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Fifth Circuit Finds COVID-19 Restrictions Not “Direct Physical Loss” Under Texas Law


BatesCarey attorneys Adam Fleischer, Lindsey Dean and Matthew Fortin represented State Automobile Mutual Insurance Company in establishing that, under Texas law, COVID-19 business income claims do not constitute “direct physical loss” and that COVID-19 restrictions did not result from any condition at the insured’s premises. Terry Black’s Barbecue, LLC v. State Automobile Mutual Insurance Co., --- F.4th ---, 2022 WL 43170 (5th Cir. Jan. 5, 2022). 

The insured owns and operates two dine-in restaurants in Texas that have been impacted by the limitations imposed on the operation of nonessential businesses in the wake of the COVID-19 crisis. The restaurant owners attempted to recoup lost revenue due to restrictions on indoor dining through their commercial property insurance policy which covered business interruption losses. 

BatesCarey’s client declined coverage for the insured’s claim because the alleged losses were untethered to any “direct physical loss of or damage to property,” as required by the policy’s business interruption coverage. BatesCarey’s client also declined coverage under the policy’s Restaurant Extension Endorsement, which provided coverage for lost income when a business suspends operations due to a government order that results from exposure of the premises to an infectious disease. The insured filed a lawsuit, and the district court granted judgment on the pleadings in favor of BatesCarey’s client on the grounds that suspension of dine-in services during the pandemic does not constitute a direct physical loss of damage to property, and that the Restaurant Extension Endorsement did not apply because there was no causal connection between any condition at the insured’s restaurants and the government orders that suspended operations. Judgment was entered in favor of the insurer and the insured appealed.

In a precedent-setting decision, the Fifth Circuit Court of Appeals affirmed the district court, holding thatthe insured’s losses were not covered by the business interruption, extra expense or Restaurant Extension Endorsement provisions in the policy. The Fifth Circuit found that a direct physical loss of property entails a tangible alteration or deprivation of property, and civil orders prohibiting dine-in services did not tangibly alter the insured’s restaurants. The Fifth Circuit also found that the Restaurant Extension Endorsement did not apply because the government orders did not “result from” the insured’s restaurants’ exposure to COVID-19.

This victory marks another of the firm’s precedent-setting wins defending clients against COVID-19 business interruption claims in the wake of the multi-year pandemic and ensuing impact facing the insurance industry at large.