Case Information
*1
Before COVID-19 became a problem, before the president declared it a pandemic, and before the State of Texas and Harris County issued orders temporarily closing businesses, Zadok purchased an all-risk commercial property insurance policy from Certain Underwriters at Lloyd’s of London. [1] (Docket Entry No. 1 at ¶ 72). The policy provides 30 days of business-income loss coverage and two weeks of civil-authority order and extra-expense сoverage. The policy does not have a virus, pandemic, or communicable-disease exclusion clause. ( Id. at ¶¶ 77–79).
Under the policy’s business-income loss provision, Lloyd’s agreed to cover business income lost during a “period of restoration” caused by a “direct physical loss of or damage to property”:
We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your “operations” during the “periоd of restoration.” The suspension must be caused by direct physical loss of or damage to property at the premises described in the Declarations, including personal property in the open (or in a vehicle) within 100 feet, caused by or resulting from any Covered Cause of Loss. [2]
(Docket Entry No. 5-2 at 30). “Period of restoration” is defined as “the period of time that . . . [b]egins with the date of direct physical loss or damage . . . [and] [e]nds on the date when the proрerty at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality.” ( at 36).
Under the civil-authority order provision, Lloyd’s agreed to cover business income lost and extra expenses incurred due to certain government-ordered closures:
We will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss.
(Docket Entry No. 5-2 at 31; Docket Entry No. 1 at ¶ 84).
The policy defines “extra expenses” as “necessary expenses [the insured] incur[s] during the ‘period of restoration’ that [the insured] would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss.” (Docket Entry No. 5-2 at 30). These expenses include costs to “[r]epair or replace any property; or . . . [r]esearch, replace or restore the lost information on damaged valuable papers and records.” ( Id. ).
In March 2020, the Governor declared a state of disaster in Texas due to COVID-19. (Docket Entry No. 1 at ¶ 48). On March 19, the Governor issued executive orders that banned gatherings of 10 or more people and discouraged gatherings at bаrs, food courts, restaurants, and gyms. ( Id. at ¶ 49). The Governor also required nonessential services to operate remotely. [3] In Harris County, on March 24, the Commissioner’s Court Judge issued a “Stay Home, Stay Safe Order,” prohibiting nonessential businesses from opening. ( Id. at ¶ 50). On April 27, the Governor allowed nonessential retail stores to reopen at 25% capacity, and on May 5 expanded the maximum capacity to 50%. ( Id. at ¶¶ 56, 57). The Harris County Order was extended, but Zadok was able to reopen on April 30, 2020. ( Id. at ¶ 52).
Zadok closed its store from March 23 until April 30, 2020, when it reopened with limits on capacity. ( Id . at ¶¶ 65, 75). Zadok alleges that it was forced to close for approximately five weeks due to “various orders issued by the State of Texas and Harris County” and “the prevalence of COVID-19.” ( Id. at ¶ 3). As Zadok states, the closure orders required it to shut down because retail jewelry sales are not essential. ( at ¶ 11).
Zadok also alleges that it closed because “рeople infected by the virus, or who had contact with other infected people, have likely visited Zadok’s store, and thereby contaminated Zadok’s store and surrounding property with the virus by the time of the Closure Orders, and thereafter.” ( Id. at ¶ 12). Three Zadok employees tested positive for COVID-19, though it is unclear if they were in the store while they were contagious. ( Id. at ¶ 13). Zadok alleges that the “transmission of COVID-19 and the Closure Orders” adversely impacted its business becаuse customers either could not access its store or would not do so for fear of contracting COVID-19, or both. ( Id. ). Zadok alleges that the pandemic and closure orders resulted in $3 million in lost sales. ( Id. at ¶¶ 70, 75).
On April 3, 2020, Zadok filed a claim with Lloyd’s for lost business income and extra expenses due to COVID-19 and the Texas closure orders. ( Id. at ¶ 89). On May 28, Lloyd’s denied the claim, in part because Zadok’s store did not suffer direct physical loss or damage to property at the premisеs. ( at ¶ 90). This lawsuit followed. Zadok asserts breach of contract, bad faith, and violations of the Texas Prompt Payment of Claims Act, T EX . I NS . C ODE § 542.002, et seq . (Docket Entry No. 1). Lloyd’s moves to dismiss.
II. The Legal Standard
A. The Rule 12(b)(6) Standards
Rule 12(b)(6) allows dismissal if a plaintiff fails “to state a claim upon which relief can be
granted.” F ED . R. C IV . P. 12(b)(6). Rule 12(b)(6) must be read in conjunction with Rule 8(a),
which requires “a short and plain statement of the claim showing that the pleader is entitled to
relief.” F ED . R. C IV . P. 8(a)(2). A complaint must contain “enough facts to state a claim to relief
that is plausible on its face.”
Bell Atl. Corp. v. Twombly
,
To withstand a Rule 12(b)(6) motion, a complaint must include “more than labels and
conclusions, and a formulaic recitation of the elements of a cause of action will not do.”
Lincoln
v. Turner
,
A court reviewing a motion to dismiss under Rule 12(b)(6) may consider “(1) the facts set
forth in the complaint, (2) documents attached to the complaint, and (3) matters of which judicial
notice may be taken under Federal Rule of Evidence 201.”
Inclusive Cmtys Project, Inc. v. Lincoln
Prop. Co.
,
B. Texas Insurance Law
The parties agree that Texas law governs this action. Insurance policies are read based on
“common principles governing the construction of contracts, and the interpretation of an insurance
policy is a question of law for a court to determine.”
Am. Int’l Specialty Lines Ins. Co. v. Rentech
Steel LLC
,
If a policy is ambiguous, a court must resolve the uncertainty by adopting the construction
that most favors the insured.
John M. O’Quinn, P.C. v. Lexington Ins. Co.
,
III. Analysis
Zadok cannot recover under the policy’s business-income, civil-authority, or extra- expenses provisions unless it adequately alleges “direct physical loss of or damage to property.” The business-income provision allows recovery only if the insured alleges facts that plausibly show that the suspension in business operations was “caused by direct physical loss of or damage to property at the premises.” (Docket Entry No. 5-2 at 30). The civil-authority order provision allows recovery only if the insured alleges facts that plausibly show that a government order prohibited “access to the described premises due to direct physical loss of or damage to property, other than at the described premises.” ( at 31). The extra-expenses provision allows recovеry only if the insured incurred expenses due to “direct physical loss or damage to property.” ( at 30).
A. Business-Income Coverage
1.
The Suspension-of-Operations Clause
While the policy does not define “direct physical loss of or damage to property,” the Fifth
Circuit has held that pleading “direct physical loss or damage” to property requires allegations of
“distinct, demonstrable physical alteration of the property.”
Hartford Ins. Co. Midwest v. Miss.
Valley Gas Co.
,
Applying these precedents to similar, if not identical, policy language, district courts in Texas have consistently held that COVID-19 does not produce direct physical loss of or damage to property. [4] The majority of courts across the country interpreting identical or similar contract language have concluded that COVID-19 does not cause a direct physical loss of or damage to property. [5]
Like other insureds facing similar losses, Zadok alleges that its store was physically damaged because COVID-19 may remain on surfaces and in the air for days. (Docket Entry No. 1 at ¶¶ 42, 62–66). Zadok does not allege that COVID-19 was found on any store surface or lingered in the air. Zadok acknowledges that “the property’s structure remains undisturbed,” (Docket Entry No. 13 at 9), even while alleging that the potential presence of COVID-19 caused “direct physical loss of or damage to” the property. (Docket Entry Nо. 1 at ¶¶ 62–66). Zadok also argues that COVID- 19 deprived it “of the functionality or the intended use of the [s]tore.” (Docket Entry No. 13 at 13).
Zadok does not allege that COVID-19 was found on any surface or in the air of its store. Zadok merely alleges that COVID-19 was potentially present because there were confirmed cases in Houston and customers visited the store before it was closed. (Docket Entry No. 1 at ¶¶ 62–67). (N.D. Tex. Jan. 12, 2021) (under Minnesota law, “direct physical loss or damage requires something more than mere loss of use or function”).
[5]
See, e.g.
,
Kevin Barry Fine Art Assocs. v. Sentinel Ins. Co., Ltd.
, No. 20-CV-04783,
This does not plausibly allege that COVID-19 directly caused physical loss of or damage to the store property.
Zadok alleges that three employees tested positive for COVID-19, but does not allege that
the employees were in the store while they were contagious, much less that COVID-19 lingered
in the store so as to physically alter or damage the property. Even if Zadok had alleged that the
employees tested positive within a certain period before or after being in the store, that would not
plausibly allege that the store property was actually contaminated by COVID-19, much less that
COVID-19 caused physical damage to the store.
See, e.g.
,
Berkseth-Rojas
,
Nor does Zadok allege that “an actual physical exposure caused [it] to close [its] particular
store.”
Water Sports Kauai, Inc. v. Fireman’s Fund Ins. Co.
, No. 20-CV-03750, 2020 WL
6562332, at *4 (N.D. Cal. Nov. 9, 2020). Zadok has not plausibly alleged that COVID-19
physically altered its property in a distinct, demonstrable way, as the policy language requires.
See
Hajer
,
Even if Zadok had alleged facts showing that COVID-19 was detected in its store—which
it has not—courts considering similar claims have repeatedly stated that COVID-19 does not cause
physical damage to property; it causes people to get sick.
See Kevin Barry
,
Zadok does not allege that COVID-19 changed the property so as to make it unusable or
uninhabitable. At most, Zadok alleges that COVID-19 caused a change in the way it operated its
store, first by temporarily closing it, then by restricting the number of customers physically present
in the store at any one time. None of these is sufficient to plausibly allege direct physical loss of
or damage to property.
[6]
See Berkseth-Rojas
,
Other policy sections support the conclusion, reached by other courts considering similar language, that Zadok does not plausibly allege that COVID-19 caused direct physical loss of, or damagе to, the insured premises. The policy allows insureds such as Zadok to recover for lost business income only during a “period of restoration,” defined as the period needed for physically damaged property to be “repaired, rebuilt or replaced.” (Docket Entry No. 5-2 at 36). The policy also allows insureds such as Zadok to recover “extra expenses” to “[r]epair or replace any property.” ( at 30).
Zadok does not allegе facts showing that any part of its store property required repair,
rebuilding, or replacing.
See Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am.
, No. 20-CV-03213,
For all these reasons, Zadok does not allege that COVID-19 caused direct physical loss of, or damage to, its store.
2. Civil-Authority Order and Extra-Expense Coverage Zadok alleges that government closure orders caused it to close its store, lose business income, and sustain extra expenses. (Docket Entry No. 1 аt ¶ 3). Zadok shut its doors only after, and for the period that, Texas and Harris County officials ordered nonessential businesses to close. Zadok reopened when those orders were lifted at the end of April 2020, even though COVID-19 was still pervasive in Harris County and Texas.
A government order must cause a loss of business income in two ways to trigger coverage. First, the order must prohibit access to the insured premises. Second, the order prohibiting access must be “due to direct physical loss of or damage to property, other than at the described premises.” (Docket Entry No. 5-2 at 31).
Courts have consistently found that the type of civil-authority orders closing or limiting
capacity at issue here do not meet the coverage criteria the policy requires
. See Terry Black’s
Barbecue
,
To claim civil-authority order coverage, Zadok must plausibly allege that the Texas closure orders were “due to” a “direct physical loss of or damage to property, other than at the described premises.” (Docket Entry No. 5-2 at 31). Zadok does not allege that the closure orders restricted access to its store because of physical damage to other property or premises. See Mudpie , Inc. , 2020 WL 5525171, at *7 (“Because the orders were preventative – and absent allegations of damage to adjacent property – the complaint does not establish the requisite causal link between prior property damage and the government’s closure order.”); Pappy’s Barber Shops , 2020 WL 5500221, at *6 (“[E]ven if the government orders alleged in the complaint could be construed as prohibiting Plaintiffs from accessing their premises, the orders were not issued due to direct physical loss of or damage to property other than at Plaintiffs’ premises.”).
To claim extra-expensеs coverage, Zadok was required to allege that it incurred expenses that it “would not have incurred if there had been no direct physical loss or damage to property.” (Docket Entry No. 5-2 at 30). Because Zadok did not allege, and could not plausibly allege, facts showing direct physical loss of or damage to its store, Zadok cannot allege that it incurred extra expenses within the policy.
C. The Texas Insurance Code Claims
“As a general rule, there can be no claim for bad faith when an insurer has promptly denied
a claim that is in fact not covered.”
JAW The Pointe, LLC v. Lexington Ins. Co.
,
IV. Conclusion
Lloyd’s requested dismissal with prejudice. (Docket Entry No. 5). When a complaint fails
to state a claim, the court should generally give the plaintiff at least one chance to amend before
dismissal with prejudice.
See Reece v. Chubb Lloyds Ins. Co. Tex.
, No. 11-CV-507, 2011 WL
841430, at *2 (S.D. Tex. Mar. 8, 2011);
see also Great Plains Trust Co. v. Morgan Stanley Dean
Witter & Co.
,
The motion to dismiss, (Docket Entry No. 5), is granted, without prejudice and with leave to amend. Zadok may file an amended complaint, if amendment would not be futile, or notify the court that it intends to stand on its current pleading, no later than March 25, 2021.
SIGNED on March 12, 2021, at Houston, Texas.
_______________________________ Lee H. Rosenthal Chief United States District Judge
Notes
[1] The policy certificate number is SS0140418/7266, with effective dates from March 10, 2020 until March 10, 2021. (Docket Entry No. 5-2 at 2–3).
[2] “Covered Cause of Loss” is a broad term that includes all risks of direct physical loss “unless the loss is” caused by certain excluded causes, such as “Earth Movement,” “Nuclear Hazard,” and “War And Military Action.” (Docket Entry No. 5-2 at 37).
[3] These orders can be found at T EXAS H EALTH & H UMAN S ERVICES , E XECUTIVE O RDERS , https://www.dshs.state.tx.us/coronavirus/execorders.aspx.
[4]
See Hajer v. Ohio Sec. Ins. Co.
, No. 6:20-CV-00283,
[6] Zadok alleges that, since the complete closure orders were replaced with capped-capacity orders, it has been able to operate its store. It is not clear that Zadok was forced to change the way it operates its business, other than by limiting capacity, requiring masks, and increasing the frequency аnd amount of cleaning. See Terry Black’s Barbecue , 2020 WL 7351246, at *7 (“They continued to offer take-out services and, subsequently, limited capacity dine-in services. Thus, Plaintiffs were not denied access to or use of their property.”). To the extent Zadok alleges additional cleaning, courts have rejected that allegation as insufficient to show physical damage to the property. See Promotional Headwear Int’l v. Cincinnati Ins. Co. , No. 20-CV-2211, 2020 WL 7078735, at *8 (D. Kan. Dec. 3, 2020) (“[R]outine cleaning and disinfecting can eliminate the virus on surfaces”); Uncork & Create LLC , 2020 WL 6436948, at *5 (“[COVID-19’s] presence on surfaces can be eliminated with disinfectant.”).