Eastern District of Virginia Upholds “Virus Exclusion” Barring Coverage for COVID-19 Business Losses

On October 18, 2021, Senior United States District Judge Robert E. Payne of the United States District Court for the Eastern District of Virginia upheld and enforced an insurance policy’s “Virus Exclusion” to deny coverage for a beauty salon’s business income and extra expense claim. See Adorn Barber & Beauty LLC v. Twin City Fire Ins. Co., 2021 U.S. Dist. LEXIS 200344 (E.D. Va. Oct. 18, 2021).

This matter arose on March 23, 2021, when Governor Ralph Northam issued “Order 53” that required all nonessential businesses, including beauty salons, to stop operations and physically close. Id. at *2-3. The plaintiff-insured, Adorn Barber & Beauty LLC (“Adorn”), alleged that the government-mandated closure and contamination of its facilities “resulted in over $150,000 in losses.” Id. at *3. Adorn argued that its insurance policy with the defendant-insurer, Twin City Fire Insurance Company (“Twin City”), covered business income losses and extra expenses attributable to the virus and the virus-related order by the Virginia government. Id. Twin City disagreed, arguing that the virus-related losses were excluded from coverage under the insurance policy’s “‘Fungi’, Wet Rot, Dry Rot, Bacteria And Virus” Exclusion (“Virus Exclusion”). Id. at *3-4.

Specifically, as stated by the Court, the Virus Exclusion provided that Twin City:

will not pay for loss or damage caused directly or indirectly by the “[p]resence, growth, proliferation, spread of any activity of ‘fungi’, wet rot, dry rot, bacteria or virus

and that

[s]uch loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss[;] however, if ‘fungi’, wet rot, dry rot, bacteria or virus results in a ‘specified cause of loss’ to Covered Property, we will pay for the loss or damage caused by that ‘specified cause of loss.’ The exclusion applies whether or not the loss event results in widespread damage or affects a substantial area.

Id. at *6-7.

The Court acknowledged that it recently had addressed a similar situation and exclusion in L&L Logistics & Warehousing Inc. v. Evanston Ins. Co., No. 3:20-cv-324, 2021WL1396280 (E.D. Va. Apr. 13, 2021). Id. at *10-11. The Court found that “[i]n L&L Logistics, the clear and explicit language of the virus exclusion in the policy precluded coverage. Essentially the same virus exclusion language is present in the case at hand, and it excludes coverage for Adorn’s claims as a matter of law.” Id. at *11. The Court also observed that its decision was consistent with other federal district courts, who:

Have held that policies with the Twin City virus exclusion preclude claims for business losses related to the COVID-19 pandemic. And, courts within the Fourth Circuit have largely agreed that the virus exclusion language applies in the case of COVID-19 business closures. In general, federal courts across the country also have upheld virus exclusion provisions in policies issued by other insurers. On the basis of the foregoing extensive and well-reasoned authority, the Court finds that Adorn’s claims for coverage for its business income and expense losses is excluded by the plain language of the Virus Exclusion provision of the Policy.

Id. at *11-12.

Adorn also raised a number of arguments as to why the Virus Exclusion should not apply to bar its claim, which the Court addressed one-by-one. Id. at *12-13.

First, Adorn argued that the Virus Exclusion was contrary to the reasonable expectations of the parties because it “‘specifically sought coverage for business interruption losses and extended expenses and paid premiums for such coverage and with an expectation that the Policy [Adorn] purchased provided such coverage’ and that Twin City ‘did not make any disclosures to the contrary.’” The Court disagreed, stating that Adorn’s argument did not “establish the expectation of either Adorn or Twin City. Nor does it permit a finding that there existed some mutual expectation at variance with the Policy.” Id. at *13-15.

Next, Adorn argued that the Virus Exclusion was ambiguous because it did not specifically apply to “a pandemic,” but the Court found that the Virus Exclusion was “clear and unambiguous” and that there was “no ‘latent ambiguity’ present in the Policy.” Id. at *15-17.

Adorn further argued that the doctrine of regulatory estoppel should apply to preclude the application of the Virus Exclusion because “the insurance industry and ISO misrepresented ‘whether the exclusions would actually bar coverage or merely clarify coverage in order to raise premiums.’” The Court found these allegations “conclusory.” Not only had no Virginia court previously subscribed to the regulatory estoppel theory, but the clear text of the policy at issue also foreclosed any potential application of the theory. Id. at *17.

Lastly, relevant to the Virus Exclusion, Adorn argued that the Court’s recent decision in Elegant Massage stood for the proposition that “COVID-19 coverage was available under a policy requiring a ‘direct physical loss.’” The court agreed, in part, but found that “Elegant Massage does not help Adorn because Elegant Massage hinged on whether the mandated closures . . . qualified as a ‘fortuitous loss,’ which caused direct physical loss to the plaintiff’s property.” As stated by the Court in Adorn, “no evaluation of ‘direct physical loss’ is necessary, in perspective of the plain Virus Exclusion text,” and, even if an evaluation of “direct physical loss” was necessary, “a growing body of federal courts have determined that ‘physical loss’ does not incorporate viruses. These significant authorities are persuasive. And, if they were applied here, they would foreclose Adorn’s position.” Id. at *18-19.

The Court concluded by addressing coverage under the insurance policy’s “Civil Authority Coverage.” The Court found that “the decisions that deal with coverage in cases where COVID-19 (either the virus or Civil Authority Orders, or both) is alleged to be a cause of the loss provide a base of authority that is a sound ground upon which to base coverage decisions where, as here, the virus and Civil Authority Order are the key issues,” and, in this case, “the plain language of the Policy necessitates the conclusion that, because COVID-19 precipitated the Civil Authority Order, it was an indirect cause of Adorn’s losses, and, as explained above, the Virus Exclusion excludes coverage for those losses.” Id. at *20-23.

The Court’s decision in Adorn is another favorable decision for insurers dealing with the fallout of the COVID-19 pandemic. The EDVA has, again, reinforced and upheld a virus exclusion to exclude coverage for an insured’s business income and extra expense claim.

For more information about this and other similar cases, please contact Robert Tayloe Ross, Esq., Diane U. Montgomery, Esq., or Robert S. Reverski, Jr., Esq. of MMR.