36 F.4th 656
5th Cir.2022Background
- Ferrer & Poirot, a law firm, sought coverage from The Cincinnati Insurance Company for lost income and extra expenses incurred when COVID‑19 restrictions forced remote work and required purchases of protective equipment and supplies.
- The policy provided Property Damage, Business Income, Extra Expense, and Civil Authority coverages; coverage required a “Covered Cause of Loss,” defined as a direct "loss" and further defined as "accidental physical loss or accidental physical damage."
- Cincinnati denied the claim; Ferrer sued for breach of contract, alleging the virus’s physical presence caused loss meeting the policy terms.
- Cincinnati moved to dismiss under Rule 12(b)(6). The magistrate judge and district court concluded Ferrer had not alleged a physical loss or damage and dismissed the complaint with prejudice.
- Ferrer appealed to the Fifth Circuit, which reviewed de novo whether the pleaded facts plausibly alleged a covered physical loss.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether COVID‑19 losses constitute a "physical loss" or "physical damage" under the policy (Business Income/Extra Expense) | The physical presence of the virus on property and resulting operational loss amounted to physical loss/damage | Policy requires tangible alteration or deprivation of property; virus did not cause such physical change | No — virus-related economic loss without tangible, demonstrable physical alteration is not a covered physical loss |
| Whether Civil Authority coverage is triggered by government lockdown orders absent property damage | Civil orders prohibiting access were taken in response to dangerous physical conditions (the virus) and thus trigger coverage | Civil Authority coverage requires damage to property or continuation of a Covered Cause of Loss that caused such damage | No — Civil Authority coverage not triggered because there was no physical property damage or resulting covered cause of loss |
| Whether a policy endorsement dropping the word "physical" creates ambiguity broadening "loss" to include nonphysical harms | The amendment creates ambiguity and should be construed in favor of the insured | The change merely removed a redundant term; "loss" remains defined as accidental physical loss/damage | No — endorsement does not create ambiguity; policy unambiguously requires physical loss/damage |
| Whether dismissal under Rule 12(b)(6) was proper given the pleadings | Pleading that virus was physically present and caused losses suffices to state a plausible claim | Pleadings do not allege tangible alteration or deprivation of property necessary for coverage | Dismissal affirmed — Ferrer failed to plead a plausible covered physical loss |
Key Cases Cited
- Terry Black’s Barbecue, L.L.C. v. State Auto. Mut. Ins. Co., 22 F.4th 450 (5th Cir. 2022) (interpreting similar policy language and holding COVID‑19 losses without tangible property alteration do not constitute physical loss)
- U.S. Metals, Inc. v. Liberty Mut. Grp., Inc., 490 S.W.3d 20 (Tex. 2015) ("physical" given its plain meaning requires a tangible injury)
- Pan Am Equities, Inc. v. Lexington Ins. Co., 959 F.3d 671 (5th Cir. 2020) (courts enforce unambiguous insurance policy language as written)
- State Farm Lloyds v. Page, 315 S.W.3d 525 (Tex. 2010) (Texas law treats insurance policies as contracts to be interpreted by ordinary meaning)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (pleading standard: claims must be plausible on their face)
- Erie R. Co. v. Tompkins, 304 U.S. 64 (1938) (federal courts apply state substantive law in diversity cases)