section B.1.f. however, it found that the Virus Endorsement did contain a valid exclusion clause that precluded recovery under sections other than Section B.1.f.

Regarding Plaintiff’s request to certify its class action, the court ruled that it would determine that issue of class certification at an appropriate time but not as part of Defendant’s Rule 12(b)(6) Motion to Dismiss.

Take Away: This Order is a reminder that words in a policy matter. Not all virus exclusions in a policy bar all coverage and particularly is this so in endorsements that separately provide virus coverage. Judge Nowlin, a senior federal district court judge with a no-nonsense reputation, should be congratulated for his focus on specific policy language. And although Judge Nowlin’s decision that there might be some coverage under a limited virus coverage endorsement may be considered a small victory, given the number of cases of late that have resulted in complete dismissal under similar circumstances and arguments, it is indeed a large one.
1 Independence Barbershop, LLC v. Twin City Fire Ins. Co., No. 1-20-CV-00555 (W.D. Tex. Nov. 4, 2020).
2 Id. at 7.
3 § B.1.f.: “The following applies only if a Time Element Coverage applies to the “‘scheduled premises’” and only if the suspension of “‘operations’” satisfies all the terms and conditions of the applicable Time Element Coverage. (1) If the loss which resulted in “‘fungi’” , wet or dry rot, bacteria or virus does not in itself necessitate a suspension of “‘operations’”, but such suspension is necessary due to loss or damage to property caused by “‘fungi’”, wet or dry rot, bacteria or virus, then our payment under the Time Element Coverage is limited to the amount of loss and expense sustained in a period of not more than 30 days unless another number of days is indicated in the Declarations. The days need not be consecutive. If a covered suspension of “‘operations’” was caused by loss or damage other than “‘fungi’”, wet or dry rot, bacteria or virus prolongs the “‘period of restoration’”, we will pay for loss and expense sustained during the delay (regardless of when such a delay occurs during the “‘of restoration’”), but such coverage is limited to 30 days unless another number of days is indicated in the Declarations. The days need not be consecutive.
4 “1. Limited Coverage for “‘Fungi”’, Wet Rot, Dry Rot, Bacteria and Virus.
a. The coverage described in 1.b. below only applies when the “‘fungi’”, wet rot or dry rot, bacteria or virus is the result of one or more of the following causes that occurs during the policy period and only if all reasonable means were used to save and preserve the property from further damage at the time of and after that occurrence.
(1) A “‘specified cause of loss’” other than fire or lightning’
(2) Equipment Breakdown Accident occurs to Equipment Breakdown Property, if Equipment Breakdown applies to the affected premises.
b. We will pay for loss or damage by “‘fungi’”, wet rot, dry rot, bacteria and virus. As used in this Limited Coverage, the term loss or damage means:
(1) Direct physical loss or direct physical damage to Covered Property caused by “‘fungi’”, wet rot, dry rot, bacteria or virus, including the cost of removal of the “‘fungi”’, wet rot, dry rot, bacteria or virus’
(2) The cost to tear out and replace any part of the building or other property as needed to gain access to the “‘fungi”’, wet rot, dry rot, bacteria or virus; and
(3) The cost of testing performed after removal, repair, replacement or restoration of the damaged property is completed, provided there is a reason to believe that “‘fungi”’. wet rot, dry rot, bacteria or virus are present.” Id. at 4.