525 F.Supp.3d 771
E.D. Tex.2021Background
- Selery Fulfillment, Inc. purchased a commercial property insurance policy from Colony Insurance covering business income loss caused by a "direct physical loss of or damage to" insured property and a civil-authority clause triggering coverage when access is prohibited due to nearby property damage.
- In March–April 2020 Selery ceased operations at its Carrollton, Texas facility following Texas, Denton County, and City of Carrollton COVID-19 restrictions and submitted a claim for lost business income.
- Colony denied the claim on June 5, 2020; Selery sued for breach of contract and multiple extra-contractual claims; Colony removed the case and moved to dismiss under Rule 12(b)(6).
- The Court applied Texas contract law and the Twombly/Iqbal pleading standard to interpret whether the policy language requires tangible, structural property damage for coverage.
- The Court concluded the Business Income and Civil Authority provisions unambiguously require a distinct, demonstrable physical alteration or proximate property damage and that government COVID-19 orders alone do not satisfy that requirement.
- All contract and extra-contractual claims were dismissed with prejudice; leave to amend was denied as futile.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Business Income provision covers COVID-19 shutdown losses ("direct physical loss of or damage to" property) | COVID-19 is a physical virus/material condition that prevented use of the premises; language is at least ambiguous. | Policy requires tangible, structural physical damage; pandemic/government orders caused only economic loss. | Court: No coverage—"direct physical loss or damage" requires distinct, demonstrable physical alteration; dismissal. |
| Whether Civil Authority provision applies to government shutdown orders | Civil orders prohibited access due to dangerous physical conditions from the virus, triggering coverage. | Provision requires property damage within one mile and a causal link between that damage and the civil-authority action. | Court: No—orders were precautionary and not taken in response to proximate property damage; no causal link. |
| Validity of extra‑contractual claims (Tex. Ins. Code, bad faith, DTPA, negligence, negligent misrepresentation, declaratory relief) | Colony’s denial was wrongful/statutorily violative and supports tort/statutory claims. | Denial was proper under the policy; no coverage and no independent injury to support extra-contractual claims. | Court: Claims fail because plaintiff cannot establish entitlement to policy benefits or independent injury; dismissed. |
| Motion for leave to amend | Plaintiff requested leave to amend if complaint deficient. | Policy language forecloses coverage; amendment would be futile. | Court: Denied leave; dismissal with prejudice. |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (plausibility pleading standard)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (two-step plausibility/conclusory-pleading framework)
- Hartford Ins. Co. of Midwest v. Mississippi Valley Gas Co., [citation="181 F. App'x 465"] (5th Cir. 2006) (physical loss requires demonstrable physical alteration)
- Trinity Indus., Inc. v. Ins. Co. of N. Am., 916 F.2d 267 (5th Cir. 1990) ("physical loss or damage" implies a change from a satisfactory to an unsatisfactory physical state)
- Dickie Brennan & Co. v. Lexington Ins. Co., 636 F.3d 683 (5th Cir. 2011) (civil-authority clause requires causal link between property damage and governmental action)
- Citigroup Inc. v. Fed. Ins. Co., 649 F.3d 367 (5th Cir. 2011) (insurance-policy interpretation follows general contract rules)
- Fiess v. State Farm Lloyds, 202 S.W.3d 744 (Tex. 2006) (if policy has only one reasonable meaning, court enforces it as written)
- Diesel Barbershop, LLC v. State Farm Lloyds, 479 F. Supp. 3d 353 (W.D. Tex. 2020) (COVID-19 business-interruption claims fail without physical property damage)