The U.S. District Court for the Northern District of Texas has granted an insurer's motion to dismiss a policyholder's third amended complaint, holding that the policyholder failed to plausibly plead that it suffered a direct physical loss or damage so as to trigger coverage under the policy. The case is Vandelay Hosp. Grp. LP v. Cincinnati Ins. Co., Civil Action No. 3:20vv-1328-D, 2021 U.S. Dist. LEXIS 129806 (N.D. Tex. July 13, 2021).
In a fact pattern we have seen time and time again in the wake of the pandemic, this action stemmed from government-mandated shutdowns in Texas beginning in March of 2020. Vandelay Hospitality Group LP (Vandelay) was insured by The Cincinnati Insurance Company (CIC) with an "all-risk" commercial property policy. On March 23rd, Cincinnati's agent submitted a reservation of rights letter to Vandelay, stating that COVID-related damages were not direct physical losses and were not covered under the policy.
On April 23, 2020, Vandelay sued Cincinnati and its broker for breach of contract, anticipatory breach/repudiation of contract, breach of good faith and fair dealing, and violations of sections of the Texas Prompt Pay Act and Texas Insurance Code, and sought a declaratory judgment that the policy covered the business losses due to the COVID-19 pandemic and state and county orders. The court dismissed the first amended petition for failure to plead a plausible breach of contract claim. The court concluded that Vandalay had failed to allege facts demonstrating that Vandelay suffered a direct physical loss or damage to its restaurants. Vandalay was granted leave to replead.
Vandelay filed a second amended complaint and Cincinnati moved again to dismiss for failure to state a claim on which relief can be granted, which the court granted, holding that Vandelay "failed to adequately allege that the presence of COVID-19 caused any distinct, demonstrable, physical alteration of the property so as to trigger coverage under any provision of the Policy." The court then granted Vandelay another opportunity to replead.
On the third attempt, Vandalay alleged fifteen counts of breach of contract, corresponding declaratory judgment claims, and three counts of breach of duty. Cincinnati moved to dismiss the third amended complaint for failure to state a claim. Vandelay opposed that motion.
The court held that Vandelay failed to plausibly plead that it suffered a direct physical loss or damage so as to trigger coverage under the policy. In the decision, the court noted "[a]assuming arguendo, that Vandelay has adequately alleged that COVID-19 was present in its restaurants, it has not sufficiently alleged that the virus caused a distinct, demonstrable, physical alteration to the restaurants. . . .
Even if Vandelay has sufficiently alleged that COVID-19 was present in its restaurants, it has not adequately alleged that COVID-19 caused physical damage or loss. Vandelay repeatedly makes the conclusory assertion that it suffered physical loss and damage but it fails to specify what damage or loss was caused, aside from the presence of COVID-19 on the property and COVID-19′s 'proclivity to attach [to] surfaces for prolonged periods of time.' Id. at 95-96. Despite the repeated use of the word "physical," the third amended complaint does not plausibly plead that Vandelay's property suffered a distinct, demonstrable, physical alteration."
The court also pointed out that Cincinnati noted and Vandelay acknowledged that COVID-19 can be removed from surfaces by routine cleaning.
The court found that the mere presence of the virus on surfaces does "not constitute the direct physical loss or damage required to trigger coverage under the Policy because the virus can be eliminated. The virus does not threaten the structures covered by property insurance policies and can be removed from surfaces with routine cleaning and disinfectant.
Editor's Note: This seems to be the common finding of the courts. Without physical loss or damage there will not be coverage. Some are finding differently, that a policy would not list both loss and damage if there was not a material difference between the two terms. We will continue to cover relevant business interruption and COVID-19 cases as we see them.