In the recent decision in Q Clothier New Orleans LLC v. Twin City Fire Insurance Co., the Fifth Circuit Court of Appeals affirmed the dismissal of an insured’s claim for coverage under a property policy for loss arising from compliance with pandemic-related shutdown orders. In concluding that such losses did not fall within the meaning of “direct physical loss of or damage to property” in the policy’s insuring agreement under Louisiana law, the court noted that its decision was consistent with its own prior jurisprudence under Texas law, as well as “the decisions of the unanimous circuit courts,” which now include the Second, Fourth, Fifth, Sixth, Seventh, Ninth, Tenth, and Eleventh Circuits.
Plaintiffs-Appellants (collectively defined as “Q Clothier”) own and operate men’s clothing stores in four states, including Louisiana. Q Clothier purchased a property policy from Defendant-Appellee Twin City Fire Insurance Co. covering its stores, effective June 19, 2019, through June 19, 2020. Q Clothier alleged that, in response to the onset of the COVID-19 pandemic, Louisiana authorities ordered the closure of nonessential businesses. Q Clothier complied and lost income as a result. Q Clothier sought coverage under the Twin City policy, and coverage was denied. This coverage action ensued. The trial court granted Twin City’s motion for judgment on the pleadings, finding no “direct physical loss of or damage to” covered property and that the coverage was further precluded under the policy’s virus exclusion. Q Clothier appealed.
On appeal, the court primarily addressed three provisions of the Twin City policy: the insuring agreement, the civil authority extension, and the virus exclusion, which included a “limited virus coverage” exception. First, the insuring agreement states that Twin City “will pay for direct physical loss of or physical damage to Covered Property at the premises described in the Declarations … caused by or resulting from a Covered Cause of Loss.” “Covered Causes of Loss” are defined as “risks of direct physical loss” unless excluded or limited by the policy. Second, the civil authority extension applies “to the actual loss of Business Income [Q Clothier] sustain[s] when access to [the] ‘scheduled premises’ is specifically prohibited by order of a civil authority as the direct result of a Covered Cause of Loss to property in the immediate area of [the] ‘scheduled premises.’” And third, the virus exclusion states Twin City “will not pay for loss or damage caused directly or indirectly by … presence, growth, proliferation, spread or any activity of ‘fungi,’ wet rot, dry rot, bacteria or virus.” The limited virus coverage exception to the virus exclusion “only applies when the … virus is the result of one or more of the following causes that occurs during the policy period and only if all reasonable means were used to save and preserve the property from further damage at the time of and after that occurrence.” The causes listed are (1) a “specified cause of loss” other than fire or lightning or (2) equipment breakdown or accident.
As an initial matter, the court found that Louisiana law governed the policy. Noting that the policy language at issue had not yet been interpreted by the Louisiana Supreme Court, the court determined that it must “make an ‘Erie guess’ as to how the Louisiana Supreme Court would decide the issue.” The court considered Louisiana state courts’ interpretation of “direct physical loss” in other contexts, determining that “the Louisiana Supreme Court would interpret ‘direct physical loss of or damage to property’ to cover only tangible alterations of, injuries to, and deprivations of property.”
Applying this definition to Q Clothier’s claims in this case, the court concluded that its COVID-19-related losses were not covered:
Q Clothier’s losses are not covered by the policy’s general coverage, Business Income Extension, or Limited Virus Coverage. Q Clothier has only alleged a loss of business income due to its compliance with the civil authority orders directing the close of its stores. But that loss is not tangible. Nor is it an alteration, injury, or deprivation of property. Q Clothier’s property has been unchanged by the orders or the close of its stores. Although we recognize the government orders placed limitations on the operations of businesses, those limitations did not tangibly alter Q Clothier’s property or deprive Q Clothier of its property.
The court similarly concluded that the civil authority extension did not apply because “[t]here is no plausible nexus between the orders and any loss to property nearby Q Clothier’s stores.”
Regarding the limited virus coverage in particular, the court noted that, as an exception to the policy’s virus exclusion, it would only apply if the Virus exclusion itself was triggered. Thus, the court’s analysis of the exception was based on its preliminary conclusion that the virus exclusion “unambiguously applies”:
The Limited Virus Coverage is an exception to the Virus Exclusion which explicitly excludes from coverage losses that are caused by a virus. Q Clothier does not attempt to avoid the applicability of the Virus Exclusion. Nor could it in light of its unambiguous exclusion of the losses claimed here. … So, although we conclude the Virus Exclusion unambiguously applies, we must nonetheless address the exception here.
Noting that the above conclusions are consistent with its own prior precedent and the decisions of “the unanimous circuit courts,” the court stated:
[W]e conclude, pursuant to Louisiana law, that losses caused by civil authority orders closing nonessential businesses in response to the COVID-19 pandemic do not fall within the meaning of “direct physical loss of or damage to property.” And because Q Clothier has not plausibly alleged that any other policy provision applies, its losses from the close of its stores are not covered by the policy.
Accordingly, the Fifth Circuit affirmed the trial court’s grant of Twin City’s motion for judgment on the pleadings.
