DZ Jewelry, LLC v. Certain Underwriters at Lloyds London
525 F.Supp.3d 793
S.D. Tex.2021Background
- Zadok purchased an all-risk commercial property policy (Mar 10, 2020–Mar 10, 2021) that provides business-income coverage for loss during a “period of restoration,” civil-authority coverage when access is prohibited due to "direct physical loss of or damage to property" elsewhere, and extra-expense coverage; the policy contains no virus/pandemic exclusion.
- Texas and Harris County issued COVID-19 closure orders in March 2020; Zadok closed its jewelry store Mar 23–Apr 30, 2020 and alleges ~$3 million in lost sales.
- Zadok alleges the store was contaminated by COVID-19 (three employees tested positive) and that the pandemic and orders prevented customer access. Zadok did not allege the virus was detected on store surfaces or that the store suffered any structural alteration.
- Zadok submitted a claim on Apr 3, 2020; Lloyd’s denied coverage, citing lack of "direct physical loss or damage."
- Zadok sued for breach of contract, bad faith, and violations of the Texas Prompt Payment of Claims Act; Lloyd’s moved to dismiss under Rule 12(b)(6).
- The court held the complaint failed to plausibly allege "direct physical loss of or damage to property" and granted dismissal without prejudice with leave to amend.
Issues
| Issue | Plaintiff's Argument (Zadok) | Defendant's Argument (Lloyd's) | Held |
|---|---|---|---|
| Whether COVID-19 or related closures constitute "direct physical loss of or damage" for business-income coverage | Virus contamination (potential presence on surfaces/air), loss of use/function, and employee infections caused physical loss | Policy requires distinct, demonstrable physical alteration; COVID-19 does not physically alter property | Court: Allegations speculative; no pleaded physical alteration; coverage not triggered; dismissal granted (leave to amend) |
| Whether civil-authority coverage is triggered by government closure orders | Closure orders prohibited access and thus triggered civil-authority coverage | Orders were preventive and not issued because of physical damage to other property as required by the policy | Court: Plaintiff failed to allege orders were "due to" physical loss/damage elsewhere; civil-authority coverage not shown |
| Whether extra-expense coverage applies for cleaning/operational changes | Extra cleaning, PPE, and operational changes are "extra expenses" caused by the loss | Extra-expense coverage requires those expenses to result from direct physical loss/damage | Court: Without plausible physical loss/damage, extra-expense coverage fails |
| Whether denial supports bad-faith and Prompt Payment Act claims | Denial was wrongful and supports extracontractual relief | Denial was reasonable because there was no coverage entitlement | Court: Extracontractual claims fail when insured is not entitled to policy benefits; dismissed |
Key Cases Cited
- Trinity Indus., Inc. v. Ins. Co. of N. Am., 916 F.2d 267 (5th Cir.) ("physical loss or damage" implies a change from a satisfactory to unsatisfactory state)
- Hartford Ins. Co. v. Miss. Valley Gas Co., [citation="181 F. App'x 465"] (5th Cir.) (pleading direct physical loss requires distinct, demonstrable physical alteration)
- Pan Am Equities, Inc. v. Lexington Ins. Co., 959 F.3d 671 (5th Cir. 2020) (courts enforce unambiguous policy language as written)
- Nassar v. Liberty Mut. Fire Ins. Co., 508 S.W.3d 254 (Tex. 2017) (policy interpretation uses ordinary meaning of words in context)
- Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154 (Tex. 2003) (unambiguous policy language is construed as written)
- USAA Tex. Lloyds Co. v. Menchaca, 545 S.W.3d 479 (Tex. 2018) (no bad-faith or extra-contractual recovery when insured had no right to policy benefits)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (pleading must state a claim that is plausible on its face)
- Ashcroft v. Iqbal, 556 U.S. 662 (complaint must plead factual content permitting a reasonable inference of liability)