Fifth Circuit Again Concludes Direct Physical Loss Required for Business Interruption Coverage

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Aggie Investments, L.L.C. owns and operates a tea and spice gift shop in McKinney, Texas. Like many businesses, Aggie Investments suffered a loss in revenue during the COVID-19 pandemic when Texas civil authorities placed limitations on the operations of nonessential businesses. Aggie Investments then sought coverage from its commercial property insurance policy which covers losses “caused by direct physical loss of or damage to property at the described premises.”

In Aggie Investments, L.L.C. v. Continental Casualty Company, No. 21-40382, United States Court of Appeals, Fifth Circuit (January 26, 2022) the Fifth Circuit Court of Appeal joined with almost every court that has considered the issue and required proof of direct physical loss for coverage to apply.

FACTS

In March 2020, the COVID-19 pandemic caused authorities to issue orders to address the ongoing threat from the virus. The city of McKinney issued a shelter-in-place order. Aggie Investments complied with the orders, closed its shop, and suffered a reduction in sales and loss of business income.

Aggie Investments submitted a claim for coverage under the BI/EE provision.

DISCUSSION

Whether a business is directed to cease one kind of service or all of its services, that order is not a tangible alteration or deprivation of property. Nothing tangible happened to Aggie Investments’ property.

A “direct physical loss of property” as stated in the BI/EE provision requires a tangible alteration or deprivation of property. Therefore, the Fifth Circuit concluded the district court properly granted Continental’s motion to dismiss.

ZALMA OPINION

Businesses continue to attempt to obtain coverage for business interruption as a result of the state or local government orders that required the shut-down of their businesses. The policies clearly, and unambiguously, required actual, direct, physical loss to the property causing the shut-down and loss of business. The suits seem to be brought against the wrong entity. The order took “property” the business of the plaintiff who has a right to recover under the Fifth Amendment of the U.S. Constitution for a taking of the property. No one, to my knowledge, has tried to sue the city or state for such taking and continue to pursue insurers.

© 2022 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

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